Martin Feldstein’s Vie en rose

The world in which Martin Feldstein lives must be very pleasant indeed:

The Fed’s strategy worked, causing household net worth to increase by $10 trillion in 2013. Households responded by spending more, leading to an accelerated rise in gross domestic product and a decline in unemployment.

The increase in network was highly concentrated; debt has been rising, much of it student debt; the labor force participation rate has plummeted to what it was 40 years ago. As Bernie Sanders points out in his stump speeches, if the LFPR was what it was in 2007, unemployment would be 10%.

Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation. They know therefore that interest rates must rise, and that a return to normal levels will reverse the mispricing of assets. The Fed cannot hide that realization by postponing rate hikes for a few months. And so the Fed should get on with the task of normalizing rates, particularly so that investors and lenders are no longer tempted to sink deeper into mispriced assets.

I’m not sure the market participants know any such thing. The CPI is closer to 0% than it is to 2% and MIT’s Billion Price Project, an actual empirical measurement of prices across the economy and, consequently, inflation already shows deflation.

I agree with Dr. Feldstein that the Fed shouldn’t gauge their reactions by stock prices but that’s what they’ve been doing for the last eight years. Even less should they gauge those results by stock prices in China but there are those urging just that.

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    Feldstein sounds suspiciously like a young Kevin Bacon.

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