Apropos of my column of a week ago — “Has Bernanke Gotten the Story Right?” — this week’s paltry GDP revision again backs up the actions of the Federal Reserve chairman and his market-monetarist supporters.
Real GDP was a miniscule 0.4 percent at an annual rate for last year’s fourth quarter, up from an earlier estimate of 0.1 percent. Perhaps more to the point, the year-on-year GDP change is only 1.7 percent, less than the 2 percent average growth of the Obama recovery, which is still the weakest in modern times going back to 1947.
Inside the report, there was good strength in housing investment (17.6 percent), business equipment (11.8 percent), and business structures like factories and warehouses (16.7 percent), all in annual rates for last year’s fourth quarter. Consumer spending, however, was a rather soft 1.8 percent.
But get this: While government spending fell 7 percent, private sector GDP rose at a decent clip. This still suggests that budget cuts lead to government austerity, and are not a negative for private-sector prosperity. That’s a key lesson in this whole sequester debate.
Incidentally, corporate profits after-tax rose 13 percent year on year in the new GDP report. This shows how resilient business is, despite regulatory obstacles like Obamacare and all the various tax hikes that come with it.
But back to Bernanke. Nominal GDP, which is what the market monetarists want the Fed to target, has increased only 3.5 percent over the past year, which is below the 4 percent trend line of recent years. I believe my monetarist friends want a 5 percent target for national income. And that is why they want the Federal Reserve to continue its policy of pushing bank reserves into the system.
The problem is, much of the Fed’s $3 trillion balance sheet remains on deposit as excess bank reserves, getting a quarter percent interest rate from the central bank. The actual money supply — M2 — does not reflect the printing-press mythology that has grown up around the Fed’s story.
To wit, M2 over the past year has grown by less than 7 percent. But the turnover of money, called velocity, has fallen by 3.5 percent. Therefore, despite the Fed’s stimulus, overall nominal GDP (real growth plus inflation) is still a sluggish 3.5 percent.
What’s more, Bernanke’s boast that he has held inflation down remains true, at least through fourth-quarter revised GDP. Both the GDP deflator and the chain price index have increased only 1.8 percent, and show no signs of acceleration.
And the gold price is hovering around $1,600. It really hasn’t moved over the past year. Nor has it budged since the Fed instituted its latest quantitative-easing, bond-buying policy last September. Even more interesting, King Dollar continues to strengthen. In fact, the greenback has gained ground since the Fed’s September QE announcement.
As I’ve said before, the gigantic increase in the Fed’s balance sheet, which will run close to $4 trillion later this year, makes me very uneasy. And if the velocity turnover of money does pick up in the future, there will be an inflation problem that will be very difficult for the Fed to unwind. Can it sell its massive bond portfolio in a timely fashion? No one can say.
But at the moment, looking at the numbers, I’m going to give this round to Mr. Bernanke and his market-monetarist supporters. There is no massive printing-press money, no huge inflation jump, and certainly no overheated economy. With the U.S. economy rising at perhaps 2 to 3 percent in the first quarter, which is much better than the economies of Europe and Japan, and with the U.S. stock market hovering near record highs, I would have to characterize my stance as relatively optimistic, but certainly not irrationally exuberant.
However, I continue to disagree with the Fed chair on fiscal policy. We need more government spending cuts coupled with serious tax reduction for large and small companies in order to boost this economy without injecting more and more money. This supply-side policy would deliver a much more predictable and reliable path to prosperity.
But on monetary matters, it may just be that the Bernanke Fed is right where it should be.
– Larry Kudlow, NRO’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web log, Kudlow’s Money Politic$.