The swans of lore are beautiful and vulnerable but common. Often the cursed lily white distressed damsels of the Norse fairy lands turn into the birds festooned in feathers of the same hue until some charming prince comes along to undo the spell to return them into their human form. The enchantment is in the transmogrification. The statement that “all swans are white” is almost a logical truism. That is, until a black swan comes along. Wall Street, the lore of lower Manhattan says, is preparing for one as if waiting for the prophecy to be fulfilled. For it to be yielded by the “unusual uncertainty” in the financial markets. Legends do not reveal much about what happens when the spell goes away from black swans. Nor can economic forecasters at the Fed or elsewhere.
Black Swans are the rare and unpredictable economic shocks, mostly negative but can also be positive. Econometricians―those who make a living measuring the economic activities of supply and demand―define Black Swans as extremely low probability tail risks such as, for example, the stock market plummeting once again to close to half its current value which is barely hovering above the psychologically important 10,000 mark of the Down Jones Industrial Average (DJIA) or any number of low probability events such as foreigners and Wall Street dumping the dollar and U.S Treasuries or worst, another depression. Wall Street seems to be thinking that this tail is getting fatter. So they are preparing to make it happen, similar to a herd of wilde beast looking to stampede at the roar of a young lion in the cartoon film The Lion King, only to stampede the King of the Jungle, the U.S economy, to death.
The U.S economy is recovering in starts and stops. It robustly grew out of the recession initially as any economy in a prolonged recession with plenty of pent up demand and lots of government help does, and then is now petering out to prove the Fed Chairman Ben Bernanke correct by stagnating at perhaps a 1.5 per cent steady state growth rate, with the unemployment buoy precariously bobbing close to the shore warding off the stormy seas by the deep waters, as cash is both leaving and entering the U.S debt market, also at a steady state rate. Investors are neither demanding more return for buying U.S Treasuries nor less. It is now an uncertain safe haven. The flight to safety itself has become unsafe. The yield curve is shallow, neither portending a recession nor a robust recovery.
The government is building levees between the deep seas and the shallow shore so that the people can get used to the higher unemployment for some time to come until the storm settles some time in the distant future. The beach is still safe for swimming as Summer turns into Fall if only the swimmers can avoid the currents that can pull them into drowning past the buoys. While the consumers are being risk averse, Wall Street is embracing risk, especially as it gets closer to the superstitious Black Mondays and Tuesdays of October only to be followed by the Christmas tree lighting at Rockefeller Plaza in Manhattan, in time for the bonuses which those habituated to the shade of the Buttonwood tree have not missed even once since this crisis began in 2007.
U.S economy needs domestic investment. Gobs of it to rebuild the Depression-era infrastructure and build once again the railroad-era rails in the post-industrial age before another depression strikes and to become self-sufficient in energy to fuel such a solid economic recovery. Money supply out of the Fed is in part at the Fed and in part with the large corporations. Trillions of dollars are not finding the United States to be welcoming enough to lend to invest to create jobs. They are seeking refuge elsewhere where these very same infrastructure and energy projects are being undertaken. The yield there is higher for the investment dollars.
If U.S debt keeps on rising and growth suppurates because of starving the country of real investment, yield on American debt will rise and so will inflation and unemployment. The ‘70s will return until the right thing is done in Washington to painfully squeeze out inflation with higher interest rates and reform taxes and government to make the country once again a sanctuary for the investment that is desperately needed for an American renewal in the new century. But before that, the ‘70s could be followed by the ‘30s and, ironically as it is usually said about all that is good at home: “only in America.” The transmogrification of the Black Swan would be the America of the future: not renewed and rejuvenated but spent and integrated into the rest of the world, instead of integrating it into America.
Independent central bankers can indeed change the world if only as facades of ideological politics. What began with Marriner Eccles and FDR will end with Ben Bernanke and Barack Obama by repeating the same “mistake” differently. The rise of the United States after the Great Depression and FDR in the 20th century will end in its steady decline in the 21st. Does it matter whether the Fed contracts or expands the money supply?