Jones Lang LaSalle
LaSalle Americas Professionals
In a room crowded with over 1500 members and guests, the Economic Club of Chicago hosted Ben Bernanke as its featured lunchtime speaker today.
Miles White, the Club's presiding Chairman, introduced Dr. Ben with an amusing emphasis on his intellect that was then on display for the next hour.
It turns out that Ben placed out of first grade, scored a 1590 on the SATs and taught himself Calculus because he couldn't wait to take the high school course.
Our new Fed Chairman then delivered a very thorough and precise lecture on the role that rising energy prices are playing in the global economy. Among the key points:
1) Unlike previous price shocks in 1974 and 1991…the futures markets appear to be telling us that energy price rises this time are likely to be much more permanent.
Oil: Supply and demand dynamics suggest that refining capacity constraints, geopolitics and hurricane disruptions all are hitting the supply side, just as global demand continues to rise due to a strong, growing global economy. Natural Gas: Much the same story, but with better ability to rely on domestic or North American supplies.
Over the longer term, we should expect more capacity to come back on line, but demand will not fall.
Result: Prepare for longer-term impact of higher prices, but expect that the US economy will adjust over the long term.
Example: US consumers will be changing their patterns of housing and auto consumption in the years ahead to save on energy costs.
2) Fed reaction to rising energy prices will be to make sure that the first round (direct) effects don't lead to more long-lasting second-round (indirect) price-push inflation.
This is what happened in the seventies, with the Fed was forced to raise interest rates dramatically to squeeze out the second round effects, when businesses and labor all began to try to pass along higher energy costs by raising prices for all kinds of goods, services and wages. And inflationary expectations, once started, became very difficult to get out of the national psyche.
3) The key message, as in several of the Chairman's recent speeches, was to establish his credentials as an inflation-hawk. The cost to the American economy of higher energy costs is high ($50 billion in 04, $70 billion in 05 and on pace for $100 billion in 06). But, as an economist, Dr. Ben reminded the audience that the US economy is highly resilient and will be able to adapt. In a Ten Trillion dollar economy, these costs can be absorbed, although he did acknowledge that the Federal Reserve would expect that consumer demand would bear the brunt of this energy tax. Businesses have more options to find substitutes and to become more efficient users of energy.
The more interesting part of the Luncheon came after this somewhat pedantic Energy Speech, when the Chairman responded to a series of pre-planned questions, but this time with unscripted answers.
Q. Relation between interest rates and energy prices?
A. No need for higher short or long-term i-rates, if the Fed is seen to be credible in stopping second round effects from creeping into the economy.
Q. What can be done about the Current Account (Trade) Deficit (CAD)?
A. Domestic Savings needs to rise, as does Foreign Consumption and Investment. At 6.5% of GDP….the CAD is high, but manageable.
Gradual stable reduction would be best. Exchange Rate flexibility in Asia (read China) would help also.
Ben has re-phrased his famous "global savings glut" ideas of years past in more politically correct language, but the message is the same.
We also heard the recitation of the productivity stats that have helped the US economy over the last ten years.
Political Backlash to stop trade would absolutely NOT be the way to improve the CAD.
Q. What about the Federal Deficit?
A. Relative to GDP today (2.6%), we are OK, by historic (2.2%) or by global standards.
The problem is that the big three entitlements (Social security, Medicare and Medicaid) are driving the future growth of the deficit.
Today they are 8% of GDP. By 2040, they will grow to 16% of GDP.
Tax revenues in 2005 were 18% of GDP…which shows that something's gotta give.
He implied strongly that the spending side would be the place for public policy to focus its efforts, not the taxation side.
Best
Q. Does Washington understand Economics?
A. Congress may choose not to at times. But the FOMC and the Federal Reserve System has plenty of well-trained economists.
Their job is to keep Congress well-advised and well-informed. And they are doing exactly that!
Q. Cubs or Sox?
A. Whoever is in town.
So what?
Our new Fed Chairman has come to Chicago twice now for important speeches. Clearly Chicago still ranks as venue worth visiting (a relief given our lackluster office market in recent years).
Ben was wearing his inflation hawk feathers today…getting us all ready for 25 bps in June and again August.
I found the most interesting aspect of his speech, though, his fundamental world-view: Namely that the US economy is highly resilient.
Workers move to where the work is. Our economy takes better advantage of technology than other economies, which have access to the same technology.
Our capital markets finance new ways to adapt the technology faster than other economies (clearly thinking of Google, yahoo, face book, etc)
His reference to US consumers adapting to higher energy prices in the years ahead through their housing and transportation decisions is clearly an intriguing idea, from a real estate perspective. And sitting here in the AON Center staring out my window and row upon row of new high rise residential buildings…the evidence may already be in front of us.
Alan Greenspan, in his frequent speeches before the Economics Club, was also highly scripted…but also more humorous and less professorial.
Ben is a much clearer communicator, but needs help with some style points. But, Chairman Bernanke clearly knows his numbers, his economics and I believe is going to make a very credible inflation fighter, which, after all is the main job of the Chairmanship.
Jacques Gordon
Global Investment Strategist
LaSalle Americas Professionals
In a room crowded with over 1500 members and guests, the Economic Club of Chicago hosted Ben Bernanke as its featured lunchtime speaker today.
Miles White, the Club's presiding Chairman, introduced Dr. Ben with an amusing emphasis on his intellect that was then on display for the next hour.
It turns out that Ben placed out of first grade, scored a 1590 on the SATs and taught himself Calculus because he couldn't wait to take the high school course.
Our new Fed Chairman then delivered a very thorough and precise lecture on the role that rising energy prices are playing in the global economy. Among the key points:
1) Unlike previous price shocks in 1974 and 1991…the futures markets appear to be telling us that energy price rises this time are likely to be much more permanent.
Oil: Supply and demand dynamics suggest that refining capacity constraints, geopolitics and hurricane disruptions all are hitting the supply side, just as global demand continues to rise due to a strong, growing global economy. Natural Gas: Much the same story, but with better ability to rely on domestic or North American supplies.
Over the longer term, we should expect more capacity to come back on line, but demand will not fall.
Result: Prepare for longer-term impact of higher prices, but expect that the US economy will adjust over the long term.
Example: US consumers will be changing their patterns of housing and auto consumption in the years ahead to save on energy costs.
2) Fed reaction to rising energy prices will be to make sure that the first round (direct) effects don't lead to more long-lasting second-round (indirect) price-push inflation.
This is what happened in the seventies, with the Fed was forced to raise interest rates dramatically to squeeze out the second round effects, when businesses and labor all began to try to pass along higher energy costs by raising prices for all kinds of goods, services and wages. And inflationary expectations, once started, became very difficult to get out of the national psyche.
3) The key message, as in several of the Chairman's recent speeches, was to establish his credentials as an inflation-hawk. The cost to the American economy of higher energy costs is high ($50 billion in 04, $70 billion in 05 and on pace for $100 billion in 06). But, as an economist, Dr. Ben reminded the audience that the US economy is highly resilient and will be able to adapt. In a Ten Trillion dollar economy, these costs can be absorbed, although he did acknowledge that the Federal Reserve would expect that consumer demand would bear the brunt of this energy tax. Businesses have more options to find substitutes and to become more efficient users of energy.
The more interesting part of the Luncheon came after this somewhat pedantic Energy Speech, when the Chairman responded to a series of pre-planned questions, but this time with unscripted answers.
Q. Relation between interest rates and energy prices?
A. No need for higher short or long-term i-rates, if the Fed is seen to be credible in stopping second round effects from creeping into the economy.
Q. What can be done about the Current Account (Trade) Deficit (CAD)?
A. Domestic Savings needs to rise, as does Foreign Consumption and Investment. At 6.5% of GDP….the CAD is high, but manageable.
Gradual stable reduction would be best. Exchange Rate flexibility in Asia (read China) would help also.
Ben has re-phrased his famous "global savings glut" ideas of years past in more politically correct language, but the message is the same.
We also heard the recitation of the productivity stats that have helped the US economy over the last ten years.
Political Backlash to stop trade would absolutely NOT be the way to improve the CAD.
Q. What about the Federal Deficit?
A. Relative to GDP today (2.6%), we are OK, by historic (2.2%) or by global standards.
The problem is that the big three entitlements (Social security, Medicare and Medicaid) are driving the future growth of the deficit.
Today they are 8% of GDP. By 2040, they will grow to 16% of GDP.
Tax revenues in 2005 were 18% of GDP…which shows that something's gotta give.
He implied strongly that the spending side would be the place for public policy to focus its efforts, not the taxation side.
Best
Q. Does Washington understand Economics?
A. Congress may choose not to at times. But the FOMC and the Federal Reserve System has plenty of well-trained economists.
Their job is to keep Congress well-advised and well-informed. And they are doing exactly that!
Q. Cubs or Sox?
A. Whoever is in town.
So what?
Our new Fed Chairman has come to Chicago twice now for important speeches. Clearly Chicago still ranks as venue worth visiting (a relief given our lackluster office market in recent years).
Ben was wearing his inflation hawk feathers today…getting us all ready for 25 bps in June and again August.
I found the most interesting aspect of his speech, though, his fundamental world-view: Namely that the US economy is highly resilient.
Workers move to where the work is. Our economy takes better advantage of technology than other economies, which have access to the same technology.
Our capital markets finance new ways to adapt the technology faster than other economies (clearly thinking of Google, yahoo, face book, etc)
His reference to US consumers adapting to higher energy prices in the years ahead through their housing and transportation decisions is clearly an intriguing idea, from a real estate perspective. And sitting here in the AON Center staring out my window and row upon row of new high rise residential buildings…the evidence may already be in front of us.
Alan Greenspan, in his frequent speeches before the Economics Club, was also highly scripted…but also more humorous and less professorial.
Ben is a much clearer communicator, but needs help with some style points. But, Chairman Bernanke clearly knows his numbers, his economics and I believe is going to make a very credible inflation fighter, which, after all is the main job of the Chairmanship.
Jacques Gordon
Global Investment Strategist
posted by Jones Lang LaSalle NJ News Blog at 9:35 AM
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