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Sunday, June 12, 2011

A note to the Fed chair

Tony Paradiso

Dear Ben Bernanke:

I’m a bit confused and I’m hoping you can help clarify things.

In your recent speech you set a dour tone. Sure, many of your comments were stating the obvious: that economic growth has been “somewhat slower” than expected. No news there.

You then followed up by indicating that things should pick up in the second half of 2011. If I didn’t know better I’d think you were rehearsing for a political career. The “don’t worry, things will be better tomorrow” mantra: I get it. At this point what else can you say? But this is one source of my confusion.

Despite your economic stature, the financial markets ignored your latter comment, choosing to focus on the “slower than expected” part. You managed to turn a small rally into yet another loss. This I find a bit odd. I mean how stupid does one have to be not to comprehend the slow rate of economic growth?

Being a Princeton man perhaps you might know if the Ivy League MBA programs have redefined the impact of 1.8 percent growth in GDP? Perhaps it’s like women’s dress sizes where yesterday’s size 12 is today’s size 8. And correct me if I’m wrong, but aren’t the markets supposed to be forward looking? If so, why didn’t they take solace in your more upbeat second half assessment and continue the rally?

Maybe it’s because you chose not to confine your undue pessimism to your “somewhat slower” comment. Going on to mention that the recovery remains “uneven” despite being two years removed from the end of the recession could be construed as piling on. Yet, you didn’t stop there. You felt compelled to cap off your comments by characterizing the labor market as troubled.

Ben, I think everyone realizes that 54,000 jobs created in May doesn’t constitute “robust.” And the Labor Department report that indicated total job openings in the U.S. slipped from 3.1 million in April to 3 million in May can’t exactly be considered heading in the right direction. Still, there’s really no reason to beat that dead horse, particularly knowing that things are getting better.

Obviously you need more practice in the art of delusional optimism if you’re serious about a life in politics. I’m sure you realize that “glass half empty” thinking like yours is what makes the business community nervous about hiring. I might suggest you take a page out of the White House’s playbook and remind everyone how much worse things would be if there weren’t so many capable people in Washington working diligently to put us back on the right track.

But I digress.

What has me even more befuddled are the subsequent findings from the Federal Reserve’s beige book. I don’t need to tell you that the beige book is a survey of regional economies consisting of anecdotal evidence from the Fed’s 12 districts. With eight of the 12 districts reporting improved conditions, the report was mostly upbeat. This news came a day after your pessimistic pronouncements.

I know that this particular edition of the beige book won’t be discussed until your next meeting on June 21-22, but surely you got a sneak peak at it. That’s why I’m puzzled by your less than enthusiastic assessment of the economy.

Obviously, the tragedy in Japan – which was mentioned 25 times – must be considered transitory. So there was a little hiccough in the supply chain that temporarily impacted the auto industry. And yes, some high tech firms were also affected. But this is a mere blip. No need to dwell on it is there?

And just like you promised, the broader measures of inflation were subdued. As the Fed said, “In general, selling prices increased only modestly.” Well most prices. Food and energy prices continued to escalate but we know they don’t count.

Following the release of the beige book was a positive trade balance report. The April trade deficit unexpectedly narrowed to $43.7 billion on both lower imports and higher exports. That devaluing the dollar plan of yours is working to perfection. And you have to be elated that your counterpart at the European Central Bank is intent on raising interest rates. That feeds right in to your “dollars like pesos” strategy.

Could it be that your unnecessarily negative attitude stems from concerns over recent events in China? Real estate – which has helped fuel economic growth – is showing signs of weakness. Among other things, China’s local municipalities and provinces rely on escalating prices to fund infrastructure projects. A downturn could slam the brakes on the world’s primary economic driver.

But surely, there’s no precedent for inflated real estate values toppling an entire economy the size of China’s. So what that, by some accounts, property construction accounted for 13 percent of China’s gross domestic product in 2010. That leaves 87 percent in fine shape.

And what if China tanks? That will just make your call regarding the transitory nature of commodity inflation prescient.

Still, I am confused by it all. If you have a moment I would appreciate some clarification.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso is a marketing and management expert and CEO of Phoenix Finishings.