Archive for category Monetary Policy
Are Low Rates Counterproductive?
Posted by Tom in Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt on August 12, 2010
John Michaelson’s WSJ post, “The High Costs of Very Low Interest Rates,” presents the dark side of the Fed’s current policy. In it he makes the following points:
- low rates mean low earnings on savings giving consumers less to spend,
- folks close to retirement need to save more to get expected earnings,
- corporate pension plans need to fund more to make up for low earnings, which reduces money available for investment, and
- banks can borrow at zero and buy US bonds at a risk free return, so they do not lend to businesses for investment and job creation.
What’s sad is that the Fed has not learned from Japan’s lost decade experience. In 1990 following the burst of the credit bubble, Japan dropped it rate to an unprecedented .25% It’s government then borrowed to create massive “stimulus.” This froze out private borrowing, investment and consumption creating the lost decade.
Does any of this sound familiar?
I recommend the full article linked above.
Deflation, A Self Fulfilling Prophesy?
Posted by Tom in Business, Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Taxation on August 3, 2010
When Bill Gross, the bond guru manager of Pimco Total Return Fund, says “it’s happening,” he brings credibility to the deflation first scenario, that is deflation before inflation. According to yesterday’s WSJ article many fund managers are loading up on US Government bonds and hedging stocks. Others expect the Fed to come to the rescue. The Fed has limited options since it has interest rates near zero. According to another WSJ report these options are “unorthodox!” As the Fed mulls these, it may spook investors and highlight the weakness in the economy. So when the Fed is playing offense in trying to reflate the economy, savvy investors might conclude as Gross did that it’s time to play defense. Typically these “unorthodox” measures mean increasing the money supply by buying bank assets good and bad, bonds and mortgage backed securities. Problem is that there are not too many bullets left in the Fed’s arsenal.
To cap matters off, vis a vis the “self fulfilling prophesy,” today’s WSJ leads the front page with “Fed Mulls Symbolic Shift” that is using cash from maturities to buy additional assets instead of letting its portfolio shrink to a stable economy level. The Fed’s $2.3 Trillion portfolio has nearly tripled in size since 2007!
So, what to do? If prices are going to be lower tomorrow, why buy today? And this, ad infinitum! Couple this with Hussein Obama’s proposed tax increases, the pile on of entitlement deficits from Obamacare, and the great uncertainty posed by the regulatory bureaucracy, and you get a bleak picture.
Hope I’m wrong!
July Hayek Dinner: State of the Economy
Posted by Tom in Centrally Managed Economy, Deficit, Economics, Employment, Financial Crisis, Financial Policy, Government Regulation, Individual Freedom, Monetary Policy, National Character, National Debt, Statism, Yucca Mountain on July 21, 2010
Our thanks to Tom Cargill for the excellent presentation last evening and to Jerry O’Driscoll for arranging the meeting in my absence.
Jerry opened with a snapshot on employment trends from selected countries since 2008. The US is at the bottom of the pile and trending down!
Tom picked it up from there with a quick look back on the first decade of this century focusing on four remarkable points: 1. US homeland is vulnerable to attack since 911; the first since the war of 1812. 2. Critics of the market are strong despite the increase in standard of living in the last quarter century. 3. Failures of the welfare state notwithstanding, the US is moving toward socialism. And, 4. the political force toward socialism can be traced to our current great recession.
Technically, the recession is still in full force. The question is what kind of recovery will come, weak flat “U” or “J,” or a double dip. Ten key points are apparent:
- the US has not seen more economic, financial, and political distress since the Great Depression.
- our recession was not caused by market failure but mainly by government failure, both monetary with low rates too long and fiscally with housing policies of Fannie-Freddie.
- yet, the public hypnotized by Obama rhetoric believes market failure was the cause.
- admittedly, the $700 billion financial bailout was necessary to prevent a liquidity crisis.
- but the five “stimulus” packages ignored history and had a negative effect, negative Keynesian multiplier, on the GDP. Wasteful spending directed to leftist programs.
- while we now see some GDP growth, the private sector is not creating jobs and budget pressures will force a decline in public sector employment.
- the private market is not creating jobs due to the great uncertainty of the rules of the game; we are going to state directed allocation of resources not market directed allocation.
- Adam Smith calls man an economic animal, “truck, barter, and exchange” but the uncertainty of the rules creates inefficiencies that lower growth potential.
- the economic game becomes even more uncertain because of the greater role of government; what happens to the chess game if it is announced in the middle of the game that there will be a rule change; Obama is regularly announcing rule changes to come!
- QED, the most likely “recovery” is a flat “J” over the next several years with a chance of a double dip.
Tom now thinks the chance of a double dip is 50/50, an increase from his earlier thinking. Potential economic shocks which will push toward a double dip are: the dramatic increase in taxes next year, and the questionable stability of the European Union. The current divergence in fiscal policy between the overspending US and the rapid austerity in Europe may well be a third negative shock. Tom concluded saying that only a change in the US congress and administration will offer hope of a solid recovery.
We thank Beth Powers and her crew for her comments and patriotic efforts with LibertyInAmerica.org. Please consider a donation to help continue the fine bus treck.
John Dunn provided a positive report on Yucca mountain efforts, see NV4CFE.org.
Finally, our thanks to Mike Herring for treating the group to dinner and drinks, this an an inducement to make contributions to Sharron Angle’s campaign to retire Dirty Harry.
US Deficit-Debt and the European Debt Quiz
Posted by Tom in Deficit, Economics, Europe, Financial Crisis, Financial Policy, Humor, Monetary Policy, National Debt on May 27, 2010
It’s rare to see a thoughtful economic comment in the liberal NYT, but David Einhorn penned one yesterday with Easy Money, Hard Truths. In it he suggests that our grandchildren will not need to face the day of reckoning caused by our unmanageable deficits and debt simply because we will face it ahead of them. The future, though, is no less grim for them.
“Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
“The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?”
A rather humorous take on the question is given by a couple of Aussie satirists, John Clarke and Bryan Dawe, who take on a timely quiz show Q&A on the European debt crisis.
Remember those last words, “laughing as you sink!”
Will China Fall Off the Seesaw?
Posted by Tom in Centrally Managed Economy, Financial Policy, Foreign Policy, Foreign Trade, Monetary Policy, National Debt on April 2, 2010
In the second of three major Stratfor’s geopolitical updates Peter Zeihan treats, China: Crunch Time. (Note: last month’s predictions on Germany were prescient. See: Germany’s Upcoming Remake of the European Union.) In this analysis of China Zeihan discusses the rebalancing that the major commercial nations are currently undergoing and indeed striving to attain.
China’s economic system is inherently unstable. It is closed, highly regulated, overly export dependent, without private capital allocation, and dependent on a controlled currency. Historically this is much like Japan and East Asia in the ’90s. China “funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers…It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share.” The consequent effects include: inefficient capital use, a large number of property bubbles, regional disparity, a tiny consumer base, and over-dependence on exports, foreign consumption.
A major structural factor in the global economy that has the past 30 years protected China is also a core tenet of U.S. foreign policy: Bretton Woods. Bretton Woods was essentially an agreement between the U.S. and the Western allies that gave the allies near duty-free access to American consumers in exchange for the right of the U.S. to call the shots in security and foreign policy of the rebuilding allied nations. “In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement.” Thus was the USSR contained. China eventually benefited.
The Obama administration is rethinking Bretton Woods, ostensibly to update the global financial system, but in reality the National Export Initiative is much more mercantilist calling for the doubling of U.S. exports in five years and targeting countries like China. While the NEI is vague as to method and optimistic in aim, it spells a policy shift. Trade policy will no longer be subordinate to foreign and military policy but potentially “a beast unto itself!” Zeihan gives the 1980s Japan as his perfect analogy, not a good outcome for China.
China has no good options. “China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down.” China’s only recourse would be to stop purchasing U.S. debt which is unlikely: a. Beijing can’t safely invest in China’s undeveloped capital markets. b. And the bond purchases largely fuel U.S. consumers’ ability to buy China exports. We are China’s market with more disposable income than all China’s other markets combined!
“STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.”
For another somewhat similar perspective see the Economist article, Hope at last.
This report is paraphrased in part and republished republished in part with permission of STRATFOR. I highly recommend becoming a member.
Economic Effect of Propping Up “Values”
Posted by Tom in Centrally Managed Economy, Congress, Deficit, Democrats, Economics, Financial Policy, Monetary Policy, National Debt, Real Estate on March 29, 2010
I’m not an economist but it seems to me that Obama’s strategy of propping up values is a wrongheaded diseconomy. Whether it’s the bailout of GM and Chrysler with its concomitant effect of propping up UAW wages and benefits or the HAMP program designed to avoid foreclosures of underwater home mortgages, the economic effects are negative in the long range. In each case an artificial value is “supported” with confiscated money in the form of increased taxes.
The results are several and all bad:
- Potential sales of these assets by economic buyers will be delayed because a market clearing price cannot be reached without foreclosure.
- Potential private market loans using these assets as security will be delayed for the same reason.
- Necessary valuations of these assets whether as security or for tax purposes will be artificial casting doubt on the results of the valuations. Shareholders or lenders have no real idea of the economic value of GM. County governments have no confidence the the assessment value of the underwater home and thus continue to over spend or commit tax revenues.
- Owners of these assets continue contributing to the support of these assets instead of choosing more economic alternatives, for instance renting instead of buying.
- Investment capital is reduced or destroyed by tax increases needed to support the government action.
- The credit of the government is damaged by the debt increases necessary to support the government action.
- And general economic uncertainty is created by the delay in the recognition of real market valuations.
Japan should present a lesson. Its bubble economy of the ’80s in real estate and equities was fostered by cheap money and the close relationship between businesses, banks and government bureaucrats. When the bubble burst in 1990 the valuations continued to be supported by the banks funding one bad loan to repay another. Write downs and write offs were avoided or deferred. Uncertainty prevailed. Business decreased and deflation ensued. All government attempts at rescue were premised on the hope that prices would recover, but they didn’t. Prices decreased with sustained deflation. Savings increased as money was more valuable than goods or services. Consumption obviously decreased. The decade of the ’90s is thus referred to as the lost decade.
So the equation of cheap expansionary monetary policy (Greenspan) and government supported value inflation (Fannie/Freddie subprime lending) created artificial values which government policy now hopes to sustain by avoiding foreclosures and real bankruptcies. Market clearing prices are avoided and economic activity is decreased.
Yesterday’s Democratic umbrage at major companies recognizing GAAP losses resulting from Obamacare betrays their attitude toward proper valuations. These ignorant socialists have put the nation well down the road to serfdom!
Our Creditors Are Nervous……..Do You Blame Them?
Posted by Tom in Centrally Managed Economy, Deficit, Financial Policy, Foreign Trade, Monetary Policy, National Debt, Nationalized Health Care, Social Security, Statism, Welfare on March 15, 2010
Bloomberg reports today that China and Japan reduced their holdings of U.S. Treasuries again in January. In fact, China has been a net seller for three straight months.
“Chinese Premier Wen Jiabao this week sought assurances that the U.S. will protect the value of China’s dollar assets. At a press conference in Beijing marking the end of China’s annual parliamentary meetings two days ago, Wen said dollar volatility is a “big” concern and “I’m still worried” about China’s U.S. currency holdings.”
“Wen urged U.S. officials to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.”
“China’s share of U.S. bills, notes and bonds in January amounted to 24 percent of the total $3.7 trillion in Treasuries owned by investors abroad, up from 19 percent three years ago, according to Treasury data.”
With record Obama deficits, unsustainable national debt, and gigantic unfunded liabilities from welfare programs like Medicare, Medicaid, and Social Security inflation is a real threat. Add to that the demographically certain bankruptcy of these programs, the worry becomes all the more acute. Instead of a sober attempt to remedy the situation we have a socialist president on a hell-bent-for-leather campaign to add to welfare with Obamacare’s takeover of 16% of the U.S. economy. So Obama’s answer to a non-economic, non-functioning welfare system is to add a gigantic new program to it. How, with gimmicks and double counting!
If your a creditor with long-dated U.S. paper it’s reasonable to think you will be paid back with devalued dollars. And given the uncertainty caused by Obama’s socialistic, statist push of the economy, it’s reasonable to think that American consumers will not be back to buy your exports anytime soon. How can they, they don’t have jobs!
In short, our creditors should worry. And we should worry all the more!
Tom Motherway
“Stimulus or Sedative?” Thomas Sowell Never Disappoints
Posted by Tom in Business, Centrally Managed Economy, Democrats, Economics, Financial Crisis, Government Regulation, Monetary Policy on March 9, 2010
Sowell opens his succinct RCP post with an Abe Lincoln story: President Lincoln asked an audience how many legs a dog has, if you call the tail a leg? Some shouted “Five” but Lincoln corrected them saying that the answer was four. “The fact that you call a tail a leg does not make it a leg!”
The professor uses that tale to drive home the truth about the “stimulus” and the “jobs bill.” The idea behind stimulus, for example, is to get investors to invest, lenders to lend, and employers to employ. Prime the pump, put a little bit of water in to get the well flowing. That little bit of water, the government money, was never meant to restore the economy by itself, but to get the private business sector going. What has happened?
- After the Bush-started stimulus in 2008–business spending fell by 28%.
- Durable goods spending fell by 22%.
- Four months after the TARP billions–large TARP banks made 23% fewer loans.
- The velocity of money fell faster than at any time in the last half century.
- The WSJ reports the “sharpest decline in lending since 1942.”
Why would banks lend when, “from the White House to Capitol Hill, politicians are coming up with all sorts of bright ideas for borrowers not to have to pay back what they borrowed…” Why would investors invest when a substantial number of the consumers are unemployed? Why would employers employ when faced with higher taxes and more Obamacare mandates? In short, the outlook is uncertain and certainly more big government than private sector oriented.
Sowell points out that none of this is new: during the Great Depression of the 1930s, money velocity, lending, investing and employment were all lower than they were in the 1920s. The anti-buisness rhetoric and anti-business policies did not inspire any more confidence then than they do now. “In an atmosphere where nobody knows what the federal government is going to come up with next, people tend to hang on to their money until they have some idea of what the rules of the game are going to be.”
Economists have estimated that Roosevelt’s New Deal prolonged the depression by several years, how long will Barack Hussein Obama, Reid and Pelosi prolong our current difficulties?
Tom Motherway
the Spending Limitations Amendment would eventually put us on a sustainable path
Posted by Tom in Centrally Managed Economy, Congress, Constitution, Deficit, Financial Crisis, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Statism on March 6, 2010
Even without any more stimulus, bailouts, Obamacare, or cap and trade the US is on a course to bankruptcy. Consider:
- In the past five years federal spending has increased 42% to nearly 25% of the economy, the highest level since World War II.
- The deficit has exploded from $318 Billion in 2005 to $1.4 Trillion, a 400+% increase, equal to the entire accumulation of debt from George Washington to Bill Clinton.
As James Antle points out in his American Spectator article, Amending the Spending, “this will be remembered as a golden era of fiscal responsibility compared to what is to come.” Again I emphasize, this is even without Obamacare, added stimulus, bailouts, etc. With demographic certitude, as baby boomers retire, social security, medicare, and medicaid as we know them will be bankrupt. THE PUBLIC DEBT WILL EXCEED 110% OF THE ECONOMY IN 2026 AND CLIMB PAST 200% BY 2040! Again, this is without Obamacare, added stimulus, bailouts, etc.!
Three congressmen, Mike Pence (R-Ind.), Jeb Hensarling (R-Texas) and John Campbell (R-Calif.) have proposed a constitutional amendment to cap federal spending at 20% of the U.S. economy. The limit would be waived only when an official declaration of war is in effect or by two-thirds majorities of both houses of Congress. 20% is the historic average share of the economy consumed by the federal government.
The backers admit that Republicans are just as spendthrift as Democrats. They are not naive about getting it passed, 5000 amendments have been offered and only 27 enacted! But the mood of the country seems to be shifting to a serious concern for the current fiscal insanity.
If they’re correct, and the amendment has some legs, the country can get off the current unsustainable course and onto a path that’s fiscally sustainable.
Tom Motherway
America’s Lost Decade(s)-Complements of Obama, Bernanke and Geitner
Posted by Tom in Deficit, Democrats, Economics, Fed, Financial Crisis, Financial Policy, Monetary Policy, Real Estate, Uncategorized on January 25, 2010
Japan’s “lost decade” was caused by hiding bad assets, inflating values, and failing to recognize losses. “Hide the problems.” “Kick the can down the street.” Bank capital was suspect because bank assets were suspect. This societal attempt not to “lose face” resulted in a stagnant decade and higher interest rates for Japanese borrowers.
Fast-forward to the U.S. today. Fannie and Freddie, the efficient government instigators of the subprime residential debt bubble, are government toxic waste dumps. Tim Geithner in a little publicized Christmas Eve surprise, removed the $400 Billion in federal bailout limits from Fannie and Freddie. Currently the government, that’s your tax dollars, are behind everything these toxic twins do, without limit!
Why worry? What do they do? One thing is HAMP, the Home Affordable Modification Program. This is the $75 Billion program to keep people in the over-leveraged, over-priced homes that they can’t afford. It supports the inflated values of mortgage assets on the books of the banks so they won’t be required to write down the value of these assets with the corresponding hit to capital. As previously reported, including Christmas Eve Time Bomb, the program is a dangerous tilt at windmills! It only postpones the inevitable day of reckoning.
What happens to the Fannie-Freddie mortgages once made? Well, the majority go into the secondary market in packages against which bonds are issued, mortgage backed securities, MBS. Well, you argue, the market should fairly price these instruments. Unfortunately the Fed is the market, at least the great majority of the market, 75-80%. Where does it get the $1.45 Trillion to do this? Well, it prints the money. Yes, the Fed has doubled the monetary base.
Why then don’t we now have runaway inflation? Most of that excess liquidity is sitting on the banks’s balance sheets as bank reserves. The banks have not started lending it into the commercial market. There is little increase in the velocity of money, little economic activity. When the economic recovery gathers steam, inflation will raise its ugly head–on steroids!
To control that inflation the Fed would normally sell assets sitting on its balance sheet, typically government bonds. Problem is that now a lot of the securities sitting on the Fed’s books are the Fannie-Freddie toxic waste. Who’s going to buy that crap? And, at what price?
In an intriguing NRO post today, Fed Hedge, Stephen Spruiell points out that whoever the next Fed chairman is he will fail. He will have no where to turn when the stuff hits the fan. We will face runaway inflation with no exit, no remedy. Defaults, foreclosures, double-digigt interest rates. Borrowing will stop, business will atrophy.
So it really doesn’t matter who the next Fed chairman is. This gives populist bent Senators cover to oppose Bernanke’s confirmation. When the inevitable explosion occurs, they will say “told you so!”
Tom Motherway