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David de los Angeles

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  • The OPEC Catalyst As U.S. Production Slowly Declines [View article]
    Hello mg10011,

    One must begin with the observable phenomena. Prices are falling and demand is less than supply. So clearly the old Organization of Petroleum Exporting Countries is no longer an effective cartel. Yet before 2008 they were very effective. OPEC is not producing too much more today than in 2008 so something changed and it was not internal to OPEC. The vast expansion of the crude oil production following the Shale Revolution is the only logical explanation. It is worth noting that the Saudis say that this is the problem so that gives the notion a bit more credence, aside from the logic and evidence.
    Sep 2, 2015. 07:34 PM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello RS055,

    This was not Dr. Bernanke's doing.

    1) The Federal Reserve Bank (FRB) began the effort to be allowed to offer interest on reserves (IOR) before 2008. IOR was first proposed by Dr. Milton Friedman almost exactly fifty years ago in "A Program for Monetary Stability" [1]. Dr. Friedman’s goal was to reduce the degree of control that the Federal Reserve Bank over commercial banks ("The Chicago Plan") to make a 100% reserve system. Dr. Friedman wrote:"[The Chicago Plan] would be necessary to go in the radical direction of eliminating controls over individual banks, in the direction of 100% reserve banking. This move would tend to eliminate all control over the lending and investing activities of banks and would separate out the two functions of banking....On the one hand, we would have banks as depository institutions, safe-keeping money and arranging for the services of transferring liabilities by check. They would be 100% reserve banks, pure depository institutions... our present banks would be sliced off into other branches operating like small - scale investment trusts. They would be lending and investment agencies in which private individuals would invest funds as they now do in investment trusts and other firms, and these funds would be used to make loans. Such organizations could be completely exempt from the kind of detailed control over financial activities that banks now are subject to."

    Dr. Friedman believed that paying interest on reserves would for the half of the new banking system that was strictly savings oriented would create greater price stability. So the idea is an old one that does not have its roots in the Crash of 2008 or the Great Recession.

    2) The FRB has been working for nearly 20 years to make Dr. Friedman's proposal for IOR a reality. Their current authority was introduced into legislation in 2001 in what later became the Financial Services Regulatory Relief Act of 2006 [2]. The FRB did not have authority to offer IOR under the Federal Reserve Act. IOR was not supposed to go into effect until 2001 but with the Crash of 2008, the FRB was able get emergency legislation through congress to allow them to offer IOR immediately [3].

    3) The FRB did not really have the sort of emergency response to an economic melt down in mind when it adopted Dr. Friedman's idea of IOR and proposed it to Congress. However it did indeed prove useful once it was enacted to address the Quantitative Easing Policy (QEP).

    [1] http://bit.ly/1AAHb6v

    [2] http://bit.ly/1F2KLO7

    [3] http://bit.ly/17SIG0G
    Sep 2, 2015. 06:47 PM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello RS055,

    You sources are correct and I was not. Here is what the Federal Reserve Bank says:

    "The interest rate on required reserves (IORR rate) is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate on excess reserves (IOER rate) is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy. According to the Policy Normalization Principles and Plans adopted by the Federal Open Market Committee (FOMC), during monetary policy normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC *primarily by adjusting the IOER rate*. Specifically, when economic conditions warrant the commencement of policy firming, the Federal Reserve intends to set the IOER rate equal to the top of the target range for the federal funds rate. "[1] (Emphasis added)

    [1] http://1.usa.gov/YhcrFl
    Sep 2, 2015. 06:31 PM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello RS055,

    I was merely describing what the Federal Reserve Bank planned to do, not how effective it would be.
    Sep 2, 2015. 03:35 PM | Likes Like |Link to Comment
  • Are We Facing Quantitative Tightening And What Does That Mean For The Markets? [View article]
    Hello Christiaan van der Meer,

    The Federal Reserve Bank (FRB) has the most control over short term interest rates and the least control over long term interest rates. The shortest term loan is the Federal Funds Rate (FFR) which is the overnight rate for member banks of the FRB. The Quantitative Easing Policy (QEP) went into effect in December of 2008. In November of 2008 the FFR was 0.38%, today it is 0.13%, a drop of 25 basis points. The 30 year fixed mortgage rate in November of 2008 was 6.05%, today it is 4.05%. Yes, interest rates did decline because of QEP but not very much. Indeed, how could they, they were nearly zero before QEP went into effect. These are actually the side effects of QEP, not the main target.

    "The QEP consisted of three key elements: (1) The BOJ changed its main operating target from the uncollateralized overnight call rate to the outstanding current account balances (CABs) held by financial institutions at the BOJ (i.e., bank reserves), and ultimately boosted the CAB well in excess of required reserves. (2) The BOJ boosted its purchases of government bonds, including long-term JGBs, and some other assets, in order to help achieve the targeted increases in CABs. (3) The BOJ committed to maintain the QEP until the core CPI (which in Japan is
    defined to exclude perishables but not energy) stopped declining."[1]

    "Over recent years, short-term nominal interest rates in many countries have effectively been driven to the zero lower bound. Deprived of their traditional tool for policy, the four major central banks have begun adopting unconventional monetary policy, including forward rate guidance, asset purchases and programs to directly support bank lending."[2]

    "What sort of monetary policy would change expected inflation, the expected path of short term rates, and/or the term of premium? First, a central bank can commit to zero beyond the period that their reaction function can normally call for, for what Eggerttson (2006) called 'committing to be irresponsible'. Such a strategy – often termed “signaling” – is time inconsistent however: The central bank will want to renege on its commitment and return to normal policy when conditions improve. The second and third methods – outright asset –purchases and *bank lending* [Quantitative Easing] – can help resolve the apparent time inconsistency of a commitment to an announced policy path by changing the central banks incentives through its balance sheet.”[3]

    The focus is clearly on increasing the CABs and bank lending and not really on interest rates. Since interest rates were very low before QEP, lowering interest rates cannot have been effective.

    [1] http://1.usa.gov/1yqZXwq

    [2] http://1.usa.gov/1FFMXLa

    [3] http://bit.ly/1yByZBM
    Sep 2, 2015. 03:33 PM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello Salmo trutta,

    Well, it is what the Federal Reserve Bank has been doing since they instituted Interest on Reserves.
    Sep 2, 2015. 03:09 PM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello RS055,

    The Federal Reserve Bank could use open market operations. Now, that is not necessarily going to be an easy operation. With such a large balance of assets on their books, the FRB may have difficulties hitting it target.

    "Prior to the financial crisis, because reserve balances outstanding averaged only around $25 billion, relatively minor variations in the total amount of reserves supplied by the Desk could move the equilibrium federal funds rate up or down. With the nearly $3 trillion in excess reserves today, the traditional mechanism of adjustments in the quantity of reserve balances to achieve the desired level of the effective federal funds rate may well not be feasible or sufficiently predictable"

    It seems rather like swatting a fly with a sledgehammer.

    Vice Chairman Stanley Fischer
    February 27, 2015

    http://1.usa.gov/1xktPtw
    Sep 2, 2015. 03:08 PM | 1 Like Like |Link to Comment
  • The Beauty Of Deflation [View article]
    Hello Salmo trutta,

    Fair play. However neither is it a commodity currency where one can debase the precious metallic content of the coinage.
    Sep 2, 2015. 03:04 PM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello RS055,

    It is the Federal Reserve Bank's strategy to keep the Interest on Reserves (IOR) rates 25 basis points higher than the Target Federal Funds Rate (TFFR). If they set the TFFR in September to 0.25%, they will increase the IOR rate to 0.50%.
    Sep 2, 2015. 01:57 PM | 2 Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello willytrd,

    The current target is a range. However, in the past it was not a range and it is my understanding that any new target would not be a range.
    Sep 2, 2015. 01:08 PM | 1 Like Like |Link to Comment
  • The OPEC Catalyst As U.S. Production Slowly Declines [View article]
    Hello sdz,

    The model to consider is that of Russia at war. When Napoleon invaded Russia, the Russian Army burnt everything in his path, the left him nothing of any value. He "conquered" a smoldering ruin. The Soviet Union adopted a similar strategy, they burnt, destroyed, or moved eat of the Urals everything that might aid the German Army. They destroyed their own country to save it from the invader. The alternatives were to lose everything for ever or a great deal over a few years. This is known as a "Scorched Earth Strategy".

    This is what the Saudis are doing. Like the Russians and Soviets, the Saudis have to chose between losing a great deal for a few years or losing everything for every.
    Sep 2, 2015. 11:18 AM | 2 Likes Like |Link to Comment
  • Are We Facing Quantitative Tightening And What Does That Mean For The Markets? [View article]
    Hello Christiaan van der Meer,

    The key point is that the goal of the Quantitative Easing Policy (QEP) is *NOT to lower interest rates*. So if interest rates world wide increase, that does not counter-act the goals of QEP. The principal goal of QEP is to increase the total quantity of money available for lending in the United States. This is was achieved and is still in place. So long as the quantity of money available for lending has been increased and remained increased, QEP is still in place.
    Sep 2, 2015. 11:03 AM | Likes Like |Link to Comment
  • Does The Federal Reserve Have Any Responsibility For The Economy? [View article]
    Hello willytrd,

    You are correct and I would add that the Federal Reserve Bank has already stated that when (or if) it sets a new Target Federal Funds Rate, it will be 0.50%, which is either 25 or 50 basis points higher than the current target since that is a range of 0 - 0.25%.
    Sep 2, 2015. 10:56 AM | 1 Like Like |Link to Comment
  • The OPEC Catalyst As U.S. Production Slowly Declines [View article]
    Hello Hampton108,

    ME = Middle East, between the Near East and the Far East.

    The question is not whether demand is growing or not, but is it growing faster or slower than supply. If supply grows faster than demand, prices will fall.

    Demand has been softening, growing more slowly, for some time. Brookings Institute [1] has an interesting piece on the subject called "And then there was none". Moreover, this is nothing new, anyone paying attention would have noted that concerns about fading demand have been around for a bit.

    However, threecyears ago there was a report from the Kennedy School of Government's report which said:" Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices."[2]

    The growing production of crude oil, largely driven by the "Shale Revolution" was colliding head on with softening demand.

    Saudi Arabia was expressing concerns along these line long before the current collapse of prices[[3]

    As the Wall Street Journal wrote nearly two years ago:

    "'Saudi Arabia is done with its role as swing producer,' said one official familiar with matter. 'It is not Saudi Arabia's role anymore to adjust output to protect the market or balance [it]. It is the [responsibility of] OPEC.'"

    This was not an unanticipated move. In 2013 The Oxford Institute for Energy Studies wrote:

    "Against a backdrop of declining oil demand following the Asian financial crisis, the increase in output led to a collapse in oil prices. Only when OPEC (in coordination with a few non-OPEC countries) implemented large cuts did oil prices recover. History suggests that the assumption that Saudi Arabia will acquiesce to large Iraqi or Iranian output increases and remain a swing producer, foregoing any response to a decline in its market share, is naive. *There is a critical point where Saudi Arabia may decide to abandon the role of the swing producer and compete to maintain its market share, especially in its key export markets.*"[4] (Emphasis added)

    The collapse of the price of oil, Saudi Arabia abandoning its lead role, this was all described some time ago.

    [1] http://brook.gs/1B2ediM

    [2] http://bit.ly/1Wmm0lW

    [3] http://bit.ly/1CLQQ0t

    [4] http://bit.ly/1CLQQ0w
    Sep 1, 2015. 07:50 PM | 1 Like Like |Link to Comment
  • The OPEC Catalyst As U.S. Production Slowly Declines [View article]
    Hello Big Ten,

    You have indeed described the world of crude oil before 2008. Key is keeping the supply of oil just a wee bit less than the supply. Consider this, in mid-2004 the highest price ever seen for bench mark West Texas Intermediate was in the low 40 USD/bbl range and it hit 50 USD/bbl in July of that year. Four years later it was over 100 USD/bbl. The cost of producing a barrel of oil had not doubled. It was Saudi Arabia working the telephones (or perhaps email) with other cartel members.

    Now however that is not possible, there is simply too much product on the market. Like Prospero, the Saudis have lost their magic power over the market place. Until someone permanently drops out the market on the supply side, that power will not return.
    Sep 1, 2015. 05:15 PM | 1 Like Like |Link to Comment
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