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  • WSJ Editorial Page Watch: 'The Slow-Growth Fed'? [View article]
    David, I understand your point and tend to agree with you about exporting capital. We could use some of it right here at home, but as I've argued we've been in something of a post crisis supply side decay (per my understanding of Fed Powell's speech) above and beyond the capital export that has been happening for decades - turning parts of Detroit into a slum.

    Massive stimulus is doing pretty much the same thing, being exported in a carry trade inadvertently debasing the dollar against some growth regions' currencies. That is not the intent of massive easing, domestic investment and employment is. The trap is sprung when we add additional stimulus to a low investment environment for the sake of debasing the currency to achieve inflation. We will be stuck there buggering thy neighbors for a very long time with cash flying the globe in a carry trade avoiding the low yielding, low returns, and ailing US economy which is deemed, ironically, in need of such massive easing.

    The US is not at that point, but I believe Japan is and Europe may be. When massive stimulus fails to jump start the economy to the point of rising inflation and growth, then adding more monetary stimulus becomes a self fulfilling currency trap trying to import inflation through a cheap currency instead of stoking it domestically through (strong dollar) capital inflows and domestic investment.
    May 4, 2015. 11:14 AM | Likes Like |Link to Comment
  • What's The Optimum Amount Of National Debt? [View article]
    "But it doesn't tell us what the optimum SPLIT as between debt and base is."

    The debt should be sufficient to close the output gap through direct government spending on it's needs contracting the private sector to perform some necessary function, such as moon landings, SDI, or spending the soviets into the ground. Infrastructure is another example, health care may be another. The base will be what the base will be depending on the funds rate.

    Neither the monetary base nor the funds rate have a guaranteed multiplier effect on the money supply in the economy, though normally they do. Today, both are a poor way to inject money into the economy increasing the aggregate demand so necessary for private sector investment.

    The debt does not necessarily mean a larger monetary base unless the Fed buys that debt. The base cannot be "spent" away, it never leaves the banking system except for short forays as currency in circulation that end up back in the banking system and back into the economy, again. As we can see today, the large base is not inflationary.

    "But the larger the debt, the higher the interest charged by debt holders."

    At $18 trillion and 2% 10 year, how can this even be true at any stretch. Look at Japan and see how their debt rises in correlation with their yields. It's true the central banks bought debt increasing the monetary base making liquidity cheap and rates low. Our debt has been increasing for decades and bonds have been in a long term bull market.

    "...the optimum amount of debt is the amount that produces a small positive rate of interest on the debt.

    I suggest that should be something between zero and the rate of inflation: that means a NEGATIVE real rate..."


    "...PSNFA should be made up entirely of base."

    All in non interest bearing cash?
    May 4, 2015. 11:02 AM | Likes Like |Link to Comment
  • QE Posted On The Wall? [View article]
    "First, the job creation side of the Fed's dual mandate should be eliminated in favor of the Fed focusing solely on controlling inflation."

    I agree, 2008 was more of a 19th century style panic. But, the Fed achieves inflation through the labor market and aggregate demand through the funds rate. The money supply should, indeed, grow in a "price stable" economy and should grow at a constant rate. Unfortunately, the Fed is relatively powerless to do anything other than lower the funds rate hoping to make it so. There is no connection between the monetary base and the rate of inflation in the economy.
    May 4, 2015. 10:22 AM | Likes Like |Link to Comment
  • Money Is Never Backed By Anything [View article]
    Borbastic is correct, Fed reserve notes are IOU's in the same way a gold certificate is and IOU. We are creditors to banks whether depositing gold, paper money, or receive a deposit through the payment's system. Banks are debtors incurring a liability to make good on their liabilities either by converting dollars into themselves or by issuing precious metal on demand.

    Really, the only difference is who's credit worthiness is at stake (and what is redeemed.) For FRNs, it is the full faith and credit of the US government to convert one dollar into another one. For gold issuing banks, it is the convertibility of paper currency into gold based on the creditworthiness of that bank or the Federal reserve.

    The government owes us something when they accept their own liabilities. It's interesting, but if you're a post Keynesian, what the government owes us is the promise to accept it's own liabilities in return for reducing our tax liability. One cannot imagine a sovereign issuer of the currency ever reneging on that simple promise.

    In today's fractional reserve system, new loans are backed by a promissory note to repay the bank at interest and are inherently risky. The Fed backs it's own reserves with government debt on the full faith and credit of the US government. So long as the sovereign debt is safe, the base money supply is also safe. You could imagine if the Fed backed the money supply buying risky junk bonds that may default compromising the base money supply.
    May 4, 2015. 08:31 AM | Likes Like |Link to Comment
  • New Tools For Manipulating Interest Rates [View article]
    Yea, it's interesting how they are going to achieve this. I see it in two parts. First, is a minor nudge upward of the funds rate which will have minimal impact on commercial bank credit based on our credit risk and is not zero, anyway. The idea seems to be to gradually tighten liquidity while keeping the funds rate very low spurring aggregate demand near the ZLB.

    The RRP and TDF seem to be a removal of excess liquidity from the system. As you point out, excess liquidity is well beyond that required for a zero funds rate. In fact, a zero funds rate is pretty much required before doing quantitative easing beyond the zero bound. This excess liquidity is not so much aggregate demand, as the ZLB is, but it is a supply side stimulus as employment improves. This stimulus seems to be what the Fed is winding down, not so much a hike in the funds rate to stifle aggregate demand.

    And it seems the ON RRP might be a safe asset to replace the apparent shortage on Fed buying and low Treasury issuance.
    May 4, 2015. 08:14 AM | Likes Like |Link to Comment
  • QE Posted On The Wall? [View article]
    Tree, can we attribute the lack of large busts to Glass–Steagall? Maybe. Quite possibly even. The Fed is suppose to be that suspension, and maybe it was preventing the shock form bottoming out when we hit that rough patch. I dunno, though, if the crisis was really a business cycle phenomenon, it was a financial crunch.

    I've blown seals in my own front fork shocks riding off road, but lived to ride another day. That's probably what the economy did, and it needs a good suspension (whatever that may be: Fed, Dodd-Frank, Basel) to smooth out the bumps in the road. This was a full blown pot hole. Hit one of those on a lonely dark back road one night, put a nice dent in the aluminium rim and lost all air pressure. Rode around on those ugly undersized donuts feeling like an idiot. :)
    May 4, 2015. 08:01 AM | Likes Like |Link to Comment
  • Perhaps Student Loan Debt Really Is Not To Blame For Slow Growth? [View article]
    Thanks for the excellent analysis of student debt. Often, I think student debt is used as a proxy for total consumer debt overhang.
    May 4, 2015. 07:28 AM | Likes Like |Link to Comment
  • The Debt Supercycle Versus Secular Stagnation [View article]
    Brian, thank you for a real thought provoking article. I look at things from a post Keynesian viewpoint, as well, but don't discount the debt super cycle entirely and appreciate the market clearing aspects of debt destruction. No doubt we could use some debt forgiveness to speed things along.

    I guess the super cycle is a proxy for a balance sheet recession (or visa versa) where we might have been a little overindulgent prior to the crisis enjoying the good life, but we definitely became insolvent when our home equity fell and we lost our jobs when the overindulgence of home prices finally collapsed. In a sense, some unfortunate labor market participants became more like Greece, getting by pretty well despite it all until we didn't.
    May 4, 2015. 07:27 AM | Likes Like |Link to Comment
  • WSJ Editorial Page Watch: 'The Slow-Growth Fed'? [View article]
    Warren Buffet invests. The Fed is not an investor, it's "an economist" working to improve the economy. Warren Buffet is along for the ride.
    May 4, 2015. 03:19 AM | 1 Like Like |Link to Comment
  • The Debt Supercycle Versus Secular Stagnation [View article]
    Excellent article. Actually, I see merit on both arguments and some relationship between them. I guess it matters how much capital and debt destruction we want to allow to happen. Depressions are very deep deflationary cycles and are difficult to recover from. There is some evidence asset purchases can keep capital destruction from falling too far and seems to have some impact on employment (along with resilient growth) to allow a new equilibrium well above that of depression, but not quite back to pre crisis growth.

    I argue, with employment rising to meet falling demand, we are approaching the new lower growth trend in a way that demand can meet supply and begin driving prices higher. Unfortunately, some pre crisis labor market slack will persist. But, it will not be at depression levels.

    So, yea, the debt super cycle (which became a super cycle after the floor fell out of the economy), secular stagnation, and even the era of slow growth hypothesis are all really speaking to the same condition. They just describe different aspects of the same thing. We could eliminate debt, but we'll not achieve high investment demand until capital falls to very deep levels to match remaining demand. In a sense, we are in secular stagnation - low investment demand - until such time as we reach equilibrium.

    With asset purchases, we seem to level out a little less than pre crisis and will have low investment demand until we can sustain aggregate demand at the ZLB with rising wages. Debt should be proportional to GDP, more or less, in a price stable economy. After all, we need a money supply to grow and the money supply comes from credit. W'll have slow growth era until both aggregate demand pick up and domestic investment replaces rusted capacity. The super cycle should be minimized relative to growth.

    It's not one or the other, it's all the above. They are all related, as I see it. Not one or the other, but aspects of each.
    May 3, 2015. 09:24 PM | 1 Like Like |Link to Comment
  • Close But Not There Yet: Getting To Full Employment In The United States [View article]
    "Our measure of the employment gap suggests that labor market slack remains, and will only decline gradually, pointing to a still important role for accommodative macroeconomic policies to help reach full employment."

    It may be that with capital destruction and falling real output, even a slack labor market, can press demand onto a lower level of capacity causing inflation. In other words, we can reach a level of full employment even if some folks remain out of the labor market for some time. At full employment, we should begin to see some inflationary pressures augmented by the still low funds rate and money easy enough for capital investment to pick up on sustained (but sluggish) domestic growth numbers.

    Basically, we seem to be growing at a lower trend line than the higher pre crisis trend of higher capacity and much less labor market slack. Not all of the damage from the crisis and slow growth is permanent, but some of it will take a long time to recover to regain pre crisis growth levels. In the mean time, we'll grow more slowly for a while as secular stagnation wears off longer term.

    The Fed will drive the economy to this lower level of growth where inflation begins to pick up at remaining capacity and full employment, then gradually tighten excess liquidity while leaving rates low for a considerable time. Business and investment demand will have to pick it up from there, some of it while interest rates are still relatively cheap but rising gradually. Then we will get back to normal in terms of investing in the world's largest economy with more normal rates of interest and returns.

    So, labor market slack is just a fact of life for now as a consequence of less capacity and a still slack labor market rising to meet it with aggregate demand stimulated at the zero lower bound over the medium term.
    May 3, 2015. 09:12 AM | Likes Like |Link to Comment
  • Secular Stagnation Or Golden Era Of Low And Stable Growth? [View article]
    "Must one be a socialist to have ordinary human compassion?"

    It would appear so. :)

    "How is profitability best maximized/ensured?"

    We maximized profits by cutting costs wherever possible while paying a livable minimum wage and paying more for productivity and responsibility. Some costs we did not skimp on preferring quality inputs to cheap ones. So, we had a baseline cost, including our wage structure, and maximized prices on demand for our output in relation to the cost we thought was acceptable.

    We reached equilibrium (within a rage) where we sold just the right amount to maximize revenue and reduce costs of excess inventory. If we sold fewer on the demand curve at a higher price, we experienced an opportunity cost of not selling a higher quantity. If we sold many more at the low priced end of the demand curve, we lost money in increased input cost and lower revenue. We found equilibrium of price and quantity along the demand curve to maximize revenue.

    We could have made more money with slave labor and reneging on our energy bill, though (tongue in cheek.) We knew our cost and made money pricing to quantity demanded at equilibrium of price and quantity along both the supply and demand curve. Any less or any more sold would cost us money.
    May 3, 2015. 08:48 AM | Likes Like |Link to Comment
  • Cries Of Despair Induced By Wednesday's Disappointing First-Quarter U.S. GDP Growth Report [View article]
    When I say I share sentiments, I mean in terms of the importance of and affordability of higher education and the pursuit of the American dream. I also think students need to start a career with less student debt load or none at all, if possible.

    It's not always certain that government involvement in anything leads to lower costs for students or the government itself. I am not sure what the solution is, but it's probably not government funded. Government funding tends to be inflationary in whatever the government funds, even discounting the usually inefficiencies heaped upon public vs private programs.

    But, somehow, education needs to be more affordable for the economic and personal benefit it affords. We all have stories of how we made it through college. My employer paid over half my tuition, I paid the rest as well as (new) books. I wanted new books because I could afford them and planned to keep them afterward. With some assistance and a decent paycheck, I finished college debt free.

    There are programs out there to be taken advantage of, but government spending seems to make college more expensive rather than less expensive. And in some ways that's okay because a good paycheck attracts good professors...those who "can", and those who teach.

    Whatever the case, it would be nice if students could get some non-debt assistance, such as a grant, scholarship or job benefit to reduce personal cost and debt trying to get an education even if part of it came from the government. Yea, I share those sentiments.
    May 3, 2015. 07:04 AM | Likes Like |Link to Comment
  • WSJ Editorial Page Watch: 'The Slow-Growth Fed'? [View article]
    David, how can we both be right and agree with each other and still differ a tiny bit? :)

    I guess my argument is, QEP is certainly a response to desperate conditions, though I am not entirely familiar with the differences in Japan's asset purchases relative to the US. My argument is such a policy can lead to a trap, even in the US if we ease to debase the currency as a form of import inflation. I do not think inflation will come, or even if it does, it likely won't do much to rid us of the desperate condition that requires massive easing - which is where I think Japan is. Only currency inflows or QEP spent domestically on investment can do that.
    May 2, 2015. 08:21 PM | Likes Like |Link to Comment
  • Why The Fed Will Raise Interest Rates This Year [View article]
    Bill, it's really not a schedule based policy move, they will begin tightening when they feel the labor market is strong enough to begin applying demand on the economy and causing inflation. As you know, of course, it's data dependent and, yea, the data doesn't look good so far this year. The move could happen this year or next, it really doesn't matter so long as they make the move sometime soon. But, they need to be somewhat ahead of the curve, and that may mean this year if the data is believed to be strong enough through next year. Let's hope they are as wise as we want to believe, I think they are.
    May 2, 2015. 12:46 PM | Likes Like |Link to Comment