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  • Congress Asks: Is The Fed Creating The Next Financial Meltdown? [View article]
    "Yes, the FED wanted equities to rise and bonds to rise or at least remain stable …but even more so the FED wanted rises in real estate price...I think real estate has a long journey to get to bubble era levels…"

    That's succinctly what the Fed is after for main street, not a housing bubble but for home prices to stabilize and begin rising again. Also, with liquid financial markets on the supply side, even if some hard asset investment occurred it would create jobs which should put upward pressure on prices (hopefully spiraling up and generating additional growth and returns for investors.) This is how the Fed meets it's dual mandate.

    In testimony before congress, Bernanke was berated for being in bed with, and saving the butts of, his "bankster buddies." He gave the congressman that, "Oh, pleeeeasse..." look. (LOL)
    Sep 17, 2014. 09:30 PM | Likes Like |Link to Comment
  • The Worst Call Of The Last 5 Years [View article]
    Oh, there has been inflation. The "monetary phenomenon" occurred where the money was, in the financial markets and not so much in the actual economy. The dollar has stood up well against the majors and against itself (domestic inflation), but it was highly inflated against many EM currencies - 30% inflation in the dollar stings badly. Wanna know where the inflation was? That's where. But, after all is said and done, Fed policy is a domestic monetary policy. A bunch of it went abroad, though. Time for it to return home and do some good? I'd think so.
    Sep 17, 2014. 06:51 AM | 8 Likes Like |Link to Comment
  • Currency Debasement [View article]
    Interesting, Larry.
    Sep 16, 2014. 09:34 PM | Likes Like |Link to Comment
  • Currency Debasement [View article]
    Stauffer, I largely agree with your interesting comment. Personally, I could care less what CEO's make so long as they earn or are worth it. And certainly risk seeking entrepreneurs deserve every penny they make. It's just that worker compensation needs to "float" along with every other boat on the lake in some manner rather than being continually "minimized" and stagnate. Inequality has to narrow the spread a little bit, surely not entirely, between the working class and the capitalist class.

    Yes, American wages can lead to less competitive pricing, but this is done while still maximizing profits. However, Americans have more buying power which eventually ends up as savings, anyway. Americans have undergone a Greek style competitiveness for a very long time (three decades or more) while relying heavily on debt consumption to keep up with productive capacity. Until home prices collapsed, anyway, and through paying very high interest on easy credit (card) consumption. The current model resulting in the period of great moderation is really what crashed in 2008. This model proved unsustainable.

    I think it's all about finding some balance in the spread of income equality while still allowing companies to maximize profits and innovators to earn what they can pull from the economy. It's about finding and paying a livable wage. Consumers create most of the money in circulation that ends up as someone's savings as money flows to the productive assets, which if fine. But such a burden can lead to over indebtedness without adequate compensation to keep the money supply growing and flowing into the hands of those who own productive assets.

    Americans should have enough to buy a home (consumer equity, which we tried to do with liars loans and the sort), put food on the table, and hopefully invest in earning assets to increase their wealth effect. You just cannot do any of that on a burger flipping wage. Are we trying to internally devalue the American workforce hoping "our" jobs will be pried form the Chinese workforce, or are we a wealthy nation consuming the world's output? We used to be both, now what are we? A third world nation?
    Sep 16, 2014. 09:31 PM | Likes Like |Link to Comment
  • Currency Debasement [View article]
    "Restore some sort of link between wages and productivity..."

    Having not read Larry's comments, yet, yes this seems plausible albeit difficult. Instead of cutting wages to maximize profits, there has to be a way to pay people what they are worth in terms of their own productivity (whatever worth means, and however it can be determined.) Of course, the free market offers and workers bid for current wages, so any free market wage level should be acceptable. But, I suspect the bargaining advantage does not reside with the worker. It's not an easy problem.

    I get the feeling our economic model expected all of main street to strike it rich in equities with consumption compensated using debt in return for less reliance on a wage and savings and reduced retirement costs to the private sector. Somehow this seems related to comments made by some politicians that about half the population are not invested in equities, presumably as they should be, other than maybe a small retirement plan. The plan seems to be for America to grow wealthy middle class id through ownership. Unfortunately not everyone participates. IN effect, if we can turn the population from wage earners into successful portfolio managers the wealth effect would play a larger role in our lives, just as home equity did.

    "perhaps directly financed by the Fed...We know that it also improves the supply side."

    The Fed already financed a large pool of loanable funds, the government just did not sufficiently tap into it and redistribute it to infrastructure projects. Hense heavy reliance on the Fed's blunt tool. To recover from a depression, the government is likely required to spend, anyway, I see no reason we could not spend to head off the deflationary spiral. If we want 2% or more inflation, of the healthy consumer demand and stressed capacity kind, consumers need to earn a 'descent' wage and consume. If by debt, then earn the means to service that debt.

    Sure, such spending helps the supply side, too. When money circulates the economy, there are plenty of investors and capitalists willing to get their hands on it. It's a beautiful thing.
    Sep 16, 2014. 09:05 PM | Likes Like |Link to Comment
  • Currency Debasement [View article]
    Yea, as always, I think you're somehow tapping into my mind and reading it. It's not an easy problem to solve, for sure. I was hoping consumer debt might have fallen off a bit more that it actually did. Some debt needs to just go away. The Austrians seem to got that right. But not to the point the entire working population and their children starve or even rich people jump out of windows.

    Depressions are awfully hard to recover from, it's probably require a lot of spending, anyway: infrastructure, war, health care (costing nearly as much lol.) So, we staved off a full blow depression, where do we go from here? Hope employment is strong enough to support some growth?

    Great flurry of interesting articles, lately, SU.
    Sep 16, 2014. 06:35 AM | Likes Like |Link to Comment
  • Currency Debasement [View article]
    "the bottom 80% or so of US households were running savings rate of minus 10% or so..."

    And actually have been since the early 80's when Americans began dis-saving relying more home equity as savings and on debt to consume. When you can buy everything on credit, you only need a wage to service it. It was not until the home owner became insolvent and unemployed they could no longer continue spending and servicing debt.

    I'm not suggesting at any arbitrary level debt is always sustainable, people often get in over their heads. During the crisis this occurred en masse. But somehow, we need consumers to spend placing demand on existing supply. If we do not want further reliance on consumer debt, we need a stronger dollar or a better wage barring any massive de-leverage that really never happened.

    Somehow the money supply (in circulation trading hands in the economy as much as flowing through the capital markets) must be able to buy everything we can produce without really increasing capacity to produce more, just yet, which is the primary driver behind monetary policy and risk seeking. One would hope we could close the production gap from below instead of allowing it to collapse to depression levels.

    One might dare to hope monetary policy dollars have an effect into whichever market they flow. With a hike in US rates, our very own monetary policy might actually flow back to the domestic economy while a bit higher rates eases creditworthiness and increases credit availability.

    Capitalism is the system to have, IMO, but for it to sustain itself it needs to float all boats: yachts and dinghies, alike, instead of leaving consumers and our workforce (who are capitalists, too, presumably) up the creek without a paddle.
    Sep 15, 2014. 10:44 PM | Likes Like |Link to Comment
  • Currency Debasement [View article]
    "prior to the crisis, the global economy generated just enough demand to achieve reasonable employment balance the large amount of global savings."

    Whatever causes one might argue, I think this is a fair statement. At this point there was likely no significant excess capacity. With the bursting of the housing 'bubble' came rising unemployment and a credit crunch. The global economy appeared to be trotting along just fine until the financial markets stalled. As we fell into recession, what at one point was not necessarily over capacity and mal investment suddenly appeared to be relative to the slower growth period that followed.

    Pre crisis growth can be claimed to have been unsustainable only after the crash into recession where past growth can no longer be attained. It was not over capacity nor mal investment until it was. The production gap, as Larry Kramer points out nicely, began not because of a major glut in over capacity, but because the bottom fell out. The consumer became underwater and unemployed as home prices fell, unemployment spiked, and credit markets froze. Even the much maligned Greece was making good on it's debt despite it's inefficiencies until the credit stopped flowing.

    When someone calls something unsustainable, it's all about context. It's one thing to say what is sustainable in growth periods. It's quite another for those same conditions to be sustainable in recession, especially one caused by a devastating bursting real estate bubble for obvious reasons.

    More on the 4% inflation later. It's almost like a nominal GDP target. If 2% target gave us $4 trillion circling the globe looking for returns, sluggish domestic growth, stubborn unemployment, and added fuel to the fire in growth regions, how large must the asset purchase program be to allow double the inflation to finally feed back into the economy. A large amount of our own monetary policy dollars sought yield in global growth regions already enjoying high employment, inflation, and higher returns.

    The dollar debasement has already happened. If one wants to feel the sting of 30% debasement on top of elevated local inflation, you simply have to live and work in a emerging market. I am not sure inflating the dollar to such heights will not result in more of our own monetary policy dollars looking for the tiniest global yields and returning as higher input costs forced onto an already beleaguered consumer. What we could use is some domestic demand pull inflation.

    I think the best way to increase global demand and close the productivity gap is through a stronger dollar and maybe a bump up in domestic wages, either through a reduction in labor market slack, adjustments in inequality, and maybe even some income redistribution. Capitalism is great, but money tends to flow from the indebted consumer to those who own productive assets. Redistribution keeps this flow a little more sustainable often times leaving the saver with deferred spending earning interest in a bond, anyway, and no less financially well off.

    Those workers (who are) saving for retirement are not likely to spend any equity earnings they are also deferring and savers do not have a propensity to spend in the economy. Someone has to spend, otherwise we have unsustainable surplus capacity and recessionary 'growth' becomes the new normal.
    Sep 15, 2014. 09:08 PM | 2 Likes Like |Link to Comment
  • How To Use Money Supply Statistics For Market Predictions [View article]
    "M2 is now $190."

    Sorry, hard to follow your example. Check out Jason's informative post above. He articulates it well. Inter-bank lending reserves does not necessarily create demand deposits, as we see today with banks in excess. In fact, it is the expansion of the money supply that drives demand for required reserves. As long as inflation expectations are well anchored, the Fed will accommodate this demand defending it's funds rate.
    Sep 15, 2014. 05:40 AM | Likes Like |Link to Comment
  • How To Use Money Supply Statistics For Market Predictions [View article]
    "The banks can take out money from excess reserves at any time and loan it out."

    Commercial banks create loans from thin air, the do not loan their reserves outside the banking system creating any form of money multiplier. When banks lend to each other, total the reserve balance remains unchanged.
    Sep 15, 2014. 01:53 AM | 1 Like Like |Link to Comment
  • How To Use Money Supply Statistics For Market Predictions [View article]
    "allowed the Federal Reserve to pay interest on contractual clearing balances and excess reserve balances, two types of balances that depository institutions hold voluntarily at Reserve Banks..."

    This is an interesting development, fast tracked by the onslaught of the credit crisis, putting the cost of maintaining "Federal" reserves in the private commercial banking system back on the government. Earning interest on clearing balances might be an incentive for banks to hold 100% contractual or clearing (and maybe even excess) reserves against deposits to allow for payment clearing instead of holding a minimal reserve requirement and risking fines is a bank is short during the settlement period. Currently lacking clearing balances requires an injection of reserves by the Fed and a fee applied, anyway.

    "allows the Federal Reserve to implement monetary policy without the need for required reserve balances."

    While there won't be any required reserves costing the commercial banks, there will be some contractual balance held by the commercial banks and paid for by the government as a cost of maintaining and operating it's own payments system. It will likely set a floor on the funds rate as, it seems, no bank would offer to loan it's excess interest bearing assets at less than the interest paid by the central bank. A bank in need of contractual clearing balances would need to bid higher than IOR to the point the discount window becomes attractive.

    I wonder if cash, not on deposit at the Fed and not earning interest, will be attractive enough to hold sufficient vault cash to meet the demand for actual currency in circulation through ATM transactions. Or whether this is a step toward a cashless society.

    In my understanding, the Fed makes no attempt to control the money supply at all. In fact, the money supply drives base money (which may be an anachronism since the money multiplier no longer exists) so long as inflation expectations anchored. The Fed simply influences the cost of borrowing by setting a floor on the cost to lending institutions. Such a policy does not control the money supply directly, it only influences free market supply and demand decisions.

    Paying interest on excess reserves is a form of monetary policy, of course, not unlike issuing a bond. There is some incentive to hold those balances as savings depending on the interest paid relative to the rate of inflation and the term of any (if any) contractual obligation to hold them.
    Sep 15, 2014. 12:35 AM | Likes Like |Link to Comment
  • How To Use Money Supply Statistics For Market Predictions [View article]
    "Federal Reserve member banks (all banks) can take those excess reserves out of the Fed at any time and they then become part of M1 or M2."

    If a bank removes it's reserves on deposit at the Fed, then it must hold vault cash - both Fed liabilities. The sum of those two, including currency in circulation which leaves the bank vault only temporarily, is the monetary base. When the Fed buys a bond, it simply credits bank reserves held at the Fed and someone get's a credit to their commercial bank deposit which is part of the money supply. This is not new money, it's just liquid money already counted in the monetary aggregates.

    Reserves are bank assets and comprise the monetary base. Conversely the actual money supply is comprised bank liabilities counted as a monetary aggregate. If a bank draws down it's reserve assets held at the Fed, they do not credit them to someone's deposit liability increasing any monetary aggregate (unless that currency, as M0, temporarily circulates the economy as M1.) The credit to a demand deposit already occurred when the Fed purchased a bond through payments system by crediting a bank's reserve account.

    The Fed 'prints' nothing new that did not already exist as a broader monetary aggregate. There is simply more liquidity in the system without changing the broader money supply.
    Sep 14, 2014. 07:37 PM | 2 Likes Like |Link to Comment
  • Congress Asks: Is The Fed Creating The Next Financial Meltdown? [View article]
    I am not so sure the Fed want's to reignite the housing bubble so much as halt the fall in home prices being exacerbated by the rise in unemployment. The Fed could probably care less about the actual price of homes decided by the free market as long as home prices stabilize and begin rising instead of falling further crushing our wealth. And they try to stimulate employment because certainly the unemployed cannot afford a mortgage. The employed can exert some demand in housing allowing the free market to price homes making it profitable to invest in them.

    "Why do we forget about the bailouts that were given to people, originating lenders / banks and Wall St. firms who got in way over their collective heads because they took greed- driven risks they should not have taken?"

    The result of such action crashed the financial system. The Fed bailed out the financial system. Yes, some got bonuses and such, but it was the functioning of the financial system the Fed was after.

    " code that is an abuse of other taxpayers." Not really, you just have to understand what taxation is to understand why the tax payer is never on the hook for someone else, including the bail outs.

    "Residential real estate is a very poor productive use of capital!" That's true, but it's main street's primary source of savings. Couple that with lower wages and you have a real problem when the bottom falls out of real estate. This is related to the ongoing discussions on income redistribution and inequality. How does capitalism float all boats, by inflating home prices whose returns are based on inflation or bubbles in real estate? The income stream of home equity is a wage, we do not lend our own home equity to someone else at interest to generate income.
    Sep 13, 2014. 10:59 PM | 1 Like Like |Link to Comment
  • Congress Asks: Is The Fed Creating The Next Financial Meltdown? [View article]
    Hi Deep, Marc Chandler did an excellent article a while ago on excess capacity. I'd have to search long and hard to find it, but it was eye opening. I guess at one time capacity was more normal as creditworthiness and consumer equity was higher than today. The result is, as Larry Kramer explains, not a drop off in capacity, but a drop off in loan creation and equity required to keep capacity working.

    In other words, it's not so much that we have over capacity, we just no longer have the means to buy everything the world can produce resulting in a larger capacity gap because "the bottom" fell out. I guess some might say this is mal investment today, but at one point we were able to keep up with it and it would not have been known to be mal investment then.

    Thanks for your insights into stock buy backs. I guess business are just strengthening their balance sheet. We should expect them to.
    Sep 13, 2014. 10:42 PM | 1 Like Like |Link to Comment
  • Even The Council On Foreign Relations Is Saying It: Time To Rain Money On Main Street [View article]
    Dodger, "Listening intently as thinking like Asby's causes the State to pound harder at freedom's door. "

    Pounding at freedom's door by offering social security and income redistribution as you say? Labor unions would be more free, then. If capitalism is competition between capitalists, then is not the worker considered a capitalist, as well? He bargains with his labor in exchange for earnings in much the same way a capitalist finances and risks capital in exchange for earnings and battles expenses, including wages, to maximize profits.

    This condition tends to concentrate income to the owner of capital and the seller of goods and services and money flows toward productive assets. This constant drain on the wage earning consumer can be offset, actually enhancing capitalism, by redistributing income back to indebted consumers and issuing the saver an interest bearing government security. Unless taxed, the saver is no less financially wealthy deferring spending by holding a government bond while the recipient of that deferred spending gains some disposable income (that can be recaptured by the productive capitalist.)

    When income is not redistributed through government borrowing, either to finance an aircraft carrier or food stamps, the consumer tends to become poorer (in net) over time and inequality increases. Capitalists capture debt money in circulation within the economy as savings, and there is nothing wrong with doing so. However, those savings (deferred spending) have to be redirected back into the economy (as not deferred spending) to mitigate debt accumulation allowing consumption and earnings to continue.

    The poor folks I speak of here are not poor simply because they receive no government subsidies, they are poor because they are not close to the production and selling to others who have almost no money. Their form of credit is often times not a bank, but at the Kiosk itself. They either have a handful of change to by 5 sticks of cigarettes, or ask the be credited for the same promising to pay "next Tuesday." Even a small amount of income redistribution would assist them in making good on their kiosk credit instead of defaulting, which happens frequently.

    There is nothing wrong with income redistribution, it keeps dollars flowing in the economy often leaving the government's creditor holding a safe earning asset instead of deferred cash savings.
    Sep 13, 2014. 10:29 PM | Likes Like |Link to Comment