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Why Interest Rates Will Almost Certainly Rise in 2010

Maybe not communism but certainly socialism. And down the line a "command economy". WE are BROKE.

How the Senate Bill Would Change Healthcare

FOUND THIS: "Among other things, GOP members suggested that tort reform be a part of the national health care overhaul.

Democrats, who receive large amounts of campaign cash from trial lawyers, eschewed the idea, despite the director of the nonpartisan Congressional Budget Office, Douglas Elmendorf, saying that as much as $54 billion could be saved over the next 10 years if Congress enacts legal reforms including a $250,000 cap on damages for pain and suffering and a $500,000 cap on punitive damages and restricting the statute of limitations on malpractice claims"

It's too bad we need legislators to vote and pass legislation. Congress and the House are prejudiced.

How the Senate Bill Would Change Healthcare

Definitely socialist. Mandatory healthcare sounds unconstitutional. What about lawsuits? Are the damages capped? There are too many lawyers in Congress.

How to Boost U.S. Exports

Correcting the current account balance, and trade deficit, is an absolutely daunting task:

The U.S. is a $7.4 trillion dollar debtor country (since 1985) and compounding.

The volume of foreign financing required to float new government debt issues each fiscal year now averages about 49%.

The U.S. imports approximately $335,992,800,000 of oil per year (@78/barrel) & 12.1 MMbd.

There were 700 foreign military bases, in 130 countries, employing more than 500,000 military personnel (2003 figures). But these numbers didn't include bases in Afghanistan, Iraq, Israel, Kuwait, Kyrgyzstan, Qatar, and Uzbekistan (this constitutes a correctable drain on the dollar - multilateral claims to foreigners).

Time for the U.S. Economy to Reindustrialize

Past due. We need comprehensive incentives (investment tax credits, and accelerated depreciation on research & development), from our Federal Government: to help reinvigorate our industrial manufacturing base (to produce higher quality & lower cost, goods & services), not the redirection and albatross of $8,000 tax breaks for “new” home buyers, & $6,500 for repeat home speculators (The Worker, Homeownership, and Business Assistance Act of 2009). Not commercial real estate (strip malls, etc.).

We need real economic business investment to be targeted in new technology (in machinery, equipment, & software). We need the Federal Government as the “playing field” has been historically, increasingly competitive, and even more imbalanced (because of dumping, subsidies, tariffs, currency pegs, etc.).

E.g., the “idiosyncratic” Corporate Income Tax (gathered from “Corporate financial statements”), in China is 25%, in Hong Kong is 16%, in Japan is 30%, in Mexico is 25%, in Russia is 20%, but it is a combined Federal & State 39.1% in the U.S. (2nd highest among OCED countries).

These figures are not strictly comparable (equally weighted); but the results are corroborated using the tax revenue as a % of GDP metric):SEE: www.taxfoundation.org/...
SEE also PriceWaterHouseCoopers study where the U.S. is higher than 101 other countries, out of 178: www.doingbusiness.org/...

Why Interest Rates Are Not Likely to Rise in 2010

It is possible for the FED to buy up the entire 2010 Federal Deficit by raising the member bank's reserve ratios. The same outcome is advanced by Scott Fullwiler being available through IORs (interest on excess reserves). I doubt the markets would buy either senario.

However, the conventional policy would be for the FED to purchase public, and or private debt, at a rate where bank credit would expand by 2-3 per cent, greater than the rate-of-change in real-output.

But if you really understand economics (rates-of-change in the flow-of-funds), you know that genius says: get the commercial banks out of the savings business. Thus, the commercial banks would become more profitable, there would be an immediate increase in the supply of loan-funds, and long-term interest rates would be lower than they otherwise would yield. This is the same policy used in 1966 (& accomplished these results).

Real-output spikes in Jan., bottoms in May, and the economy finally reverses in Oct. Increasing rates of inflation expectations will stop at the end of Mar. The markets are going to struggle through this.

Stop Calling This 'Recovery'

You could say the same for the the number of people that are employed. GDP must recover to the same level and the number of employed people should rebound to the same level. "Recovery" will be a long time in coming.

Unchartered Economic Waters

"as the Federal Reserve had the option of inflating during the Great Depression, and did not do so"

No, the circumstances surrounding the Great Depression made it impossible for the FED to expand the money supply. The collateral requirements were restrictive, its operations were uncoordinated, the volume of federal debt was insufficient for open market operations, and there weren't enough credit worthy borrowers in the private sector.

These conditions are diametrically opposed to the current conditions.

Flow of Funds: Total Debt Grows More Slowly

Certainly it is proven that, in order for the economy to grow, net debt must grow. E.g., the volume of net debt was the same in 1939 as it was 10 years eariler, in 1929. Of course this period encompassed the Great Depression. World War II, and the enormous volume of government debt issued for the war's financing, was responsible for extracating us from the moreass of the Great Depression.

But you missed some key points. On the H.8 Assets & Liabilities of Commercial Banks it shows that bank credit on Oct 2008 stood @ $11,985 trillion and has declined to $11,853 trillion on Nov 25, 2009, or bank credit has remained virtually constant.

On the Z.1 release: "F.1 Total Net Borrowing and Lending in Credit Markets":

TOTAL NET LENDING: c. $4,501 trillion in 2007. It has collapsed to c. (-)$875b in 2009, which covers up to the 3rd quarter of this year.

However, (commercial bank + monetary authority lending), as a percent of total lending, was .16% in 2007, then .66% in 2008, and lastly $2,575 trillion higher than total lending thus far in 2009 (but c. half $1,077,834b of this total are interbank demand deposits held idle at the District Reserve Banks-or excess reserves).

The point is that the commercial banks have not suffered disintermediation overall (negative cash flow, outflow of deposits, bank credit contraction); however Paul McCulley's "Shadow Banking System" has been ripped apart.

The Board of Governors has narrowly tried to reflate, instead of pressuring our legislators fix the inadequate non-bank regulations and lending operations of our financial institutions.

That is, the Central Bank has placed too much reliance upon the commercial and Reserve banks to jettison the economy from this downswing.

If U.S. Stopped Issuing Treasuries, Would It Go Broke?

No, you are wrong. There is a difference. It should not be confused by the doomsters. In fiat system the volume of currency issued is dictated by the deficit-financing requirements of the issuing government. In a fiat system the volume of currency is not self-regulatory. In a fiat system the more money that is issued, the higher prices will rise. In a fiat system the government's credit is put in jeapordy. I.e., a fiat system eliminates currency as a medium of exchange, and leads to hyperinflation.

In a managed-currency system (our current system), the volume of currency in circulation is determined by the public's desire to hold whatever volume of currency it needs for the exchange of goods & services. This is the cash-drain factor, or the process by which the volume of currency put into circulation, or taken out of circulation, through our banking system.

I.e., the volume the money stock remains the same, but it's composition changes (e.g, currency or demand deposits), depending upon the needs of trade. The currency-deposit ratio typically rises during recessions (it was .73% in June 06 & .85% in November 09). And there is no expansion coefficient associated with an increase in the volume of currency held by the non-bank public, (it is dollar for dollar).

The volume of our money stock is determined by monetary policy objectives, but the level of currency held by the non-bank public is lawfully, and properly, left unregulated.

All currency gets into circulation, directly or indirectly, through the liquidation of time deposits, by the cashing of demand deposits. There is one exception in demand deposit creation; those rare instances when the U.S. Treasury borrows from the Federal Reserve Banks. However it cannot be said, as of time deposits, that increases in the public’s holdings of currency reflect prior commercial bank credit creation. It is more appropriate to say that expansions of currency are accompanied by concurrent expansions of reserve bank credit.

And any expansion or contraction of the monetary base [sic], is neither proof that the Fed intends to follow an expansive, nor a contractive monetary policy. Furthermore any expansion of the non-bank public’s holdings of currency merely changes the composition, (but not the total volume), of the money supply. There is a shift out of demand deposits, NOW or ATS accounts, into currency. But this shift does reduce member bank legal (required), reserves by an equal, or approximately equal, amount.

An expansion of the non-bank public’s holdings of currency will cause a MULTIPLE CONTRACTION OF BANK CREDIT and checking accounts (relative to the increase in currency outflows from the banks) ceteris paribus.

To avoid such a contraction the Fed typically offsets currency withdrawals by open market operations of the buying type (e.g., purchases of governments for the portfolios of the Reserve Banks). The reverse is true if there is a return flow of currency to the banks. Since the trend of the non-bank public’s holdings of currency is up (ever since 1930), return flows are purely seasonal and cannot therefore provide a permanent basis for bank credit and money expansion....&more

Time for the U.S. Economy to Reindustrialize

And the TRADE WAR continues: "BEIJING — China’s top bank regulator said Sunday the weakening U.S. dollar and low interest rates are spurring speculation in stocks and property, distorting global asset prices and threatening the global economic recovery"

Why Bernanke Doesn’t Understand Basic Economics of Central Banking

Truly inflammatory Auerback . But as you state: banks are unencumbered in their lending operations (except for the venerated, & capricious, 10% bank capital adequacy ratios).

The problem is that the Treasury (for now), seems to be the primary customer/borrower. Lending and borrowing to/from the private sector has collapsed.

All of the FED's technical staff knows legal reserves aren't binding. I wonder if it is just a political statement, aimed at our legislators, because money creation is an abstract concept (where the whole, is not the same as the sum of its parts). Bernanke is very smart, & he understands conventional money & central banking.
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However, the crux of the cause of our monetary mis-mangement, since 1965 (even during Volcker's reign-the brackets were widened not removed), is the assumption that the money supply can be manged through interest rates, specifically the federal funds rate (but now IORs).

Ever since 1965 the operations of the "trading desk" has been dictated by the Federal Funds "Bracket Racket" (interest rates). This has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the FED assures the banks access to more legal reserves, whenever the banks need them to cover their expanding loans - deposits.

We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treasury-Federal Reserve Accord was all about. The effect of tying open market policy to a federal funds bracket is to supply additional and excessive legal reserves to the banking system, when loan demand increases.

When the member banks operate with no excess reserves of significance, the member banks have to acquire additional reserves, to support the expansion of deposits, resulting from their loan expansion.

If they use the federal funds market, which is typical, the rate is bid up and the "trading desk" responds by putting through buy orders, reserves are increased and soon a multiple volume of money is created on the basis of any given increase in legal reserves.

This is the process by which the FED has financed the rampant real-estate speculation that has characterized the bubble years.
By using the wrong criteria (interest rates, instead of member bank reserves), in formulating, and executing monetary policy, the Federal Reserve has routinely, in the long-run, generated excessive rates of inflation.

What should the FED do? First put all banks on notice that if they need funds for expansion of loans they will individually have to liquidate some of their liquid assets, Treasury bills, etc. And the discount window will only be open for emergency borrowing.

Secondly the Manager of the Open Market Account should be instructed to regulate his operation in terms of the proper volume of legal reserves (at a level where reserves are binding), which the member banks should hold (except for temporary instances, in which support operations for the Treasury are necessary - and the excessive expansion of legal reserves can be removed after the support operations have passed).
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"Where do you think the excess reserves came from?” The source of IORs is not QE, quantitative easing, (the source of IORs within the monetary system, is other bank deposits, directly or indirectly via currency, or the bank's undivided profits accounts).
For IORs to be offsetting, the remuneration rate on excess & required reserves, must be competitive, vis a’ vis other instruments and yields. The member banks have thus shifted their portfolio composition (earning assets), to hold IORs @.25% (rates higher than t-bills and rates which induce dis-intermediation among the non-banks).

This is why the increase in the volume the FED's liabilities (IORs), has been deflationary. The FED has used IORs to offset (how they determine the proper volume of IORs is a mystery to me), its expansion of assets (lending facilities), on its balance sheet.

An increase in the volume of legal reserves (idle excess reserves), is functionally equivalent to an increase in reserve ratios (similar to 1937 when the FOMC doubled reserve requirements on all deposit classifications, driving the economy into a deeper depression).

I.e., raising reserve ratios does not involve QE. In 1990 & 1992, the FED reduced required reserves ratios by > 1/2 in order to stimulate lending and borrowing. So why is the FED pursuing a "tight" monetary policy compared to 1990?

As Dr. Scott Fullwiler states (contrary to Krugman):
"There is NO “liquidity effect” associated with changes in the Target Rate"

With the FED paying interest on excess reserve balances, held at the District Banks, owned by the member banks, the FOMC's policy rate, relative to the volume of legal reserves, has become an independent variable.

Pegging interest rates through IORs will increase the probability of policy errors, as the FED will be able to hold short-term interest rates at the desired level, for longer periods of time, without increasing inflation expectations (long-term rates).

Where Bernanke demonstrates his ignorance is: commercial banks pay for what they already own, interest on their own deposits. I.e., Bernanke doesn’t understand, or demonstrate that he understands, the difference between financial intermediaries, and the commercial banking system.

Ben Bernanke Pleads for His Job; My Response to Bernanke

You are DEAD WRONG Shedlock. The FED reports to Congress.

Misunderstanding the Great Recession

Excellent discussion. You hit a home run.

Bernanke:

" A substantial body of research demonstrates that investments in education and training pay high rates of return to individuals and to society as a whole. Importantly, workforce skills can be improved not only through K-12 education, college, and graduate work but also through a variety of expeditious, market-based channels such as on-the-job training, coursework at community colleges and vocational schools, extension courses, and online training. An eclectic, market-responsive approach to increasing workforce skills is the most likely to be successful"

"From a macroeconomic standpoint, education is important because it is so directly linked to productivity, which, in turn, is the critical determinant of the overall standard of living"

"If we are to successfully navigate such challenges as the retirement of the baby-boom generation, advancing technology, and increasing globalization, we must work diligently to maintain the quality of our educational system where it is strong and strive to improve it where it is not"

Three Signal Facts on the Fed's New Balance Sheet

Legal reserves have never been a tax. The tax is on economist's minds. Commercial banks create NEW money in the lending process. A given injection of excess reserves will allow the CBs (as a system) to acquire a large multiple of new money and earning assets. The volume of new earnings thus obtained are astronomically higher than any interest received from an "interest on reserves" regime.

The only tool at the disposal of the monetary authorities in a free capitalistic system through which the volume of money can be controlled is “free” legal reserves.

Monetarism entails the following:

The sine qua non of monetary management is total current control by a central monetary authority over the volume of legal reserves held by all money creating institutions, and over the reserve ratios applicable to their deposits.

Monetary authorities have to have complete discretion over changes in reserve ratios. This is essential since under fractional reserve banking (the essence of commercial banking), these ratios determine the minimum volume of legal reserves a bank must hold against a specified volume and type of deposit liability.

Monetary authorities have long recognized that the volume of bank legal reserves, combined with the reserve ratios applicable to various classes of bank deposits, determined the limits and, since 1942, the amounts of bank credit creation.

The first rule pertaining to reserves and reserve ratios should be to require that all money creating institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios.

I.e., member commercial banks should have UNIFORM reserve ratios, for ALL deposits, in ALL banks, irrespective of size

Necessarily, the only type of bank asset that the Fed is in a position to constantly monitor and absolutely control are commercial inter-bank balances in the District Federal Reserve banks (this was the original definition of legal reserves in the Federal Reserve Act and it is the only viable definition-pre-1959 requirements pertaining to assets).