Archive for the 'Economics' Category

Reserves Increase But Loans Decrease: What’s the Point of QE2?

Posted on December 9, 2010, 8:33 am. Closed

I think it’s most likely QE2 is and will be, as Pragmatic Capitalist says, “the greatest monetary non-event.” I believe its unlikely the Fed will accomplish any of its goals with QE2. If anything positive does happen, it will be in spite of QE2, not as a result of it.

One reason I think QE2 will not help is that there is no demand for loans because people and businesses are still repairing balance sheets and people and businesses still feel very uncertain about the future due to all the new laws and regulations surrounding Obama’s agenda. Below is a visual illustration I created of my point (click for larger image).

The data is indexed to 100 on October 1, 2008, which is when the value of commercial and industrial loans peaked. Here is an explanation of the data:

  • The monetary base is highly liquid money that consists of all coins, paper money, and commercial banks’ reserves with the Federal Reserve.
  • M1 are funds readily accessible for spending. It consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits.
  • M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds.

So, now an explanation of the chart. The chart simply shows the monetary base increasing at a far greater than the broad money measures of M1 and M2. The monetary base has increased at a greater rate because the Fed has been purchasing huge amounts of assets from the banks, thereby increasing the banks’ reserve accounts, but the banks have not been making more loans. In fact, loans have been decreasing despite all the Fed’s actions.

In my mind, the Fed is quite powerless and my best guess is that they feel its better to do something rather than declare they are impotent. The best and only solution to reviving the economy is through fiscal policy. We need tax cuts and more government spending on items such as education and large projects that will help stimulate demand now and will provide good benefits to our society in the future.

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.

Quantitative Easing Explained

Posted on November 16, 2010, 3:36 pm. Closed

This funny video has started to make the rounds. If you think about it too much, its actually kind of scary.

Hayek Vs. Keynes Rap Anthem

Posted on January 25, 2010, 8:54 pm. Closed

Big thanks to Coyote Blog and Farnam Street for linking to this video. It’s great!

The Cash for Clunkers Bump

Posted on October 28, 2009, 10:06 am. 1 Comment

Much like the effect of a “Colbert Bump,” light vehicle sales experienced the effect of the cash for clunkers bump over this year’s summer. (click for larger image)

cash4clunkers-bump

Notice how quickly vehicle sales returned to historic low levels.

“Buy American” Rule Delays Gov’t Stimulus Projects

Posted on August 7, 2009, 8:37 am. Closed

From Bloomberg:

President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters.

GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund.

Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed.

See what happens when the government gets involved in anything? By placing artificial terms, conditions, and regulations on the marketplace, you often wind up with negative and/or unforeseen consequences. In this instance, I think most people could foresee that the Buy American provision was just a blatantly stupid rule. Now we have evidence.

True Bull Market or Bear Market Rally?

Posted on August 5, 2009, 8:02 am. Closed

This video from Warren Pollock explains in part why we may or may not be in a new bull market or just a bear market rally. He says that when we have a rising US dollar and a rising stock market, this is  a true bull market. However, when our currency is falling and the market is rising, this is a sign of a false bull market.

Also, if you have the time, I highly recommend watching Pollock’s full presentation entitled “The Great Reset”, the goal of which is to provide a political, economic, and social forecast in the context of the systemic failure that has already occurred in the US. Though I disagreed with some small parts of the presentation, it was nevertheless very thought-provoking.

Federal Stimulus Spending: An Oxymoron

Posted on August 3, 2009, 5:14 pm. Closed

The second quarter 2009 review and outlook by Hoisington Investment Management Company gives a good overview of the complex monetary chain between Fed actions and the economy. Stuff like money multipliers, velocity of money, and supply curves are discussed.

What was more interesting to me was the cited research that suggests the term “federal stimulus spending” is an oxymoron. The Hoisington outlook states, “Many assume that the act of sending checks from the federal government sector to the private sector helps the economy through so-called spending multipliers.” However, some researchers have found that “the government expenditure multiplier from 1955 to 2006 was negative .01, not statistically different from [zero].”  This means “that each $1 increase in government spending reduces private spending by about $1, with no net beneft to GDP.  All that is left is a higher level of government debt creating slower economic growth.”

I’m not sure if I am merely seeking to confirm my biases here, but I feel that this is good evidence that there is no multiplier effect from the federal government increasing its debt to “stimulate” the economy. After having correctly intervened to avert a major crisis during the first quarter of this year, the government should allow the private sector to do its thing — the last thing the government should be doing is ratcheting up the debt because the effect is negligible at best and most likely negative  for the American people. The only people benefiting from increasing levels of debt are the politicians who are able to hand out favors and bribes to their constituents via government expenditures. President Obama is another one of the few beneficiaries of this crazy policy — I am sure he still has many campaign favors to repay.

No, We Do Not Need a Second Stimulus

Posted on July 8, 2009, 1:04 am. Closed

Obama Adviser Says U.S. Should Mull Second Stimulus:

(Bloomberg) — The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

This idiot should be removed to Japan immediately so she can understand how great that country fared after their bubble and ensuing (and seemingly perpetual) balance sheet recession. Japan tried to prop their economy by increasing debt to GDP but that didn’t help at all. Oh, and Wikipedia says this adviser was a Morgan Stanley director since 1997. Where is MS now? Oh wait, isn’t MS one of those FORMER investment banks (now a traditional bank holding company)? Why anyone would listen to a person associated with an organization that was a party to the global financial crisis is beyond me.

The real reason behind this so-called advice is to make the American people totally dependent on the government. This means politicians and bureaucrats will have more power to hand out political favors and so they can get re-voted into office and to continue collecting special favors and money from lobbyists and business interests. If you like the idea of going to the government for your every need, or you simply insist that the government can spend your money better than you can, please continue to support the petty politicians like Obama, Pelosi, Reid, or really 98% of the people in Congress.

I am becoming more and more convinced that the best solution to our problem of a short-sighted and power-hungry Congress is their ability to run for an unlimited amount of terms. Couple that ability with the power to spend money with abandon (thanks to a complicit Federal Reserve and Treasury Department) and you have a powerful and dangerous organization. I.e., a gangster government to which businesses and individuals must go for special favors or simply to conduct business or simply to protect the rights guaranteed to them by the Constitution.

Thus, in tandem with term limits for Congress persons, I am beginning to believe the Federal Reserve must be abolished. The idea that a collection of academics and economists can shape the economy, set interest rates, prevent booms and busts, makes no sense. Isn’t government control over the economy, government control of the marketplace, of the very place and concept upon which each citizen depends in order to provide for themselves and others, isn’t this just pure socialist communist crap? Isn’t government control of a person’s life and livelihood the ideological enemy against which we continually fought ever since World War II?

For now, I’ve said all that I can say. I think a new goal for me will be to continue to organize my thoughts into a sort of party platform. No, I’m not running for office, but I feel like I’m “partying” by myself and would simply like to see if there are more people out there who agree with me.

P.S.: I’m already thinking back on this post. Consider everything I said to be representative of an idealistic Doug, not so much a pragmatic or realistic Doug.

“An Amoral Market Economy Guarantees No One Freedom”

Posted on April 24, 2009, 10:09 pm. Closed

From page 333 of Cra$hmaker, this passage is delivered by Evgenii Stolypin in the State Duma and the Federation Council of the Federal Assembly, the parliament of the Russian Federation. The Deputies were hotly debating charges that the on-going discussions between the Chairman of the Central Bank (of Russia) and an American Adivisory Committee  over a possible Russian gold standard violated the Central Bank’s constitutional duty to protect the stability of the rouble.

“Russia cannot save herself by aping Western democratic capitalism,” Stolypin warned the Deputies. “An amoral market economy guarantees no one freedom. To the contrary: it promotes the corruption of government. In the West, markets cater to consumerism. Unfortunately, many people cannot earn from voluntary transactions with others as much as they would like to spend. To obtain more income, they ask the state to steal for them from their fellow citizens. As more and more people use the state to supplement their incomes, the market provides the most efficient forms of lobbying, political action, propaganda, and other techniques for promoting redistribution of wealth—which becomes simply another product offered for sale. The society then cannibalizes itself through every variety of political looting.

“Where has democratic capitalism taken the United States?” Stolypin asked. “To the highest, most subtle and effective form of fascism—in which powerful interest groups conspire with politicians and the media to fool the people into lending legitimacy to a system designed to rob them at every turn. Friendly fascism that says Have a nice day! while it deftly picks the people’s pockets.”

Taxes & Spending as % of GDP: A Data Visualization

Posted on April 20, 2009, 9:15 am. Closed

This is a great data visualization of the relationship between taxes and spending as percent of GDP.

I suggest clicking here to see a larger version of the video.