Personal interest income in free fall


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Looks to me like this is going to be a strong headwind for a while, that is offsetting some of the fiscal expansion. It should be a ‘good thing’ as it means tax cuts and/or increased government spending is in order, but that’s not in the cards.

The non government sectors are large net savers to the tune of the cumulative government budget deficit spending.

Savers are continuously getting recouponed lower as fixed rate CD’s, tsy secs, etc. mature. This reduces aggregate demand.

Borrowers are helped some but not as much as borrowing rates remaining high due to the price of risk.

Net interest margins for banks and other lenders remain high and are drains on aggregate demand as banks are not spending their operating profits on goods and services, but instead adding to reserves.

Personal Income Graph


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36 Responses to Personal interest income in free fall

  1. Curious says:

    I read all the mandatory readings – some of it makes perfect sense to me, some of it doesn’t. Whatever doesn’t, I question.

    That is how a new theory gets validated. Logically disprove every other theory until only your theory remains.
    —————————————————————–

    In response to the article posted, I presented a simple scenario that contradicts the idea that increase in nominal income helps the economy.

    Now we have constructive discussion.

    Warren said: “DEFICIT SPENDING AND FORMALLY RE DENOMINATING THE CURRENCY ARE TWO DIFFERENT THINGS.”

    If the government deficit spends in the form of stimulus check to every citizen, how does that differ from re denominating the currency?

    Reply

    Scott Fullwiler Reply:

    So now we have Logical Positivism 101 . . . yet another (arguably, for sure) outdated view. In the natural sciences, and in economics, most theories are validated or falsified empirically (though it is again arguable if there is an agreed upon method of determining who “wins” in each instance). In the mandatory readings, for instance, most of the “logic” arises from real-world accounting identities within a flexible exchange rate monetary system. That is, the logic has an particular context.

    As I asked before, how does the existence of actual (real-world) widespread unutilized capacity (both labor and physical capital) affect your position? Why hasn’t the 6% deficit accumulated already in the fiscal year raised prices by 6%? Most analyses (empirical) by various economists and government agencies (such as CBO) suggest that the deficit and Obama’s stimulus will raise real output, even as multiplier effects vary. The only people who don’t think so that I have seen (e.g., John Cochrane) are making a purely logical argument using an inapplicable monetary context(the gold standard). So, why do you think the deficit wouldn’t affect real GDP if there is unutilized capacity and we are not in a gold standard?

    Reply

    mickslam Reply:

    Curious,

    Two reasons why sending money to U.S. citizens it not a defacto redenomination of the currency.

    1. The desire for savings. If there is greater desire for savings than there is net dollars available to save, then to the extent the extra money given to citizens matches this desire for savings there will be no nominal pressure on prices.
    2. Demand vs. capacity: if demand is sufficiently lower than capacity, increasing demand will not result in higher prices. It may in fact result in lower prices for many manufactured goods it is less expensive on a unit basis to produce more rather than less.

    If either of these two conditions are true – and right now, they both are – then you will not see inflation. Note that in the required readings, this is talked about in several sections. Warren suggests that the deficit should match the desire for savings and demand so that there is zero inflation.

    We run into difficulties because the horizontal axis of money can have short to medium term effects on price levels, and because not all prices are effected equally by money moving about in the system.

    Additionally, if you look at Milton Friedman’s key monetarist positions, you will see that they are so vague and lag dependent that the causal relationship is highly suspect.

    Reply

    mickslam Reply:

    A link to Ben Bernacke summarizing MF’s positions:

    http://www.federalreserve.gov/boardDocs/Speeches/2003/20031024/default.htm

    Scott Fullwiler Reply:

    Mickslam . . . well said. That’s pretty much the point I was making, too, but you said it much more succinctly.

    Mike S Reply:

    Hi Scott,

    The Socratic method works well in some situations, but I didn’t think this was one of them given that Curious was questioning such basic premises without that initial suspension of disbelief that is necessary for learning.

    Mike S aka mickslam

    Curious Reply:

    mickslam said:

    “1. The desire for savings. If there is greater desire for savings than there is net dollars available to save, then to the extent the extra money given to citizens matches this desire for savings there will be no nominal pressure on prices.”

    That makes sense, prices will not rise and everyone will have a bigger number on their bank statement. How does it help the economy though?

    “We run into difficulties because the horizontal axis of money can have short to medium term effects on price levels, and because not all prices are effected equally by money moving about in the system.”

    Yes, that makes sense too.

    Jim Baird Reply:

    “How does it help the economy though?”

    Quite simply, more people are at work, output is greater, and everyone is (on average) better off.

    Mike S Reply:

    Curious:

    “That makes sense, prices will not rise and everyone will have a bigger number on their bank statement. How does it help the economy though?”

    two reasons this helps the economy.

    1. Money can either be saved or spent. Where there is excess desire for savings, money is saved instead of spent. This must mean less than optimal and non-inflationary demand is not being met. Meeting demand for savings unlocks all of the potential demand, hence less people employed than possible.

    2. High unmet demand for savings must cause unnaturally high deflation in some economic sector, which reduces financing and investment in this sector relative to the natural market rate of demand for those products. This must result in inefficient allocation of resources. (Phew!) With #1 in mind, consider how this must effect the economy. Clearly, not every product will feel the exact same % decrease. Some sectors and products will feel it more than others. A widget that would be purchased is not purchased, which should reduce the price of this widget. Over time, the marketplace for widgets becomes unnaturally and artificially depressed. Investors shun this area and invest in other, more financially attractive areas. This causes over investment in some areas and underinvestment in other areas, which has long term market distortion effects. Or in other words, inefficient allocation of resources.

    knapp Reply:

    Scott

    Slightly off topic, but macroblog, the blog for the Atlanta Fed (owned by Ted Turner??) has a post on paying interest on reserves that may interest you.

    http://macroblog.typepad.com/macroblog/2009/05/more-on-interest-on-reserves.html

    Reply

    Scott Fullwiler Reply:

    Thanks for that. Mostly right . . . and another example of continued validation of the description of monetary operations presented in the mandatory readings on this site.

    jcmccutcheon Reply:

    Warren said: “DEFICIT SPENDING AND FORMALLY RE DENOMINATING THE CURRENCY ARE TWO DIFFERENT THINGS.”
    This makes sense to me.
    How can re-denominating the currency have any effect on aggregate demand when all banks accounts are credited in equal proportion? Conversely, deficit spending that involves the exchange of goods and services for bank deposits increases GDP at least by the amount of each particular transaction. No?

    Reply

    Curious Reply:

    “deficit spending that involves the exchange of goods and services for bank deposits increases GDP”

    Yes.

    Reply

    Warren Mosler Reply:

    think of redenominating this way. suppose it was announced all prices were to be expressed in pennies rather than dollars.

    so instead of saying you have a dollar you say you have 100 pennies. nothing else changes. no transactions are triggered.

    or if we switched to yen when the value was 100 yen per dollar.
    same thing.

    Reply

  2. Dave Begoka says:

    Could the government be in the pocket of the bankers?

    Reply

    Dissenting Comments Encouraged Reply:

    Matt Franko provided a link with a nice map – per capita spending of stimulus money. Why aren’t the areas with the highest unemployment getting the most money? Seems counterproductive to me. What is in montana, wyoming, and the dakotas that get so much more money?

    http://www.propublica.org/special/maps-unemployment-rates-vs-per-capita-infrastructure-spending

    Reply

    vipul Reply:

    Constitutionally those states populations have proportionally more power, because they get 2 senators just like California. You’re boy Thomas Jefferson was in on that stroke of brilliance.

    Reply

    Dissenting Comments Encouraged Reply:

    I have advocated for a long time that CONGRESS is a VERY BAD representative government for our population. 435 people representing 350 million puts too much power centralized. We need our representatives much more beholden to each individual agent and less beholden to lobbyists and corruption. A 10 fold increase would be a good start, 4500 hundred congressional representatives would distribute the power more evenly and make lobbying efforts trying to corrupt 1 chris dodd much harder. Some have suggested breaking the USA up into 250 states, that 50 states are too few.

    Matt Franko Reply:

    Dissent,
    Those states hardly have any population, Im sure Palm Beach County down there in FLA has a higher poplation than almost any 2 combined. So a little goes a long way on the per capita basis.

    Also, the organization (ProPublica.org) I referenced is a “taxpayer on the hook” type of organization and I do not subscribe to/endorse that mindset(anymore), but I think they are doing a good job of “follow the money”. And their latest “bailout” total “Invested or Loaned” (ie. NOT spent) is only $418B, the US Fed has recently had more than that loaned out to a gaggle of foreign Central banks that came up short of US$ last fall. No fanfare about that though.
    Resp,

    Reply

    Warren Mosler Reply:

    they ARE bankers!
    :)

    Reply

    Mike S Reply:

    Using the information here:

    http://www.taxfoundation.org/research/show/22685.html

    we should be able find great support for Warren’s theory.

    A natural experiment has been run for the last 50 years or so. Individual states have different levels of federal taxes received and paid. There is not a match between these, so we should be able to see the results of deficit spending vs. GDP growth.

    White paper anyone?

    Reply

  3. Dissenting Comments Encouraged says:

    Curious I am also confused about the attitudes of some of the elite here on this board. It says comments are encouraged, I make posts about the oldest profession in the world relating to russian and japanese customers, and jobs seems to be a big topic with these guys, and the post gets deleted? Academic elites who choose to put on rosy colored glasses when the real world doesn’t fit thier models and paradigms are silly if you ask me. Any talk of jobs that doesn’t involve a job that employs perhaps 30% of the world’s women and even higher percentages for some countries, over 50%, makes no damn sense to me.

    As to the prices of stuff, here is a chart to illuminate “prices” relating to money supply.

    http://forums.wallstreetexaminer.com/index.php?act=attach&type=post&id=212

    Here is what a guy said who operationally probably wasn’t in paradigm, but I think he called a spade a spade and shows warren and friends for the frauds they are.

    Napolean Bonaparte:

    When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.

    Reply

    Warren Mosler Reply:

    our government is not dependent on bankers, but they think they are and act accordingly, and we all pay the price

    Reply

    Curious Reply:

    Could you elaborate on this Warren? The central bank is owned by member banks, not by the government and since it is the CB that prints the money and it is the government that needs it, why do you say that the government is not dependent on the CB?

    Reply

    Jim Baird Reply:

    Yes, in a technical sense the Fed is “owned” by the member banks – but not in any real sense. Ownership means control. If you owned all the stock in a company but you couldn’t sell any of it, the charter only allowed you to get a low, fixed return on your investment and taxed all profits above that, and the federal government appointed the CEO and most of the board of directors, would you think your “ownership” worth all that much?

    From wikipedia:

    “The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. Each member bank owns nonnegotiable shares of stock in its regional Federal Reserve Bank—but these shares of stock give the member banks only limited control over the actions of the Federal Reserve Banks, and the charter of each Federal Reserve Bank is established by law and cannot be altered by the member banks. While it is unusual, private individuals and non-bank corporations (with proof of a resolution of the board of directors indicating it intends to do so) may also purchase one or more shares of stock of any of the Federal Reserve Banks.[citation needed] The stock is the same nonnegotiable stock as banks receive, cannot be sold and pays a small dividend.”

    Scott Fullwiler Reply:

    We can be even more precise . . .

    Banks are “owners” in the sense that they hold equity (they are, in fact, forced to buy this equity for the most part, though some is voluntary) in their regional Fed banks and receive a dividend based upon the Fed’s imputed cost of capital. They are also allowed to collectively select a majority of their respective regional Fed Bank’s directors.

    However,
    1. All profits for the Federal Reserve System beyond this imputed cost of capital are returned to the Treasury, while the framework for determining the imputed cost of capital is set by Congress and the President.
    2. Board of Governors are political appointees as they are selected by the President and confirmed by the Senate. Since most BOG members don’t serve full terms, it is common for a President to select a majority of the 7 during a four-year term, and 2-term Presidents have often selected all 7 (as Reagan did; don’t know about Clinton, but he either got all 7 too or came close).
    3. While regional Fed banks choose two classes of their boards, one of the classes of directors are selected by the BOG, which themselves are political appointees.
    4. While regional Fed bank presidents are selected by their boards (of which a majority are selected by member banks), regional Fed banks can never be a majority on the FOMC, having 5 votes to the BOGs 7.
    5. The Congress and President have the ability to set the boundaries and scope of the Fed’s actions in monetary policy and financial regulation, and have done so many, many times in the past through the Federal Reserve Act (and numerous amendments to it), the Monetary Control Act, and so forth. The notion that “the Fed prints money and the government needs it” is, frankly, silly. If it were actually true, it would merely be a self-imposed constraint at any rate via the government’s own legislation.

    In short, if the Fed’s actions are counterproductive for the rest of us, it has a lot less (if anything at all) to do with the Fed being “owned” by banks than it does with misguided, bad, or (add your own adjective here . . . corrupt? policy in the interests of particular interests? out of paradigm?) government policy.

    Warren Mosler Reply:

    the Fed operates as public entity for public purpose, turning over ‘profits’ to the tsy, and officiers and board members are appointed by the president/Congress etc.

    Functionally the Fed is government, same as the tsy.

  4. knapp says:

    How much do bank net interest margins benefit from the steep yield curve?

    The talking heads on CNBC, especially Kudlow, believe that it’s wildy bullish for the banks because they lend long, borrow short.

    But I thought you said once in the past that banks have regulatory constraints with regards to asset/liability management so there is a limit to how much they can ride the curve. Is this an FDIC/OCC rule?

    Reply

    Warren Mosler Reply:

    Yes, banks are regulated and ‘gap’ is one of the standards that says you have to show you are not adversely impacted should rates move up or down. yes, there is some leeway, but not a whole lot.

    Reply

  5. Curious says:

    The less money in the economy, the lower the prices. Money is just means of exchange to get real goods and services. Whether I have $20 and a shirt costs $20 or whether I have $200 and a shirt costs $200 makes no difference. In either case I can buy 1 shirt. If the government decides on huge deficit spending and orders every citizen to draw an extra 0 on every $ bill, will it make a difference? It seems to me that it will not. Similarly, if they then decide to erase that zero (huge drop in aggregate demand) it should not make any difference either, will it?

    Reply

    Scott Fullwiler Reply:

    Thanks for the out of paradigm, econ 101 lesson.

    Reply

    Curious Reply:

    Scott,

    I come here for constructive discussion (I think that’s why there is room for comments under the articles). I wrote how I see things and if you have a rational counter argument, let’s discuss.

    Reply

    Scott Fullwiler Reply:

    Fine, but the bases for discussion on this site are the mandatory readings, not Austrian or other similar monetary theories (ideologies, actually) that most on this site generally agree have little to do with actual operational realities.

    Regarding your initial statement, the current widespread existence of un-utilized, employable resources (physical capital, labor) refutes the point. Further, the govt has already “printed” about 6% of GDP since last October . . . where’s the like increase in the price level?

    Jim Baird Reply:

    Curious –

    “Money is just means of exchange to get real goods and services.”

    This is where you astart to go wrong. In addition to this, money is also a store of value – in fact, the most liquid store of value. Uncertainty makes people want to accumulate rather than spend it. Once you have savings, your simple exchange economy model flies out the window, and you are open to the paradox of thrift, etc. I agree with Scott – you need to go through the mandatory readings, and then if you have questions about stuff in them, people here will be glad to clarify.

    Warren Mosler Reply:

    The less money in the economy, the lower the prices.

    WHEN ON A GOLD STANDARD THIS HAD SOME VALIDITY AS ‘MONEY’ MEANT GOLD THAT HAD BEEN ‘MONETIZED’ BY THE GOVT WHICH BOUGHT GOLD WITH GOLD CERTIFICATES CALLED ‘MONEY.’

    A NEW GOLD DISCOVERY WOULD FLOOD THE SYSTEM WITH ‘MONEY’ AND WITH THE PRICE OF GOLD FIXED THIS CAUSED OTHER PRICES TO GO UP.

    WE ARE NO LONGER ON A GOLD STANDARD AND THE CURRENCY IS NO LONGER CONVERTIBLE AT THE CB FOR ANYTHING, SO THERE IS NO ‘MONEY’ AS PREVIOUSLY DEFINED.

    ATTEMPTS TO FIND A SUBSTITUTE DEFINITION FOR MONEY IN ORDER TO GO THROUGH THE SAME EXERCISE- SHOW THAT MORE ‘MONEY’ CAUSES HIGHER PRICES- HAVE ALL FAILED AND MANY CENTRAL BANKS EITHER IGNORE OR DON’T EVEN PUBLISH ‘MONETARY AGGREGATES’ ANY MORE.

    Money is just means of exchange to get real goods and services.

    RIGHT.

    Whether I have $20 and a shirt costs $20 or whether I have $200 and a shirt costs $200 makes no difference.

    RIGHT.

    In either case I can buy 1 shirt.

    RIGHT.

    If the government decides on huge deficit spending and orders every citizen to draw an extra 0 on every $ bill,

    THOSE TWO ARE NOT LINKED. DEFICIT SPENDING AND FORMALLY RE DENOMINATING THE CURRENCY ARE TWO DIFFERENT THINGS.

    will it make a difference? It seems to me that it will not.

    RE DENOMINATION MAKES NO DIFFERENCE. IT’S DONE FOR CONVENIENCE.

    Similarly, if they then decide to erase that zero (huge drop in aggregate demand) it should not make any difference either, will it?

    NO.

    Reply

    mickslam Reply:

    This:

    will it make a difference? It seems to me that it will not.

    RE DENOMINATION MAKES NO DIFFERENCE. IT’S DONE FOR CONVENIENCE.

    Similarly, if they then decide to erase that zero (huge drop in aggregate demand) it should not make any difference either, will it?

    NO.

    Is not entirely correct.

    The part between the parenthesis is not related to the number of zeros on the bills. There is no huge drop in aggregate demand associated with redenominating the currency.

    More clearly, the first meaning of the of the sentence about the number of zeors not mattering is true. The part of the sentence that relates aggregate demand to the number of zeros on a bill is not true.

    Curious,

    You should really read those required readings and understand them and be able to argue why they are true before you critique them.

    Proabably every other person on this site has done this with both Hayek and Moslers ideas. Mosler comes out way ahead.

    I have charts that come as close to proving this claim as anything in Economics. Ask Warren.

    Reply

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