Category Archives: Fed

Maybe Greenspan has finally read Soft Currency Economics?

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>   
>   (email exchange)
>   
>   On Fri, Oct 8, 2010 at 9:28 AM, Eileen wrote:
>   
>   Greenspan comments from last night. Of course, he hasn’t said that loans create deposits,
>   but he’s finally acknowledging excess reserves. Reported by BBG TV:
>   
>   “If you add to excess reserves and they just sit there, you’ve merely gone through an
>   interesting bookkeeping calculation. It has no, I mean zero, economic effect. You need
>   commercial bank A to lend to steel company B.”
>   

very good!

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Payrolls

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Karim writes:

Headline near consensus and also very consistent with trend of recent months; but details on soft side

  • Headline payrolls -95k; private payrolls +64k; payrolls ex-census workers -20k
  • The 83k drop in state and local govt payrolls likely skewed by seasonals related to education (-50k jobs)
  • Avg weekly earnings unch and hours worked unch; so personal income will be soft in Sep (though it was strong in prior mths)
  • Unemployment rate 9.579% from 9.642%
  • Notable swings by sector: construction -52k; manufacturing -22k; leisure/hospitality +18k; Retail +8k
  • Median duration of unemployed up from 19.9 to 20.4; U6 measure up from 16.7% to 17.1%
  • Diffusion index drops from 54.1 to 49.8 (first month below 50 since January).

Data consistent with moderate growth which is not enough to materially lower unemployment rate and as such, further lowers the bar for more aggressive LSAPs in November.

Census jobs still being lost. State and local cuts will also probably continue.

Also, 65,000 private sector jobs is about 100,000 short of what I’d guess will be the norm with initial and continuing claims now drifting lower.

GDP growing faster than jobs indicates productivity still doing well, which is positive for profits.

Lower interest rates also continuing to support valuations.

Bullard on CNBC shows FOMC still not up to speed on monetary operations.

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US Consumer Credit Falls by $3.34 Billion in August

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With a federal budget deficit of roughly $100 billion/month adding that much in savings (and income) to the economy total spending can be done with less additions to debt than when the deficit was a lot smaller.

Because of the deficit spending, consumers have been able to support maybe 2-3% growth in consumption and at the same time pay down credit cards and other debt, and debt continues to fall as a % of income as well.

Note below that new debt for non revolving credit has been inching up for the last 4 months, a sign that modest improvement continues.

With weekly initial claims now below 450,000 it looks like the spike to 500,000 most likely was some kind of statistical blip.
And at current levels, which seem to be drifting lower, we could be looking at 150,000- 200,000 new jobs per month.
This would mean the unemployment rate would fall only very slowly, but it’s still an upside surprise, and with 7 year treasury yields closing in on 7 year JGB’s we could also see US equity PE’s now around 12 adjust upward towards Japan’s PE’s of about 23.

I have no idea what’s going to happen with QE, except it will have very little or more likely no effect on the economy.
But there will be a lot of trading around the prospects and outcome of the Fed’s decision.

The term structure of risk free rates is always and in the Fed’s hands, and subject to the Fed’s reaction function and not to market forces. And with the talk of the Fed targeting longer term rates they may be coming around to it, as best I can tell knowledge of actual monetary operations seems to be slowly gravitating from the monetary operations staff to the actual leadership.

US Consumer Credit Falls by $3.34 Billion in August

October 25 (Reuters) — Total U.S. consumer credit outstanding declined for the seventh straight month in August as credit card debt continued to fall.

The Federal Reserve said on Thursday total outstanding credit, which covers everything from car loans to credit cards, fell by $3.34 billion after dropping $4.09 billion in July.

Analysts polled by Reuters had forecast consumer credit contracting $3 billion in August.

So-called revolving, or credit-card credit, fell $4.99 billion in August after a $4.98 billion fall the prior month.

That marked the 24th consecutive month credit-card debt decreased.

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and vacations, increased $1.65 billion after increasing $888.59 million in July. It was the fourth straight month of gains.

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in case you thought Dallas Fed Pres Fisher understands monetary operations and banking

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Fisher Speech

Summary from MNS:
FED: Dallas Fed Pres Fisher (votes on FOMC in ’11) is a hawk on QE2.
Says “it is not clear that the benefits of further quantitative
easing outweigh the costs,” especially if U.S. has “anemic recovery, but
not one that slips into reverse gear.” Barring further shock, he has
“concerns about the efficacy of further expanding the Fed’s balance
sheet until our political authorities better align fiscal and regulatory
initiatives with the needs of job creators. Otherwise, further
quantitative easing might be pushing on a string. In the worst case, it
could flood the engine of the economy with gas that might later ignite
inflation.”

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U.S. Data/Dudley

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Karim writes:

Data: General impression is manufacturing is slowing but ‘building blocks’ for consumer getting better (sorry for delay)

Consumer

  • Personal income up 0.5% in Aug and now running 3.3% y/y


This is a very significant positive. With personal income rising at this rate the chances of negative growth are slim and none.

  • Savings rate back up to 5.8% from 5.7%


Funded by the ongoing federal deficit.

  • Also of interest is core PCE at 0.1%, keeps Y/Y rate at 1.4% for the 3rd straight month-pretty far from deflation territory and close to the Fed’s desired 1.5-2.0% range

Coupled with the unemployment rate keeps the Fed on hold for now.

Also, watch car sales as today’s data looks pretty good. Cars and housing would be the signal that domestic credit expansion is beginning to kick in.

    ISM

  • “Business results (top and bottom line) continue to meet or exceed our operating plan and exceed prior year performance by double digits.” (Chemical Products)
  • “Business continues flat relative to prior month and is expected to remain flat. Commodities continue to be the main concern heading into 2011.” (Food, Beverage & Tobacco Products)
  • “Our business is softening due to seasonal considerations. Overall, our situation is much better than 2009.” (Machinery)
  • “Customers seem to be pulling back on orders. I suspect that they are trying to reduce their inventory for the approaching year-end.” (Transportation Equipment)
  • “Strategic customers reducing order quantities.” (Computer & Electronic Products)

Most ISM categories weaker, but still in expansion mode; New Orders vs Inventories Spread not looking great



ISM Sept Aug
Index 54.4 56.3
Prices paid 70.5 61.5
Production 56.5 59.9
New Orders 51.1 53.1
Inventories 55.6 51.4
Employment 56.5 60.4
Export Orders 54.5 55.5
Imports 56.5 56.5


Dudley

  • Key line in speech today: “further action is likely to be warranted unless the economic outlook evolves in away that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
  • Doesn’t sound too patient!



And looks to me like better days are coming.

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Fed Mulls Trillion-Dollar Policy Question

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Fed Mulls Trillion-Dollar Policy Question

How much of a boost to the U.S. recovery could another trillion dollars or two buy?

None, never has, never will. get over it!!! It’s about price (interest rates), not quantity. and lower interest rates won’t do much, if anything, for aggregate demand, output, and employment.

That’s a tricky question for the Federal Reserve when it meets Tuesday to debate what would warrant pumping more money into the financial system.

QE shifts balances from securities accounts to reserve accounts. Net financial assets remain unchanged.

To battle the financial crisis, the Fed bought $1.7 trillion of longer-term Treasury and mortgage-related bonds, supplementing its pledge to keep interest rates near zero for a long time.

That lowered long term rates in general a tad or so, maybe. What brought long rates down was the notion that the Fed would be low for long due to the weak econ forecasts.

All told, it helped stabilize a collapsing financial system and to avert what could have been a second Great Depression.

Yes, buying the likes of GE commercial paper may have kept GE alive. That’s a case of taking credit risk and ‘investing’ in a company when the private sector would not, rather than using the receivership process, as happened with AIG and Lehman, though with differing degrees of govt. support.

Now, faced with a 9.6 percent jobless rate and below-target inflation, Fed policymakers are trying to gauge how much they could achieve if they resume massive quantitative easing.

Their research staff will probably tell them it’s all psychological

Few analysts expect the Fed to launch a new round of bond buying this week, and uncertainty over the impact of fresh moves may be a factor keeping the central bank on the sidelines. 
 

“I think part of the hesitancy of the committee to use quantitative easing a second time around relates to views of its effectiveness,” said Vince Reinhart, a former Fed staffer.

Exactly. The astute ones know there is no effect of consequence

At the Fed’s August meeting it decided to reinvest maturing mortgage-debt in Treasuries to keep its balance sheet steady, a move many analysts saw as a precursor to more easing.
 
Proponents of a relaunch of large-scale bond-buying say it will help prevent inflation expectations from falling and spur growth by further reducing borrowing costs for consumers and businesses.

Still mired in mythical inflations expectations theory

Skeptics say the economic recovery has just hit a weak patch. They argue that more easing could be ineffective in helping the economy, potentially damaging Fed credibility. 

 
An incremental drop in long-term yields may not be enough to force banks to stop hoarding safe-haven Treasuries and make loans to businesses instead, some analysts warn.

As if banks are turning down good loans at 5% to buy TSY secs at 1%

Some policymakers worry that more easing could fuel market imbalances or sow the seeds of sky-high inflation ahead.

 
There is also the risk that the Fed spooks investors.

All sounds very scientific to me…

“My own view is that any radical balance sheet program would be seen by many as an act of desperation which would dampen business sentiment and depress non-financial borrowing even more,” said Wrightson ICAP Chief Economist Lou Crandall.

 
Hard to Measure Success

 
Fed bond purchases can have two effects. They can increase liquidity in strained markets

As if marginal changes in liquidity alter the real economy

and, by lowering yields, force investors to look for returns in riskier asset classes, helping to boost the supply of credit in the economy.

That would lower the price of credit some from where it is, not increase the supply

In addition, some officials believe bond buying helps solidify trust among investors that the Fed will keep policy easy for longer, further helping to lower borrowing costs.

Investors know the Fed’s reaction function is based on inflation and employment, which they believe are largely functions of economic conditions.

The New York Federal Reserve Bank estimates that the $1.7 trillion of purchases lowered the yield on the 10-year Treasury note by between 30 and 100 basis points.

The estimate is based in part on the sharp drop in yields that occurred when the Fed first announced its large-scale bond-buying program.

 
But this “announcement effect” approach does not show how yields acted over the course of the program and may not appropriately capture the impact, analysts say.

 
It is tough to gauge how much of a move in yields can be tied to the Fed’s actions after the fact, and it is also extremely difficult to predict the impact of another move.

 
When it comes to the benchmark overnight federal funds rate, “you can come up with rough orders of magnitude of the impact, but with quantitative easing there is so much uncertainty, you can’t calculate it with any type of precision,” said Dino Kos, former head of the New York Fed’s markets group and a managing director at Portales Partners LLC.

 
The success of the first round of purchases may have been amplified by the stressed nature of markets at the time, as well as the fact that the purchases were focused on the smaller, less-liquid agency mortgage-backed securities market.

 
“If you show up and purchase assets when markets are stressed, you are not pushing back against much conviction so you can move prices more easily,” said Reinhart, the former Fed staffer.

 
To get a significant effect in the Treasury market—where any new round of purchases would likely be centered—could be harder, says Mark Gertler, a professor at New York University.

 
“Evidence suggests it would take a huge purchase of long-term government bonds, maybe the whole market, to really have any effect, and the effect would be quite uncertain.”

 
Rather than announcing such an eye-popping amount upfront, the Fed could decide to buy Treasuries in smaller steps, calibrated to the economic outlook at each meeting.

 
Forecasting firm Macroeconomic Advisors estimates each $100 billion in asset buys could lower the yield on the 10-year Treasury note by 0.03 percentage point.

 
That is a marginal move that could go unnoticed, though if Fed buying helped nudge up the inflation rate it could get a bit more of a bang for its buck on real rates.

 
Even a small amount of easing is not to be sneezed at, says Michael Feroli, chief U.S. economist at JPMorgan Chase.

 
“If you have a headache and only one aspirin left, do you decide not to take it because you wish you had two aspirins?”

“Mosler says that since the Fed buying secs is functionally the same as the Tsy not issuing them in the first place, why not just have the Tsy stop issuing long term securities if the goal is to lower long term rates? And the benefit of lower rates is that with today’s institutional structure they probably reduce aggregate demand and thereby allow for lower taxes for a given size govt. But when the govt doesn’t understand this and keeps taxes too high we all pay the price with higher unemployment and a wider output gap.”

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Fears Grow over the Fate of Irish Economy, Banks

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The two external shocks of the summer were China, which historically has had second half slowdowns due to State lending front loaded to the first half, and the euro zone which became a ward of the ECB. China’s growth has slowed some, but not collapsed, and the ECB has continued its support of euro member solvency and funding capability in the short term markets.

There was no credible deposit insurance for the euro zone banks until the ECB ‘wrote the check’ by buying national govt debt in the secondary markets. It’s not the most efficient way to do things, but it does work to facilitate national govts being able to fund themselves, though mainly in the very short term markets (I still see my per capita distribution proposal as the better policy response). And that ability of the member nations to fund themselves means they can write the check for deposit insurance as needed.

The ECB also imposed ‘terms and conditions’ along with funding assistance, and as long as Ireland is in compliance, the ECB is for the most part responsible for the outcomes, so it seems logical the ECB will continue its support, perhaps changing its terms and conditions if not pleased with the outcomes. Additionally, the ECB will continue to supply liquidity directly to the banks, again, as with Ireland complying with the terms and conditions the ECB is now responsible for the outcomes.

But there is no question it is all a precarious brew, and there is no telling what might result in the ECB withdrawing support, so at this time steep yield curves for euro member nations due to credit risk make perfect sense.

Also, Europe and the rest of the world would like nothing more than to increase net exports to the US.

It’s all a golden opportunity for a decade or more of unparalleled US prosperity if we knew enough to again become the ‘engine of growth’ and implement the likes of a full payroll tax (FICA) holiday to provide Americans working for a living enough spending power to buy both everything we could produce at full employment and all the rest of the world wants to net sell us.

Unfortunately the deficit myths continue to cast a wet blanket over domestic demand as our leaders continue to let us down.

And with maybe 100 new Congressmen on the way, with most supporting a balanced budget and a balanced budget amendment which already has maybe 125 votes, there’s more than enough fiscal responsibility looming to create a true depression.

Hopefully their tax cutting agenda outweighs their balanced budget agenda.

And hopefully we get some kind of energy policy to decouple GDP growth from a spike in energy consumption.

Fears Grow over the Fate of Irish Economy, Banks

By Patrick Allen

September 8(CNBC) — The fate of the Irish economy is back in focus for investors across the world, after the former Celtic Tiger extended guarantees to its banking industry and depositors and with the spread on Irish bonds hitting record highs.

The country is also waiting for a decision from the European Commission on the fate of Anglo Irish, the troubled bank that was nationalized two years ago; uncertainty on whether Anglo Irish will be wound down or allowed to survive has weighed on sentiment towards the country.

Ireland is an example of a Western economy adjusting to both the banking crisis and, crucially, the emergence of Asia, Amit Kara, an economist at Morgan Stanley, said.

“Ireland has taken steps to overcome the hangover from the credit boom, but a successful outcome requires the economy to become more competitive and also, and more crucially, a global economic recovery,” Kara said.

He is confident the Irish economy will be able to roll over debt in the coming weeks and sees the chance for Irish debt to outperform the likes of Spain.

“Though Ireland faces serious long-term challenges, its liquidity position is healthy and its banks should have sufficient ECB-eligible collateral to significantly offset the funding impact of upcoming debt redemptions,” Kara explained.

“Given the underperformance of recent weeks, we see scope for Irish bonds to regain some ground against Portugal and Spain in particular, once the initial round of government-guaranteed bond redemptions has taken place over the first two weeks of September,” he added.

What is on Ireland’s Books?

The Irish banking system remains hooked on European Central Bank funding and investors are also worried about the risks posed by the scale of liabilities following Ireland’s decision to guarantee the country’s lenders.

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1938 in 2010

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1938 in 2010

By Paul Krugman

September 5 (Bloomberg) — Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.

The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.

Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.

And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.

In short, welcome to 1938.

The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion.

Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.

Most interesting!

Then came the war.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

Agreed! The deficit per se was of no consequence. The risks were and remain inflation from excess demand, which is not an easy channel to use to generate what we call inflation in today’s world. Our CPI problems have tended to come in through the cost channel and propagated by govt indexation of one form or another.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.

Agreed. Though the way I say it, for a given size govt. and given set of credit conditions there is a level of taxes that coincides with full employment, and that level is generally well below the level of govt spending.

Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

What??? Here, sadly, Paul’s implication that the actual level of the govt debt per se matters, and that his bent that lower deficits are somehow ‘better’ shines through, keeping him in the camp of being part of the problem rather than part of the answer.

(Good article for MMT’s to earn some hearts!)

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Obama to Push Tax Break

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Hard to believe that a Democratic administration is proposing only support for business and none for consumption.

While it might be an election ploy the fact that it’s been a pattern all along just adds more weight to the notion that this administration is a tool of big business as it works to keep unemployment high and domestic consumption down along the lines of the classic gold standard export model of growth. This notion is further supported by the official goal of doubling exports, and Bernanke stated before Congress a couple of years ago that he prefers exports to domestic consumption (not that anything he does actually matters for that purpose).

News Alert from The Wall Street Journal

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways.

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U.S. Green Party takes historic monetary step!

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A very sad day for the green party.

On Sat, Sep 4, 2010 at 3:09 AM, AMI wrote:

Dear Friends of the American Monetary Institute,

Some exciting and historic news from the U.S. Green Party!

This past week (end of August 2010) the Green Party’s National Committee working on monetary and economic policy matters have approved an historic, comprehensive Monetary Reform Plank in their 2010 Platform which actually does the job, as it includes all three of the necessary elements to achieve real reform. We’re happy to report this mirrors the proposed American Monetary Act.

Here below and linked at http://www.monetary.org/greenpartymonetaryplank.html is what the U.S. Green Party approved, please read it carefully.


Sincerely,
Stephen Zarlenga
Director
American Monetary Institute

Monetary Reform (Greening the dollar)

“While the banking reforms outlined in the above 12 points are very important to ameliorate the present crisis in our banking system, to affect long term, transformative change, it is imperative that we restructure our poorly conceived monetary system. The present mis-structured system of privatized control has resulted in the misdirection of our resources to speculation, toxic loans, and phony financial instruments that create huge profits for the few but no real wealth or jobs. It is both possible and necessary for our government to take back its special money creation privilege and spend this money into circulation through a carefully controlled policy of directing funds, through community banks and interest-free loans, to local and state government entities to be used for infrastructure, health, education, and the arts This would add millions of good jobs, enrich our communities, and go a long ways toward ending the current deep recession.

To reverse the privatization of control over the money issuing process of our nation’s monetary system; to reverse its resulting obscene and undeserved concentration of wealth and income; to place it within a more equitable public system of governmental checks and balances; and to end the regular recurrence of severe and disruptive banking crises such as the ongoing financial crisis which threatens the livelihood of millions; the Green Party supports the following interconnected,

Green Solutions:

1. Nationalize the 12 Federal Reserve Banks, reconstituting them and the Federal Reserve Systems Washington Board of Governors under a new Monetary Authority Board within the U.S. Treasury. The private creation of money or credit which substitutes for money, will cease and with it the reckless and fraudulent practices that have led to the present financial and economic crisis.

2. Create a Monetary Authority, which will, with assistance from the FDIC, the SEC, the U.S. Treasury, the Congressional Budget Office, and others, redefine bank lending rules and procedures to end the privilege banks now have to create money when they extend their credit, by ending what is known as the fractional reserve system in an elegant, non disruptive manner. Banks will be encouraged to continue as profit making companies, extending loans of real money at interest; acting as intermediaries between those clients seeking a return on their savings and those clients ready and able to pay for borrowing the money; but banks will no longer be creators of what we are using for money. Many new forms of banks will be encouraged such as community banks, credit unions, etc., see 11 and 12 above)

3. The new money that must be regularly added to an improving system as population and commerce grow will be created and spent into circulation by the U. S. Government for infrastructure, including the human infrastructure of education and health care. This begins with the $2.2 trillion the American Society of Civil Engineers warns us is needed to bring existing infrastructure to safe levels over the next 5 years. Per capita guidelines will assure a fair distribution of such expenditures across the United States, creating good jobs, re-invigorating the local economies and re-funding government at all levels. As this money is paid out to various contractors, they in turn pay their suppliers and laborers who in turn pay for their living expenses and ultimately this money gets deposited into banks, which are then in a position to make loans of this money, according to the new regulations.”

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