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Sergeant Friday Questions a Treasury Spokeswoman -- Just the Facts, Ma'am
by Paul Kasriel of The Econtrarian,
Sergeant Friday: What has been the behavior of total federal outlays in the past five fiscal years?
Treasury Spokeswoman: As shown in Chart 1, the year-over-year change in federal outlays ballooned to 17.9% in FY 2009 because of the sharp increase in income security expenditures (e.g., unemployment insurance benefits, food stamps) due to the most severe recession since the early 1930s, TARP expenditures to recapitalize our financial system and a fiscal stimulus program.
Does the Recent Decline in the Unemployment Rate Reflect an Improving Labor Market?
by Paul Kasriel of The Econtrarian,
Last Friday the BLS reported that the national unemployment rate declined by two-tenths of a percentage point in July vs. June. On the surface, that would seem to be good news for the labor market, right? Not according to the knee-jerk analysis by a lot of jerks on cable financial news.
QE Why $85 Billion per Month? Why Not $170 or $42 -1/2 Billion?
by Paul Kasriel of The Econtrarian,
Am I the only one who wondered how the Federal Reserve arrived at a figure of $85 billion as the amount of longer-maturity securities it planned to purchase per month in its third round of quantitative easing (QE)? Why not double that amount? Why not half that amount? How will the Fed know when it is time to taper its securities purchases? How will the Fed know by how much to taper? Inquiring minds want to know.
If the Fed Wants to Lower Bond Yields, Perhaps It Should Switch to QT
by Paul Kasriel of The Econtrarian,
Whenever I forget to mute CNBC or Bloomberg TV, I invariably hear some wag explaining to us that the goal of the Feds policy of quantitative easing (QE) is to lower bond yields in order to stimulate borrowing by the nonbank public and thus, increase aggregate spending. If, in fact, the Feds paramount goal is to lower bond yields, then I suggest that it might want to consider quantitative tightening (QT). Why?
Will the Recent Rise in Interest Rates Shut Down Household Spending?
by Paul Kasriel of The Econtrarian,
Not likely. Today, June 27, the yield on the Treasury 10-year security closed at 2.47% according to the Bloomberg public (i.e., free) website. According to the Fed, this security closed at 1.66% on May 1. All else the same, household borrowing and spending would be stronger had this interest rate not risen by 81 basis points in the space of about two months. But it is doubtful that the recent rise in bond yields of many stripes will shut down consumer borrowing and spending.
Does Fed “Tapering” Represent Fed Tightening?
by Paul Kasriel of The Econtrarian,
It depends. On what? Whether a reduction in the amount by which Federal Reserve purchases of securities increases each month represents a tightening in monetary policy depends on how much loans and securities on the books of private depository institutions (i.e., commercial banks, S&Ls and credit unions) change each month. Whether Fed monetary policy gets more restrictive or more accommodative when Fed the Fed begins to taper the amount of securities its purchases per month depends on what happens to the growth in the SUM of Fed credit and depository institution credit.
2013 Midyear Economic Update -- Another False Dawn?
by Paul Kasriel of The Econtrarian,
Weve seen this movie before since midyear 2009, havent we? The pace of economic activity begins to quicken and it looks as though a full-throated cyclical expansion might finally be at hand, only to have the economy slip back into the doldrums. Nominal private domestic spending on currently-produced goods and services grew in the first quarter at an annualized rate of 5.5% compared to 3.4% in the previous quarter. Consumer spending accelerated, housing sales picked up and business spending on equipment and software continued to grow at a healthy pace.
"America Has Faced the Unknown Since 1776," So Says Warren Buffett
by Paul Kasriel of The Econtrarian,
So wrote Warren Buffett in his March 1, 2013 letter to Berkshire Hathaway Inc. stockholders. In the phrase before this quote, Mr. Buffett wrote: Of course, the immediate future is uncertain And after this quote, he wrote: Its just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).
Ben Bernanke, the Rodney Dangerfield of Fed Chairmen
by Paul Kasriel of The Econtrarian,
First it was 2012 presidential candidate Rick Perry, who wanted to deal with Ben Bernankes money-printing Texas style. Then 2012 presidential candidate Mitt Romney indicated that Ben Bernanke had better have his personal effects packed up and ready to move out of his Fed office by January 21, 2013.
Why Not a Quantitative Target for Quantitative Easing?
by Paul Kasriel of The Econtrarian,
When I should have been practicing my bass guitar in preparation for my band class Thursday evening, I, instead, watched the first few minutes of Federal Reserve Chairman Bernankes post-FOMC press conference. A number of press inquiries were related to adding specificity to the FOMCs criteria for modifying its current $85 billion per-month purchases of securities. In the short time that I watched the press conference, Chairman Bernanke did not seem to satisfy the press on this issue.
Sequestration Will Slow Real GDP Growth But Not Because of Demand-?Side Effects
by Paul Kasriel of The Econtrarian,
In my February 5, 2013 commentary "2013 Economic Outlook Bright Sunshine for the U.S., Some Cloud Abroad," I argued that changes in federal fiscal policy have no material impact on total spending on the economy, but rather affect the distribution or composition of a given amount of total spending. The crux of my argument was that other private spending would "crowd in/out" changes in demand emanating from changes in tax and/or government spending policies. In this commentary, I will amend that argument.
Don't End the Fed, Mend the Fed
by Paul Kasriel of Northern Trust,
Congressman Ron Paul has written a book entitled End the Fed. I have to admit that I have not read his book. But I have read many of Congressman Pauls excellent (in my opinion) essays on monetary theory and policy. Congressman Paul likely argues in End the Fed that the Fed and other central banks have created monetary "mischief" in the past and are likely to continue to do so in the future. Because of this monetary mischief, I assume that Congressman Paul would like to replace the Fed and other central banks with some form of a gold standard. I share Congressman Pauls sentiments.
Kasriels Parting Thoughts Mortgage Refinancing: Stimulative or Redistributive?
by Paul Kasriel of Northern Trust,
It is a little acorn for you to bury today and dig up in the future when some partial-equilibrium yahoo on CNBC says that total spending in the economy will get a boost as households refinance their mortgages at lower interest rates. Yes, the folks doing the refinancing will now have more income left over after making their monthly mortgage payment to spend on other things. But what about the ultimate lender who has had his higher-interest security called away from her? She was earning 6% on her loan but now is able to earn only 4% on the same type of loan.
The Cyclical Macroeconomic Impact of Taxmageddon 2013 and Seniors Worried about the Debt
by Paul Kasriel of Northern Trust,
December 31, 2012, the current federal personal income tax rate structure will revert to the structure that prevailed at the close of the Clinton administration. And among other things, tax rates also will go up because of the additional taxes on investment income as part of the Affordable (Health) Care Act. All told, tax revenues will increase by about $500 billion in 2013, which is about 3.2% of the Blue Chip survey average forecast of 2012 nominal GDP.
Kasriels Parting Thoughts Recent Federal Budgetary Trends: Facts, Not Opinions
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012. The year-over-year growth in the 12-month moving total of federal outlays peaked at 19.7% in July 2009. In March 2012, the year-over-year change in the 12-month moving total of federal outlays was minus 1.1%. The median growth in the year-over-year moving total of federal outlays from December 1955 through March 2012 is 6.6%.
Recent Federal Budgetary Trends: Facts, Not Opinions
by Paul Kasriel of Northern Trust,
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012.
Why Should Not Stocks Have Done Well? or Business, With Enemies Like This, Who Needs Friends?
by Paul Kasriel of Northern Trust,
Brent crude oil is trading around $122 and change today, down from a peak of $128.31 on March 9. The rapid run-up in oil prices since late-January has made a dent in household budgets and keeps us wondering if it is permanent. The reasons for the jump in oil prices in recent months is largely a supply story the Iran nuclear controversy raising concerns about future oil supply and actual supply bottlenecks in several spots of the world. The support to this thesis is visible in the recent behavior of industrial metal prices.
Kasriel's Parting Thoughts - Has the Fed Boosted the Stock Market?
by Paul Kasriel of Northern Trust,
The Feds actions have benefited the stock market as well as aggregate demand for goods and services in the U.S. economy. Would you have preferred that the Fed sit idle as it did in the early 1930s, with likely similar results for the stock market and the economy in recent years as occurred at that time? The Fed has simply provided some of the credit to the economy that the private MFI system would have had it not been crippled with loan losses. And even with the Feds additional credit creation, total MFI credit growth has fallen short of the long-run normal credit creation of private MFIs.
Kasriels Parting Thoughts Mary Matlins Economics
by Paul Kasriel of Northern Trust,
There is a controversy about whether one should use real GDP or real GDI to evaluate the performance of the U.S. economy. Real GDP is obtained by adding up spending across the economy and real GDI is computed by adding up income earned. Conceptually, GDP and GDI are identical but the source data for each is different and they yield different numbers. The GDI measure is gaining attention; Jeremy Nalewaik of the Fed has pointed out the National Bureau of Economic Research uses monthly indicators, GDI and GDP to determine official dates of business cycle peaks and troughs.
Hey, Big Spender?
by Paul Kasriel of Northern Trust,
Some political movement ought to unfurl the Mission Accomplished banner with regard to reining in federal government spending. As shown in the chart below, in the 12 months ended January 2012, the cumulative total of federal outlays-defense, non-defense, entitlements, interest on the debt-increased only 1.5% vs. the 12 months ended January 2011. The median growth in 12-month cumulative total federal outlays from January 1954 through January 2012 is 6.6%. Starting with the 12 months ended March 2010, this measure of growth in federal outlays has been below the long-run median.
If Current Bank Credit Trends Continue, Bet Against the Feds Interest Rate Forecast
by Paul Kasriel of Northern Trust,
A majority of FOMC members expect that the interest rate on federal funds, an interest rate controlled by the Fed, will not be increasing until late in 2014. If the current trend in the behavior of bank credit continues in 2012 and into 2013, I believe that the FOMC will be lifting its federal funds rate target early in the second half of 2013. Again, if the current growth trend in bank credit continues, a failure on the part of the FOMC to raise its federal funds rate target and shrink its balance sheet will sow the seeds of a rate of consumer inflation above the FOMCs 2% annualized target.
Should the Definition of the Central Bank Lender of Last Resort Function Be Expanded?
by Paul Kasriel of Northern Trust,
If the ECB needed to expand its balance sheet to maintain the specified rate of growth in combined ECB and MFI credit, the ECB could purchase in the open market the requisite amount of pan-euro bonds rather than individual-country sovereign debt. In this way, the ECB could fulfill its expanded lender-of-last resort function without taking on individual-country sovereign-debt credit risk.
Europe Is in for a Long Recession
by Paul Kasriel of Northern Trust,
Collectively, the 27 sovereign nations that make up the EU most likely entered a recession this quarter. Given that the EU represents the largest economy in the world, a recession there is no small beer for the rest of the world. The Greek tragedy morphed into an Italian comedy. Now, it has become a French farce. The plot behind all of these theater forms is how an economy struggles when deprived of adequate bank credit. Although eurozone MFI credit is growing, its growth is much slower than it was prior to the global recession.
With Apologies to James Carville, It's the Demand, Stupid
by Paul Kasriel of Northern Trust,
If there were more demand for goods and services in the economy, then corporations allegedly sitting on all that cash would start to use it. Our current weak economic growth is largely the result of inadequate aggregate demand for goods and services, not inadequate supply. And that is why I suggested a properly designed Federal Reserve quantitative easing could chum up aggregate demand until banks are able to create adequate amounts of credit on their own to get the job done. Monetary policy is all about affecting aggregate demand; fiscal policy is all about affecting aggregate supply.
Benjamin Strong and Milton Friedman - Ironically, Something in Common?
by Paul Kasriel of Northern Trust,
Had Milton Friedman not passed away in 2006 and were alive and writing today, he would be arguing forcefully in favor of continued Federal Reserve quantitative easing. Friedman argued that had Benjamin Strong been alive to influence Federal Reserve policy in 1930 and 1931, the recession of 1929 would not have degenerated into the Great Depression. If Milton Friedman were alive today to influence the current Federal Reserve monetary policy debate, the near stagnant economic environment we find ourselves in would not need to persist.
Fed 'Twisting' Will Stimulate Economic Activity for Bond Traders
The consensus view is that after adjourning from its September 20-21 meeting the FOMC will announce a plan to lengthen the maturity structure of its securities portfolio by increasing the proportion of longer-maturity securities in the portfolio.
If Some Dare Call It Treason, Was Milton Friedman a Traitor?
by Paul Kasriel of Northern Trust,
The principal factor accounting for the current exceptionally weak economic recovery is not unusually high uncertainty, too burdensome regulation and taxation, excessive federal government spending and/or debt or a major structural change in the economy, but rather inadequate depository institution credit creation. The reason depository institutions are not creating normal amounts of credit is that they suffered enormous losses after the residential real estate bubble burst and they remain concerned about current and/or future capital adequacy.
The August 9 FOMC Decision - Ineffective at Best, Dangerous at Worst
by Paul Kasriel of Northern Trust,
The FOMCs decision to commit to holding its federal funds target in a range of zero to 25 basis points at least through mid 2013 strikes me as an ineffective way to accomplish one of its goals full employment of the labor force and potentially dangerous with regard to another of its goals stability in an index of goods/services prices. In my view, the Fed should abandon an interest-rate targeting approach to monetary policy. Rather, it should adopt a quantitative-targeting approach targeting the growth in the quantity of combined Federal Reserve and commercial bank credit.
I was sent to Washington to Change the Trajectory of Government Spending
by Paul Kasriel of Northern Trust,
In the 12 months ended Jul 11, cumulative total federal outlays were 2.7% higher than cumulative federal outlays in the 12 months ended Jul 10. The average year-over-year % change in 12-month cumulative outlays from 1956 through today has been 7.6%. And with 12-month cumulative total federal receipts growing at 8.7% the cumulative deficit in the 12 months ended Jul 11 was $1.225 trillion, $36 billion less than the cumulative deficit in the 12 months ended Jul 10. With continued fiscal progress of this nature, S&P will beupgrading U.S. debt faster than the Fed can change its forecast!
S&Ps Downgrade of U.S. Sovereign Debt Some People Actually Pay Them for these Opinions?
by Paul Kasriel of Northern Trust,
S&P stated the obvious after the U.S. markets closed on August 5 - the projected growth in U.S. public debt is on a long-term unsustainable path. Rather than paying S&P for this opinion, all you need to do is look at some past CBO projections and you would have arrived at the same opinion years ago.
U.S. Debt Ceiling If Cooler Heads Do Not Prevail
by Paul Kasriel of Northern Trust,
What would be the immediate economic effect of a sudden balancing of the U.S. federal government budget? The $1.26 trillion decline in federal outlays would represent a negative demand shock to the U.S. economy. Some entities who were expecting payments from the federal government would be disappointed. These disappointed entities might have to cut back on some of their planned spending in order to be able to honor their payment commitments to others. Alternatively, these disappointed entities might have to increase their borrowing in order to honor their payment commitments.
Washington Had a Spending Problem
by Paul Kasriel of Northern Trust,
Although Washington does not seem to have a current spending problem, what about a spending problem going forward? Specifically, if the programs specified in President Obamas February 2011 budget proposal were implemented, how would growth in federal total outlays in an eight-year Obama presidential tenure compare with growth in federal total outlays of other presidents tenures? To answer this question, I have relied on projections of total federal outlays by the Congressional Budget Office (CBO), the nonpartisan scorekeeper of all things fiscal.
U.S. Businesses Appear to Have Selective Uncertainty
by Paul Kasriel of Northern Trust,
Business hiring remains weak and business capital spending is robust. The capital spending part is illustrated in the chart below showing the 8-quarter annualized growth in shipments of nondefense capital goods deflated by the PPI for capital goods. I would think that if abnormally-high business uncertainty prevailed today, there would have been considerably slower growth in price-adjusted purchases of nondefense capital goods than what has occurred.
Poor People or Old People - Who Do We Want to Help?
by Paul Kasriel of Northern Trust,
Milton Friedman used to talk about the "tyranny of the status quo." By that, he meant that it is difficult to change public policy because of entrenched interest groups allied with policies that have been in effect for decades. I would argue that opposition to changes in our current Social Security and Medicare programs is an example of tyranny of the status quo. The original intent of both was to provide an income support floor for our retired senior citizens. So, why do these programs supplement the income directly through Social Security and indirectly through Medicare to wealthy seniors?
Do We Have a Medicare Budgetary Problem or an Aging Population Problem?
by Paul Kasriel of Northern Trust,
If it makes sense for corporations to borrow to fund capital expenditures, why does it not make sense for the federal government to do so as well? By the gov making investments in physical capital (infrastructure) and human capital (education), the economy's future growth rate would be expected to be enhanced. This would imply higher future tax revenues (without higher tax rates) to pay the interest and principal on the debt issued to fund capital expenditures. So, rather than trying to balance the overall budget, would it not make more sense to bring into balance the operating expenses?
U.S. Monetary Policy: A Case of Self-Induced Paralysis?
by Paul Kasriel of Northern Trust,
Part of the decreased real GDP growth/increased unemployment rate central-tendency forecasts for June vs. April can be attributed to supply interruptions from Japan and higher energy prices. But given the FOMC's assumption that the supply interruptions are dissipating and that energy prices are declining, this explanation does not apply to the reduced real GDP growth and unemployment rate central-tendency forecasts for 2012. I think the central-tendency forecasts for real GDP growth and the unemployment rate are optimistic for 2011 and 2012 in the absence of continued quantitative easing.
Economy Brakes Even Before Fed Takes Its Foot Off the Accelerator
Although quantitative easing might not help stimulate domestic spending on goods, services and assets, in the words of our grandmothers-it couldn't hurt. All else the same, if the Fed purchases securities in the open market, the seller of these securities can do one or a combination of three things with them - spend them, lend them or just hold them. If sales proceeds are spent or lent, then there is a net increase in spending on something in the economy. Only if the sales proceeds are just held would quantitative easing not lead to a net increase in spending in the economy.
One Man?s Fiscal Austerity is Another?s Prosperity?
by Paul Kasriel of Northern Trust,
Fiscal austerity is the rage in the developed economies. The proponents of fiscal austerity argue that it will lead to economic prosperity. The opponents of fiscal austerity argue that it will lead to poverty. If the government decides to spend less, then, it will need less funding. This, in turn, implies that the government will either cut back on its current taxation or cut back on its current borrowing. The former recipients of the cut-back government expenditures will indeed experience a decline in their spendable funds. However, taxpayers will find themselves with extra spendable funds.
To QE or Not to QE? That is the Question
Historically, % changes in MFI credit "explain" a large proportion changes in nominal GDP. Commercial bank credit accounts for the largest component of private MFI credit. Since the FOMC commenced its second round of easing in early November 2010, the increase in Federal Reserve and commercial bank credit has been dominated by the increases in Federal Reserve credit. If the FOMC terminates its easing policy in June and private MFI credit creation does not pick up, total MFI credit growth will slow. All else the same, this would augur poorly for nominal GDP growth in the second half of 2011.
Musings on Proposed Government Spending Cuts and Current Energy Price Increases
by Paul Kasriel of Northern Trust,
Just as labor is an important input in the production of goods and services, so is energy(E). An increase in the price of E reflects a relative shortage of E from what was the case. Just as the price of labor can increase from an increase in demand or a decrease in supply, so, too, can the price of E. Assume that before an increase in the price of E, the economy was set to go from 3% growth to 4% growth. Assume that the increase in the price of E has resulted from an increase in the demand for E. At the higher price of E due to demand, the economy will not be able to rise from 3% to 4%.
Don?t Know Much about Geography, Don?t Know Much Trigonometry, But Sarah Palin Does Know Her ...
by Paul Kasriel of Northern Trust,
On November 8, 2010, Sarah Palin commented that the Fed?s quantitative easing monetary policy was tantamount to printing money out of thin air. Sarah Palin may not know much about geography, but she does know her Fed policy. I would phrase quantitative easing a little differently. It is the Federal Reserve creating a specific amount of credit figuratively out of thin air. Theoretically, the Federal Reserve can create an unlimited amount of credit out of thin air. Of course, there would be dire economic consequences if the Fed were to create an unlimited amount of credit out of thin air.
The 2011 Economic Outlook ? Credit Given Where Credit Is Due
by Paul Kasriel of Northern Trust,
With regard to 2011 real GDP growth, we now expect Q4/Q4 growth of 3.3% vs. 3.0%. An upward revision of 2011 Q4/Q4 real consumption growth to 2.9% from 2.5% in November is the primary factor accounting for the upward revision to the real GDP growth forecast. We are more optimistic about 2011 real GDP growth primarily because QE2 implies that the Fed will be purchasing all of the additional Treasury debt issued in conjunction with the Obama-McConnell tax and unemployment insurance compromise. We currently see more upside risk to our 2011 real GDP growth forecast than downside risk.
Corporations, Give Thanks - With 'Enemies' Like This, Who Needs Friends?
by Paul Kasriel of Northern Trust,
On November 23, the Bureau of Economic Analysis updated its analysis of U.S. corporate profits. After-tax corporate profits from current operations hit their highest level, $1.221 trillion, since the beginning of this data series, 1947:Q1. Paul Kasriel gives further analysis.
I Wonder What Milton Friedman and Karl Drunner Would Say About Allan Meltzer
by Paul Kasriel of Northern Trust,
On November 9, I wrote a commentary entitled ''Quantitative Easing in the mid 1930s Appeared to be Successful''. In my commentary, I did not mention what happened to the U.S. unemployment rate as a variation on quantitative easing was taking place. So, let?s do this now.
I Am Shocked, Shocked that the QE2 is Akin to Printing Money and Public Debt Monetization!
by Paul Kasriel of Northern Trust,
Whenever the sum of Federal Reserve and commercial banking system credit increases, credit is being created out of thin air and debt is being monetized. The magnitude of the credit creation being contemplated by the Fed is not extraordinary in an historical context. It is not an extraordinary increase in credit creation given the current amount of resource underutilization in the U.S. economy. Being shocked by the implications of QE2 with respect to ?printing money? and the ?monetization of debt? would appear to be either nave or hypocritical.
They Just Don't Get It
by Paul Kasriel of Northern Trust,
Had the Fed said that QE2 would involve the purchase of $600 billion of Treasury bills rather than Treasury coupon securities, we could have avoided this phase of uninformed criticism of the policy. Of course, the chorus of critics would have complained that by the Fed purchasing bills rather than coupons it was not affecting the ?important? part of the yield curve.
The Quantitative Easing in the mid 1930s Appeared to have been Successful
by Paul Kasriel of Northern Trust,
There is much skepticism as to whether the Fed?s second round of quantitative easing, QE2, will be effective in stimulating the nominal demand for goods and services in the U.S. economy. Keying off Mark Twain?s aphorism that although history may not repeat, it often rhymes, perhaps we can get some guidance as to whether QE2 will be successful from the results of the quantitative easing that was initiated in the second half of 1933.
QE2 Is Likely to Be More Successful than QE1
by Paul Kasriel of Northern Trust,
The theory behind quantitative easing is that an increase in the quantity of combined central and commercial bank credit will lead to an increase in nominal aggregate spending on goods, services and assets. Indeed, the correlation coefficient between percentage changes in the annual average of combined Federal Reserve and commercial banking system credit and the percentage changes in nominal U.S. GDP from 1960 through 2006 is relatively high, at 0.62. This correlation coefficient is reduced to 0.49, however, when the period is extended through 2009. Northern Trust explains why.
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