Central Banks Run Amok?

[GGT]

Interesting article:

As Inflation Surges, Central Banks Run Amok
Super heroes for the world economy they're not, as the Federal Reserve's inflation-stoking policies prove

Inflation is rising around the world, and none of the major central banks have shown serious interest in containing it. To prosper now, under these inflationary conditions, one needs thick skin.

The Bank of England has the thickest skin of all: It no longer gives excuses for ignoring inflation. The U.S. Federal Reserve is constantly inventing new theories while trying to explain away inflation, and while trying to justify its QE2 quantitative easing project despite inflationary signs aplenty.

The European Central Bank has the thinnest skin of all, and recently raised interest rates to defend its credibility in targeting price stability even though, unfortunately, the ECB won't be able to maintain this stance. The Bank of Japan is still shy, but it will have to out-QE the Fed to help its government pay for post-earthquake reconstruction.

Price stability is supposed to be central banking's main goal. But these days, central bankers think they're super heroes who should rescue the world and make everyone happy.

Inflation, since its negative effects are spread thin and take time to materialize, is ignored. Today's central banking is about so many things except inflation. This is why inflation will worsen for a long time to come. Indeed, inflation is the main theme for the current decade. A change will occur only when the current generation of central bankers is replaced.

continued http://english.caing.com/2011-04-22/100251567.html


"So the Fed's policy is, at best, designed to buy time. I'm afraid it's mainly aimed at helping vested interest groups saddled with debt. Negative real interest rates can save them by giving them more time. The sad truth, though, is that many of these people should go to jail. The United States needs a jasmine revolution."

[GGT]

Copying this interesting post from wiggin in General Chat about the stock market. (Hope that's okay and you don't mind, wiggin?)

I think there's a lot more to this than exchange rates, Dread, though obviously exporters will be hurt by a stronger dollar.

The bigger question is whether early monetary tightening will put a crimp on the recovery, which would hurt a lot of companies across the board, especially those relying on domestic consumer spending. Essentially, monetary tightening too soon will hurt company investment/expansion/borrowing, which reduces the recovery in unemployment and other indicators, which will reduce projected consumer spending.

Also, there's the usual tradeoff between interest rates and overall stock prices, as above a certain level people start to flock to the increasing returns of bonds or other interest rate-linked instruments rather than sticking in riskier stocks. Since we're at the zero bound and the Fed still has a lot of QE to unwind, though, I doubt this will be a significant issue until stocks get frothier or interest rates rise quite a bit.

There's some other interesting effects possible as well. Honestly, using the fed funds rate to control exchange rates is a really bad idea - the dollar fluctuates on the basis of a lot of other factors, including perception of the Fed's behavior (i.e. people might dump dollars if they think a Fed rate rise means they're afraid of a wage-price spiral in core inflation, which is counterintuitive to how it should actually work). The fed funds rate roughly controls inflation, and has significant effects on nominal GDP and employment. The dollar is a whole lot more complex.

[GGT]

Hard to believe this is the first time in almost 100 years of its existence that the US Federal Reserve Chairman is going to hold planned press conferences when announcing their policy plans, and taking questions from the press. I posted one of the 5 hard questions for Bernanke in another thread, but here's the entire list:

By Richard Band
LONDONDERRY, N.H. (MarketWatch) — The clock is ticking on “Bubbles” Bernanke. Come June 30, his latest quantitative easing program (QE2) is scheduled to end. The big question on everyone’s mind is: what happens after June 30? Will government bond yields explode?

A number of respected commentators, including bond king Bill Gross of PIMCO, are bracing for the worst — and it’s not hard to see why. Certainly, the Federal Reserve’s behavior in the wake of the 2008 financial crisis has exceeded, in sheer recklessness, anything attempted by any senior central bank in history.

First, the Fed stuffed its balance sheet with more than $1 trillion of dodgy mortgages (purchased with money created out of thin air). Then last November, well over a year after the economy supposedly pulled out of recession, Bernanke’s crew voted to buy another $600 billion of Treasury paper.

This massive money printing has undermined global confidence in the dollar’s purchasing power. One result: A sharp jump in commodity prices, including gold, oil and — most recently — foodstuffs. Is Bernanke happy with things? You have to wonder.

But as the Federal Reserve chairman takes the podium Wednesday in the central bank’s first-ever press conference, there are far more direct questions on my mind for Ben Bernanke. Here are five that I would like the answer to:

1) How much quantitative easing is enough?

Abe Lincoln supposedly said, “You can’t fool all the people all the time.” I might add: “You don’t have to — a majority will do.” And sure enough, markets have moved about 12% higher since the announcement of QE2 almost six months ago.

But wait, this wasn’t supposed to happen: When the Federal Reserve launched its latest bond-buying program on Nov. 4, the yield on the 10-year T-note stood at 2.48%. By February, the benchmark yield had soared as high as 3.72%, a whopping 50% increase. If QE2 was supposed to keep rates down (as you promised), it has been a flop.

Mr. Bernanke, your $600 billion QE2 program clearly smacks of a desperation tactic, ill grounded in economic theory or historical experience. Over the past 10 years, Japan has repeatedly failed to spark its moribund economy by monetizing government debt. Why should the same gimmick work here? Read about how Fed failures have doomed Barack Obama to just one term, on InvestorPlace.com.

2) What do gold at $1,500 and oil at $112 say about confidence in the Fed?

In an op-ed last November, Mr. Bernanke, you wrote that concerns about quantitative easing were “overstated.” You went on to say that it did not “result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.”

But if that’s the case, then why is gold GCM11 +0.24% hitting new all-time highs over $1,500 an ounce? Why did oil CLM11 +0.03% close Monday at $112 per barrel? Does gas at a national average of $3.88, just 23 cents shy of its all-time high, strike you as the “price stability” described in the Fed’s announcement of QE2?

Already, according to MasterCard SpendingPulse, gasoline sales in the United States have tumbled for five straight weeks. Consumers are cutting back, and businesses will soon feel the pinch. How can we have confidence amid your comments and these trends? Read about 11 ETFs that will save you from inflation, on InvestorPlace.com.

3) Are near-zero interest rates are fair to savers and retired folks on fixed incomes?

Mr. Bernanke, earlier this year, you said on CNBC that the purpose of QE2 was “not to increase stock prices per se.” But at the same time, you said, “But the way monetary policy always works is through interest rates and asset prices. …By taking these securities out of the market and pushing investors into alternative assets, we have led to higher stock prices… The policy is affecting the stock market really in two ways. One is by lowering long-term yields and forcing investors into alternative assets.”

Thanks to your monetary policies, money-market mutual funds are now relying on fee waivers to avoid breaking the buck. For example, according to the Spring 2011 edition of the T. Rowe Price Report, without these waivers the firm’s money fund yields would be as much as 29 basis points in the red! Even Vanguard, a not-for-profit fund company, admits in its money-fund prospectuses, “Vanguard and the fund’s board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the fund’s daily yield so as to maintain a zero or positive yield for the fund.” Read about

So tell me, Ben, if even a not-for-profit fund company can’t keep its money funds afloat without a subsidy, how can today’s savers and retirees secure their financial future? How much longer does the government plan to steal from savers in order to fatten bank profit margins?

4) What would you do if, one of these days, the Chinese placed a $100 billion order to sell their U.S. Treasury bonds?

Last week, Standard and Poor’s announced it was downgrading the outlook for U.S. debt, saying, “In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.” China’s Foreign Ministry spokesperson Hong Lei responded, “We hope the U.S. government will earnestly adopt responsible policy measures to protect the interest of investors.” Read about how a credit downgrade could be good for America, on InvestorPlace.com.

Let’s face right up to that big issue that S&P has called to our attention: The U.S. government’s spending has gotten wildly out of control, and something really needs to be done about it. S&P says an agreement between the Republican and Democratic parties in Congress and the White House needs to be reached by 2013. If not, S&P says there’s a one-in-three chance that they will have to lower the debt rating of the United States government.

The Fed is sitting on a powder keg. At some point, it will be necessary to restore a semblance of balance between savers and borrowers. When interest rates begin to tick up, the rush to buy anything and everything could turn into a universal urge to sell. The Chinese are already complaining about the meager rewards of Treasuries.

What would happen if they decided to dump just 10% of their $1.15 trillion position in U.S. debt? How is the Fed going to deal with such an outcome?

5) With so many regional Fed presidents voicing dissent, is the Fed’s renowned “collegial” decision-making process breaking down?

Just after you announced QE2, Mr. Bernanke, your former fellow governor at the Fed, Kevin Warsh, was critiquing the policy (in diplomatic terms, of course), saying, “The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies.”

Given what ails us, additional monetary policy measures are poor substitutes for more powerful pro-growth policies.” Since then, Warsh has resigned. Meanwhile, Thomas Hoenig of the Kansas City Fed has called QE2 a “bargain with the devil,” Richard Fisher of the Dallas Fed has warned the U.S. could suffer “the same fate as in the Weimar Republic,” and Charles Plosser of the Philadelphia Fed has said a failure to reverse course “could have serious consequences for inflation and economic stability.”

What do you think of so many regional Fed presidents going around, giving speeches that dissent from your own point of view? What makes you so sure that you are right and everyone else is wrong?

http://www.marketwatch.com/story/5-t...6?pagenumber=1


Another, albeit more political criticism of the Fed:

http://online.wsj.com/article/SB1000...LEFTTopOpinion

oops, sorry, I guess I read Lehrman's opinion as a guest before it got locked to subscribers?

[wiggin]

Interesting article:



continued http://english.caing.com/2011-04-22/100251567.html


"So the Fed's policy is, at best, designed to buy time. I'm afraid it's mainly aimed at helping vested interest groups saddled with debt. Negative real interest rates can save them by giving them more time. The sad truth, though, is that many of these people should go to jail. The United States needs a jasmine revolution."

Are you serious? Have you seen our output gap, unemployment numbers, core inflation, and inflation expectations? Every single indicator points towards continued loose monetary policy. This isn't some cabal of secret interests.

[GGT]

Are you serious? Have you seen our output gap, unemployment numbers, core inflation, and inflation expectations? Every single indicator points towards continued loose monetary policy. This isn't some cabal of secret interests.

Am I serious about what? Posting an article that questions Central Banks? Yes. Questioning US Federal Reserve dual mandates? Absolutely.

[wiggin]

Am I serious about what? Posting an article that questions Central Banks? Yes. Questioning US Federal Reserve dual mandates? Absolutely.

You haven't questioned anything, you just posted some articles with a single bit excerpted which suggested 'vested interest groups' are controlling the Fed's policy to devalue their debt. I responded explaining how ridiculous that was.

[GGT]

Did you read the whole article? And the corresponding one from the WSJ? In case you did not get the gist of my "questions" or opinions.....I don't think our Federal Reserve Bank can attend to both price stability and "full employment" at the same time. I question why our central reserve bank is involved in employment issues as mandated by congress in the first place. Why don't you?

[wiggin]

Did you read the whole article? And the corresponding one from the WSJ? In case you did not get the gist of my "questions" or opinions.....I don't think our Federal Reserve Bank can attend to both price stability and "full employment" at the same time. I question why our central reserve bank is involved in employment issues as mandated by congress in the first place. Why don't you?

I'm not sure employment is the best other metric to use, but I do think that we should look at more than just inflation targeting. I've seen some suggestions that an NGDP target might be better. *shrugs* Even a seemingly 'contradictory' mandate allows the bank to tailor policy to the complex conditions of the moment rather than slavishly adhering to a single metric.

[GGT]

Are you serious? Have you seen our output gap, unemployment numbers, core inflation, and inflation expectations? Every single indicator points towards continued loose monetary policy. This isn't some cabal of secret interests.

Sounds like you're satisfied with our Fed policies then. Despite its questionable dual mandate (price stability and maximum employment), it looks like they're continuing a form of trickle-down voo doo economics that does benefit certain interests. Not some cabal of secret interest, as you suggest, because it's clear who's winning and who's losing.

It's interesting that a number of posters here will complain about "transfer of wealth" when it comes as taxation, too much "bureaucratic intervention" when it comes as regulations, dangers of debt and deficits spending, or economic central planning when it comes from politicians......but nary a peep when it's being done by Federal Reserve. Also interesting the number of people who complain about fiscal policies that aren't working, but are mum when monetary policies aren't working.

April 28, 2011
The Fed's Low Rates Are Restraining Recovery
By John Michaelson


In May 2010 I wrote an Op-Ed for the Wall Street Journal arguing that the Fed's low interest rates were actually retarding economic recovery and job creation, not assisting it. Since then, this view has been gaining traction, albeit not at the Fed.

The prevailing view among economists, policymakers and Federal Reserve Board governors -- and the conventional Washington wisdom more broadly -- remains that zero or near-zero short-term interest rates (negative 2% in real terms) have some unavoidable adverse side effects, but unquestionably stimulate the economy. Put more simply, the lower the rate, the more economic stimulation.

The Fed believes that higher asset prices, particularly higher stock prices filter down to increased consumption, and therefore more job creation. It believes that recapitalizing the banking sector through low interest rates results in greater access to credit, more company formation, and once again more jobs. Finally the Fed believes that it will be able to rein in any resulting asset bubbles down the road once the economy recovers.

The pernicious impact of near-zero short-term interest rates on asset prices and inflation and the massive misallocation of investment dollars resulting from the policy is now well disseminated.

About the above, it should be said that the Fed is aware of the adverse side effects of its policies. It is also aware of the adverse impact of high unemployment on the jobless, the social fabric of the country and the economy, and the especially devastating impact of prolonged high unemployment. The Fed believes that the adverse side effects are an acceptable cost of a medicine that is otherwise encouraging growth, creating jobs, and supposedly curing the patient.

But what if as opposed to stimulating the economy and creating jobs, near-zero rates are actually deterring recovery by retarding consumption, deterring lending and job-producing investment, and undermining confidence; thus authoring a slower recovery and less job creation than would otherwise be the case? The continued anemic nature of the present recovery compared to that from prior recessions at the very least indicates the need for an urgent reexamination of the Fed's policy.

Once interest rates go below a certain level the negative impacts outweigh the presumed positives and recovery is actually impeded.

<graphic>

Specifically, the Fed's policy:

• Causes a massive, hidden and unprecedented transfer of wealth. The money comes from savers and retirement accounts, sponsors of defined benefit pension plans, beneficiaries of endowments and foundations that generally have a high consumption coefficient of income. The beneficiary of the wealth transfer has to a great extent been the financial sector which has used the transfer to strengthen its finances and compensate its already highly paid employees.

This transfer of wealth is on the order of $600 billion. And while the impact on households is somewhat mitigated by the reduction in mortgage interest and other debt costs, the negative impact on pension plans, insurance companies and endowments is substantial even after the increase in stock prices. The financial sector beneficiaries have shown a lower consumption rate than the investors who have forgone income.

• Results in negligible returns on savings, which stresses consumers, pension plans, retirement accounts, endowments, foundations, trusts and companies with cash. The latter stresses are delaying the restoration of confidence - a key to recovery.

• Deters lending to job-producing middle market and smaller companies by producing a steep yield curve on government and comparable debt, allowing investors and banks to earn a more than ample return without effort, expense or risk.

In human terms, the Fed's policy means emergency room nurses in Texas are working longer hours to make up for low yields on CDs, dairy farmers in Iowa are forgoing equipment purchases to save more for retirement, charities for the homeless in Manhattan are reducing services as foundations cut grants, and local governments from Albany to Sacramento are closing libraries to fund pension plan deficits. Across the country, Americans are struggling to subsidize the well paid bankers on Wall Street.

The other goal of the Fed's policy (together with the resulting steep yield curve on government debt) as previously mentioned is to provide a backdoor means of recapitalizing the financial system, thereby increasing lending and spurring job-producing investments. There is no question the financial sector is thriving.

But there are few signs of all this expected activity because the beneficiaries of the Fed's wealth transfer are just not following the playbook. Overleveraged consumers are not spending or buying homes for a small discount on mortgage rates, and financial institutions are not increasing job-creating lending. Instead, financial institutions are paying employees record bonuses and generating record returns for shareholders.

The Fed claims there is no statistical evidence of a lack of credit availability. Certainly credit is readily available to larger companies. However, it is less available for the middle market and smaller companies that are historically responsible for job creation in the U.S.

It is certainly true that large, credit-worthy, or too-big-to-fail companies are able to borrow at very low rates. But this is not leading to materially increased investment. Almost every large company CFO will tell you that slightly cheaper credit has little impact on most investment decisions. Increased demand and growth prospects are far more important.

What is especially frustrating is that supporters of the zero interest rate have a stark example of the policy's failure staring them in the face: Japan. Following the bursting of its credit bubble in 1990, Japan eventually brought its equivalent of the Fed rate down to a then-unprecedented 0.25%. The nation proceeded to suffer a "Lost Decade" of economic stagnation that has never really ended.

It is accepted wisdom among economists that this happened despite the stimulative benefit of zero percent rates, and that the Bank of Japan's colossal mistake was not bringing them down fast enough. Fed Chairman Ben Bernanke has studied the Japanese crash and believes this interpretation. In short, he does not question whether zero percent rates contributed to the Lost Decade.

In fact, Japan got caught in a cycle in which zero interest rates led to anemic private consumption and investment. The Japanese government then made up for this private sector shortfall by borrowing and spending.

Ironically, the borrowing was facilitated by the same zero percent rates that caused the private sector shortfall. National debt ballooned, eventually making it perilous to raise rates, thus trapping Japan in a cycle of depressed consumption and investment prompting more spending and borrowing to keep the economy afloat.

Of course the U.S. is not Japan. We have a far more robust economy and Japan has its own issues. But, the impact in terms of higher unemployment and slower growth is the same.

To avoid this trap, and to encourage private sector demand growth and flatten the yield curve to stimulate productive lending, the Fed should begin to raise short-term rates.

From a public policy perspective, rising short-term rates will begin to reverse the current imbalance caused by the massive wealth transfer from private owners of investment assets to banks and non-productive borrowers.
From a recovery perspective, increased returns on cash will cause Americans to feel more confident about their economic future.

Paying higher rates to attract deposits and a flatter yield curve on government debt will force banks to look for lending opportunities beyond government type credits. Investors, companies and banks will also become less tolerant of underperforming assets and seek to move those assets more swiftly to superior owners and operators, creating additional efficiencies and job-creating growth.

Yes, there are risks. First of all, I am recommending raising short-term rates only - and only from zero to a reasonably low level. Second, the current policy is not working.

The Fed remains committed to zero percent rates in the sincere but mistaken belief that this will assist the recovery. By this commitment, however, it is undermining the very recovery it seeks to create. Contrary to conventional wisdom, raising short-term interest rates from current levels would increase consumption, productive lending and job-creating investment, helping to restore confidence and get the long-awaited recovery going.

http://www.realclearmarkets.com/arti...ery_98987.html

[wiggin]

Sounds like you're satisfied with our Fed policies then. Despite its questionable dual mandate (price stability and maximum employment), it looks like they're continuing a form of trickle-down voo doo economics that does benefit certain interests. Not some cabal of secret interest, as you suggest, because it's clear who's winning and who's losing.

It's interesting that a number of posters here will complain about "transfer of wealth" when it comes as taxation, too much "bureaucratic intervention" when it comes as regulations, dangers of debt and deficits spending, or economic central planning when it comes from politicians......but nary a peep when it's being done by Federal Reserve. Also interesting the number of people who complain about fiscal policies that aren't working, but are mum when monetary policies aren't working.

http://www.realclearmarkets.com/arti...ery_98987.html

That article is hogwash. Here's why:

-Low interest rates are no more a 'transfer of wealth' than high interest rates are.
-Yes, it deters saving and hoarding of cash and encourages investment and consumption. That's the bloody point, and I don't think that somehow ruins our 'confidence'. I'm not sure why it hurts pension plans/trusts/etc. so much, though, since little of their return is from cash, and the larger plans don't have too high exposure to bonds either. QE supports stock prices, so it should help them rather more I would think.
-The yield curve argument is probably valid (certainly small business lending hasn't really recovered, though that can be addressed with fiscal policy), but the counterfactual is not: higher interest rates aren't likely to spur small business lending.

This kind of thing really makes me seethe:

In human terms, the Fed's policy means emergency room nurses in Texas are working longer hours to make up for low yields on CDs, dairy farmers in Iowa are forgoing equipment purchases to save more for retirement, charities for the homeless in Manhattan are reducing services as foundations cut grants, and local governments from Albany to Sacramento are closing libraries to fund pension plan deficits. Across the country, Americans are struggling to subsidize the well paid bankers on Wall Street.

It's wrong. People working more and longer hours is good for the economy, though I doubt savings rates have much to do with it except for those near retirement. I can't imagine that someone would delay a capital purchase right now if they had access to credit given the remarkably low rates. Charities have smaller endowments due to the crash in asset prices, not due to low return on bonds or cash. And lastly, the biggest lie of all: pension plan deficits are due to years of mismanagement and too-small contributions combined with rosy projections, not a brief period of low rates (which increases asset prices anyways).

Lastly, the bit about Japan? Nonsense. Deflation is why Japan got screwed, and that's due to too-tight monetary policy, not too-loose policy. I challenge you to find me a serious macroeconomist who doesn't agree with that assertion.

[GGT]

Zero interest for banks to borrow from the Fed is only good for banks. They don't even have to turn around and actually lend to make money, they can re-invest in stocks or buy treasurys. The Fed now has about $2 Trillion of securities and toxic crap, holding it for the banks, hoping they'll deleverage and recapitallize.

*Low interest rates transfer wealth to institutional and government classes with credit/debt; higher interests rates transfer wealth to working classes from their own gains/profits and savings.*

Favoring consumption and "investment" isn't the bloody point of a recovery, especially if consumption comes from more debt or credit, or the "investment" isn't translated into expanded hiring. JOBS and growth should be our goal. QEII favors institutional plans and stock traders/speculators/hedge funds/financial managers, it doesn't help the little guy unless they sell at a high for profits larger than inflation/cap gains taxes/fees. Record numbers of people are dipping into retirement funds to make ends meet. Credit is still tight---banks are the ones "hoarding", corporations are still holding onto Trillions---despite bail-outs and QE.

Sorry you seethe when writers talk in Human terms or microeconomics, but that IS the reality for millions of people. Working longer hours to afford gas, food, insurance, saving for retirement isn't "good for the economy" if it doesn't mean more hiring or growth. Delaying retirement isn't "good for the economy" if it keeps youth out of the work force. Charities are hurt because people have less money for donating.

(I'm less interested in your challenge about Japan, even though there ARE plenty of serious macroeconomists who don't like our current monetary policy.)

[wiggin]

Zero interest for banks to borrow from the Fed is only good for banks. They don't even have to turn around and actually lend to make money, they can re-invest in stocks or buy treasurys. The Fed now has about $2 Trillion of securities and toxic crap, holding it for the banks, hoping they'll deleverage and recapitallize.

Isn't recapitalization of banks a good thing? And I'm very much in disagreement with the assertion that QE and other loose monetary policy measures are somehow only good for banks.

*Low interest rates transfer wealth to institutional and government classes with credit/debt; higher interests rates transfer wealth to working classes from their own gains/profits and savings.*

It's hardly that clear cut, but yes, there are always winners and losers for different interest rates. Big deal; that's not what central bank policy should be focused on, but rather growth and inflation.

Favoring consumption and "investment" isn't the bloody point of a recovery, especially if consumption comes from more debt or credit, or the "investment" isn't translated into expanded hiring. JOBS and growth should be our goal. QEII favors institutional plans and stock traders/speculators/hedge funds/financial managers, it doesn't help the little guy unless they sell at a high for profits larger than inflation/cap gains taxes/fees. Record numbers of people are dipping into retirement funds to make ends meet. Credit is still tight---banks are the ones "hoarding", corporations are still holding onto Trillions---despite bail-outs and QE.

How do you plan on getting jobs if people don't buy things or if we don't expand our businesses? This works best in an expansionary monetary environment. Given the deleveraging going on in the last few years, there has been a very real risk of a deflationary spiral, where consumption and investment drop dramatically since cash will be worth more in the future.

The author of your piece and you just don't seem to get it: holding onto cash is a very bad thing for the economy, which includes keeping it idle in a savings account. You need to be keeping money flowing to keep people employed, and the best way to do that is to keep inflation expectations up to reasonable levels.

I agree, there are still some problems with credit markets, but aggressive Fed action has helped mitigate those problems to the point that credit markets more or less function nowadays, and with fairly generous terms to boot. That is a huge victory for the Fed from the dark days in 2008. I still don't get your counterfactual: how will tighter monetary policy improve credit markets and lending to small businesses? As far as I can see, it will only make things worse.

Sorry you seethe when writers talk in Human terms or microeconomics, but that IS the reality for millions of people. Working longer hours to afford gas, food, insurance, saving for retirement isn't "good for the economy" if it doesn't mean more hiring or growth. Delaying retirement isn't "good for the economy" if it keeps youth out of the work force. Charities are hurt because people have less money for donating.

I don't get annoyed about the 'human terms', I get annoyed when they use hyperbole and outright lying to make a point.

Also, thanks for including the age-old fallacy about there being a fixed number of jobs.

(I'm less interested in your challenge about Japan, even though there ARE plenty of serious macroeconomists who don't like our current monetary policy.)

Are you kidding me? Japan is the disaster scenario we've all been trying to avoid, and you don't want to address one of Michaelson's most egregiously incorrect points? We're afraid of deflation (he himself says this!) but he wants to tighten monetary policy.

As for our current monetary policy, I'll agree there is some disagreement on the current specifics, but there isn't any disagreement on the analysis of Japan. Furthermore, most of the 'inflation hawks' aren't actually economists - including several Fed presidents and most of the politicos. They're just trying to score meaningless political points that simply ignore reality.

[GGT]

Where or how did I suggest there are a fixed number of jobs?
The banks should have been recapitalized and deleveraged to reasonable levels after QEI. But their 'Free Fed Funds' and TARP didn't come with any strings attached.
If QEI worked, there'd be no need for QEII or QE2.2 (continuing to buy assets through June)
The Fed's mandate is price stability/inflation/deflation --- flooding banks with Fed created money does the opposite for dollar value and purchasing power
No other central bank (AFAIK) has a second mandate to focus on employment --- that should be fiscal and congressional policy concerns

We also have a Comptroller of Currency and a Treasury whose mandate is to monitor currency and value, an FDIC to monitor bank solvency and leverage, an SEC and FTC to monitor risk and legalities, and a congress whose job is to create conditions for growth and jobs.....without selling the population (or the middle class) down the river without a paddle.


As for Japan's lost decade and deflation comparisons, our deflation was supposedly curbed with the emergency facilities. Economists claim we've been in recovery for a while now, albeit it slow and weak, but still mostly on gov't life support. Japan is more of an export economy than the US, and they're more of an ageing nation than the US, but they can also create more of their currency just like the US.

And no offense to academic economists, but they haven't done such a bang-up job the last several years, now have they? Greenspan and Bernanke are famous for saying "we expect X to be temporary or transitory" and "we expect the effects will be limited and contained within Y sector". Yet, we go from bubble to bubble, highs to lows, crisis economics. Not that our legislators have done any better.....

[wiggin]

Where or how did I suggest there are a fixed number of jobs?

When you suggested delaying retirement was keeping the youth out of the workforce.

The banks should have been recapitalized and deleveraged to reasonable levels after QEI. But their 'Free Fed Funds' and TARP didn't come with any strings attached.

Please, TARP had plenty of strings attached, and QE doesn't give money directly to banks, it rather buys assets like bonds and other credit instruments on the market. Furthermore, you don't have any idea what amount of money was necessary for deleveraging, nor is that the only purpose of QE.

If QEI worked, there'd be no need for QEII or QE2.2 (continuing to buy assets through June)

Really? Really? Markets and growth expectations took a huge hit last year in the eurozone crisis, and QEII was a direct response to falling inflation and growth expecations. QE does its job; the only question is whether it's aggressive enough.

The Fed's mandate is price stability/inflation/deflation --- flooding banks with Fed created money does the opposite for dollar value and purchasing power

In a deflationary environment, that's exactly what you need.

No other central bank (AFAIK) has a second mandate to focus on employment --- that should be fiscal and congressional policy concerns

Really? Employment is part and parcel of monetary policy whether or not it's explicit in the mandate. The ECB's official mandate has been discussed multiple times as being too narrow, and the Bank of England seems to be following NGDP targeting rather than inflation rate targeting.

As for Japan's lost decade and deflation comparisons, our deflation was supposedly curbed with the emergency facilities. Economists claim we've been in recovery for a while now, albeit it slow and weak, but still mostly on gov't life support. Japan is more of an export economy than the US, and they're more of an ageing nation than the US, but they can also create more of their currency just like the US.

Inflation was dangerously low before both QEI and QEII. Just because you don't believe it doesn't mean it isn't true. This can happen even in a recovery, and is very dangerous to the health and strength of a recovery.

And no offense to academic economists, but they haven't done such a bang-up job the last several years, now have they? Greenspan and Bernanke are famous for saying "we expect X to be temporary or transitory" and "we expect the effects will be limited and contained within Y sector". Yet, we go from bubble to bubble, highs to lows, crisis economics. Not that our legislators have done any better.....

The Fed has made mistakes, yes (though I would strongly urge you to realize that many people on the FOMC board are NOT economists, and even if they are their ideal choices are constrained by political realities), but this isn't one of them.

[GGT]

When you suggested delaying retirement was keeping the youth out of the workforce.

Delaying retirement is a symptom of a bad economy slow to add jobs enough for new grads and those wanting to work. Also signaling lack of confidence in both the market (with their retirement savings) and politicians cutting SS or Medicare. Millions are afraid they'll outlive their savings, or inflation will eat up their savings, and there won't be a safety net when/if needed.

Please, TARP had plenty of strings attached, and QE doesn't give money directly to banks, it rather buys assets like bonds and other credit instruments on the market. Furthermore, you don't have any idea what amount of money was necessary for deleveraging, nor is that the only purpose of QE.

The Fed lets banks borrow short-term directly at zero interest, with no requirement to actually lend, creates "money" as a primer for liquidity, and buys assets too toxic for banks to hold. Sweet deal. Everyone agrees leverage that's 30:1 was dangerous and should be much lower, that Too Big To Fail is really Too Intertwined To Fail....and neither has been changed.

Really? Really? Markets and growth expectations took a huge hit last year in the eurozone crisis, and QEII was a direct response to falling inflation and growth expecations. QE does its job; the only question is whether it's aggressive enough.
In a deflationary environment, that's exactly what you need.
Really? Employment is part and parcel of monetary policy whether or not it's explicit in the mandate. The ECB's official mandate has been discussed multiple times as being too narrow, and the Bank of England seems to be following NGDP targeting rather than inflation rate targeting.
Inflation was dangerously low before both QEI and QEII. Just because you don't believe it doesn't mean it isn't true. This can happen even in a recovery, and is very dangerous to the health and strength of a recovery.
The Fed has made mistakes, yes (though I would strongly urge you to realize that many people on the FOMC board are NOT economists, and even if they are their ideal choices are constrained by political realities), but this isn't one of them.

Yeah, I already noticed your agreement with current policy. You're rationalizing things that fly in the face of peoples' reality, because it fits your political views. You trust what's being done, and the Masters of the Universe are doing the right things, for the right reasons. I don't. We can agree to disagree.

[wiggin]

Delaying retirement is a symptom of a bad economy slow to add jobs enough for new grads and those wanting to work. Also signaling lack of confidence in both the market (with their retirement savings) and politicians cutting SS or Medicare. Millions are afraid they'll outlive their savings, or inflation will eat up their savings, and there won't be a safety net when/if needed.

Not exactly. Delaying retirement (which generally happens before the legally mandated age) is a way to improve income and savings prior to retiring, which is generally a win for everyone involved. Furthermore, working people have higher consumption levels than the retired, which helps to prop up consumer spending, growth, and job creation.

People should be working and saving more since they've been pretty awful about it prior to now. I think this dose of realism is good both from an individual perspective and a macroeconomic perspective. I challenge you to find any economic data indicating young people have higher unemployment due to old people 'keeping their jobs'.

The Fed lets banks borrow short-term directly at zero interest, with no requirement to actually lend, creates "money" as a primer for liquidity, and buys assets too toxic for banks to hold. Sweet deal. Everyone agrees leverage that's 30:1 was dangerous and should be much lower, that Too Big To Fail is really Too Intertwined To Fail....and neither has been changed.

TALF is not QE. I agree that the moral hazard question needs to be addressed, though.

Yeah, I already noticed your agreement with current policy. You're rationalizing things that fly in the face of peoples' reality, because it fits your political views. You trust what's being done, and the Masters of the Universe are doing the right things, for the right reasons. I don't. We can agree to disagree.

I don't blindly 'trust' what's being done. I look at the same data the Fed is looking at and see a clear case to be made for significant monetary easing. I don't know how monetary policy fits with my 'political views' (do you even know my political views?), but I do know how it fits with our macroeconomic data.

As far as I can tell, you think monetary policy should be tighter because of inflation and unemployment. This despite the fact that inflation is still fairly subdued and unemployment can only get worse with tighter monetary policy. You consistently ignore the data I bring up and the very basic macroeconomic theory underlying it in favor of tirades against greedy banks and discourses on the 'human element' that fail to point logically towards a corrective policy. It's very frustrating.

[GGT]

Not exactly. Delaying retirement (which generally happens before the legally mandated age) is a way to improve income and savings prior to retiring, which is generally a win for everyone involved. Furthermore, working people have higher consumption levels than the retired, which helps to prop up consumer spending, growth, and job creation.

People should be working and saving more since they've been pretty awful about it prior to now. I think this dose of realism is good both from an individual perspective and a macroeconomic perspective. I challenge you to find any economic data indicating young people have higher unemployment due to old people 'keeping their jobs'.

You also said "holding onto cash is a very bad thing for the economy, which includes keeping it idle in a savings account. I disagree. We've had historical low levels of savings, even negative savings, which leaves people vulnerable and unprepared. People ought to have the option of parking their savings in interest-bearing accounts that keep up with inflation. It's not an obligation or duty to feel compelled to consume or invest in the stock market, just for the sake of keeping our consumer economy and financial industries humming.

Of course it's good for people to work and save, but when even 65-70 yr olds are saying they'll have to work until they die, that's a bad scene. When 50 yr old workers are laid off and can't find re-employment in two years, we lose many skilled people, and underemployment is a huge problem. There's plenty of economic data and academic analysis that our youth unemployment is related to (a) fewer new jobs created, and (b) reluctance of people to retire, including early retirement. There are only so many positions opened, and attrition doesn't necessarily translate to one retiree=one entering worker.

TALF is not QE. I agree that the moral hazard question needs to be addressed, though.
I don't blindly 'trust' what's being done. I look at the same data the Fed is looking at and see a clear case to be made for significant monetary easing. I don't know how monetary policy fits with my 'political views' (do you even know my political views?), but I do know how it fits with our macroeconomic data.

Any of their tools or facilities used now are aimed at easing....propping up and biding time. It doesn't change anything structurally flawed or failing, including our bubbles and crises. The Fed's look at the same data, or can fudge it just as well. BLS changed inflation metrics decades ago when they removed food and fuel from the mixture. They changed employment metrics, too. If we used the same formulae now, or included "shadow" stats, inflation is around 10% and unemployment around 15%. (I've posted links for that before.)

As far as I can tell, you think monetary policy should be tighter because of inflation and unemployment. This despite the fact that inflation is still fairly subdued and unemployment can only get worse with tighter monetary policy. You consistently ignore the data I bring up and the very basic macroeconomic theory underlying it in favor of tirades against greedy banks and discourses on the 'human element' that fail to point logically towards a corrective policy. It's very frustrating.

I think too much power (and expectations) are given to the Fed and monetary policy. They can't create jobs any more than we can eat an iPad. I see overvalued stocks bubbling, and folks piling into commodities like foodstuffs, gold and oil, and using currency trades to hedge against inflation and a weaker dollar. Anyone who buys groceries or gas doesn't buy the Fed's view that inflation is "subdued" or contained. Their payroll tax holiday was eaten up by gas and staples, wages have been flat for a decade, people will pull back again.

I don't ignore the macro theory or data you bring up---it's just repeating what the Fed says, or analysis found at WSJ or other business and financial sites. You take the position that I'm just like others on Main Street hell bent on "taxing the rich or hating on Wall Street"; in your mind that means we're all irrational or ignorant, and just don't understand the logic of corrective policy. That's very frustrating.

[wiggin]

You also said "holding onto cash is a very bad thing for the economy, which includes keeping it idle in a savings account. I disagree. We've had historical low levels of savings, even negative savings, which leaves people vulnerable and unprepared. People ought to have the option of parking their savings in interest-bearing accounts that keep up with inflation. It's not an obligation or duty to feel compelled to consume or invest in the stock market, just for the sake of keeping our consumer economy and financial industries humming.

Rarely has the spread between inflation and savings rates been very high, and it's often negative. Why should people have this option if the bank can't make a decent profit from it? Savings rates deal with retirement/etc. investing as well as actual interest-bearing savings accounts. We need to increase the amount of assets (e.g. stocks and bonds) people own, not increase their cash holdings beyond an emergency reserve.

Of course it's good for people to work and save, but when even 65-70 yr olds are saying they'll have to work until they die, that's a bad scene. When 50 yr old workers are laid off and can't find re-employment in two years, we lose many skilled people, and underemployment is a huge problem. There's plenty of economic data and academic analysis that our youth unemployment is related to (a) fewer new jobs created, and (b) reluctance of people to retire, including early retirement. There are only so many positions opened, and attrition doesn't necessarily translate to one retiree=one entering worker.

On your first point, I agree. Unemployment among older workers is a big problem that needs to be creatively addressed. 'Working till you die' is unreasonable and simply unnecessary for anyone who has been consistently saving, but working longer than before given the change in health and life expectancy is not unreasonable.

As for your last point about 'plenty of economic data and academic analysis', source? Workers don't need to leave the workforce to 'open' up a spot for someone else.

Any of their tools or facilities used now are aimed at easing....propping up and biding time. It doesn't change anything structurally flawed or failing, including our bubbles and crises. The Fed's look at the same data, or can fudge it just as well. BLS changed inflation metrics decades ago when they removed food and fuel from the mixture. They changed employment metrics, too. If we used the same formulae now, or included "shadow" stats, inflation is around 10% and unemployment around 15%. (I've posted links for that before.)

TALF is pretty much a done deal; QE is the only major program the Fed is pursuing right now. Inflation metrics weren't 'changed' or changed recently - the Fed very rightly wants to eliminate short term fluctuations from policy decisions, so they look at core inflation. It's very irresponsible to set monetary policy on the basis of headline inflation, which is a huge problem with the ECB. If food and fuel start being a longer term problem, they'll feed into core inflation and wage data and the Fed will see it.

As for employment metrics, I don't think they were ever changed, and it's not like the Fed doesn't look at all of the metrics (through U6) in making their decisions. They don't have a formal target for ANY metric, and make their decisions on a far more complex level than a single number.

I think too much power (and expectations) are given to the Fed and monetary policy. They can't create jobs any more than we can eat an iPad. I see overvalued stocks bubbling, and folks piling into commodities like foodstuffs, gold and oil, and using currency trades to hedge against inflation and a weaker dollar. Anyone who buys groceries or gas doesn't buy the Fed's view that inflation is "subdued" or contained. Their payroll tax holiday was eaten up by gas and staples, wages have been flat for a decade, people will pull back again.

Do you have a point?

I don't ignore the macro theory or data you bring up---it's just repeating what the Fed says, or analysis found at WSJ or other business and financial sites. You take the position that I'm just like others on Main Street hell bent on "taxing the rich or hating on Wall Street"; in your mind that means we're all irrational or ignorant, and just don't understand the logic of corrective policy. That's very frustrating.

When have I suggested you're interested in taxing the rich? For that matter, I don't think you're irrational or completely ignorant, just rather unaware of basic macroeconomic theory. *shrugs*

[GGT]

Rarely has the spread between inflation and savings rates been very high, and it's often negative. Why should people have this option if the bank can't make a decent profit from it? Savings rates deal with retirement/etc. investing as well as actual interest-bearing savings accounts. We need to increase the amount of assets (e.g. stocks and bonds) people own, not increase their cash holdings beyond an emergency reserve.

Banks can make profits, even if they have to pay interest for their own short term Fed borrowing, and offer a better deal for using our deposits. They can learn to "do with a little less" just like everyone else. I'm not convinced we need to increase assets people own, especially not based on debt/credit, or for those close to/at retirement age. That's what I meant about relative safety of cash deposits/CDs, and savings not tied into stock market risk-volatility chasing 8% returns. We need to get off the debt train.

On your first point, I agree. Unemployment among older workers is a big problem that needs to be creatively addressed. 'Working till you die' is unreasonable and simply unnecessary for anyone who has been consistently saving, but working longer than before given the change in health and life expectancy is not unreasonable.
As for your last point about 'plenty of economic data and academic analysis', source? *Workers don't need to leave the workforce to 'open' up a spot for someone else.

*That's what I said! NOT that number of jobs is fixed, and NOT that attrition means another hire. Productivity and technology means profits with fewer jobs. That doesn't mean we're creating enough jobs for all the people who want to work....especially newcomers out of school. You seriously need a source for that, even new jobless claims at 400,000 for March?

TALF is pretty much a done deal; QE is the only major program the Fed is pursuing right now. Inflation metrics weren't 'changed' or changed recently - the Fed very rightly wants to eliminate short term fluctuations from policy decisions, so they look at core inflation. It's very irresponsible to set monetary policy on the basis of headline inflation, which is a huge problem with the ECB. If food and fuel start being a longer term problem, they'll feed into core inflation and wage data and the Fed will see it.

It matters for all those comparing the 70s-80s-90s to today. Removing food and fuel made the numbers look better, by saying those things were too volatile. That's one of those moments for consumers vs economists. People are now spending almost 50% of their income on housing, food, fuel, and health insurance. Something like 18% of our nation is collecting food stamps, WIC, school lunch subsidies, housing subsidies, SCHIPs or Medicaid. Those are the things that matter to people. It's silly to strip those things out to make an academic proclamation that "Inflation hasn't taken hold yet...the recovery continues....the economy is on firmer footing...."

As for employment metrics, I don't think they were ever changed, and it's not like the Fed doesn't look at all of the metrics (through U6) in making their decisions. They don't have a formal target for ANY metric, and make their decisions on a far more complex level than a single number.

Household surveys, U3 or U6, we've been through all that. They also aren't great at differentiating types of jobs or under-employment. Discouraged lookers that give up shouldn't be turned into a higher employment rate . 50,000 McJobs shouldn't be cause for celebration.

Do you have a point?
When have I suggested you're interested in taxing the rich? For that matter, I don't think you're irrational or completely ignorant, just rather unaware of basic macroeconomic theory. *shrugs*

Replied to "As far as I can tell, you think monetary policy should be tighter because of inflation and unemployment" giving my opinion. ie The Fed should get rid of its second mandate about maximum employment, and focus on price stability. I think we need a little "inflation" now for the Banks, and they shouldn't keep getting interest-free risk-free Fed money. Time for the Big Boy Banks to suck it up and leave the nest, fly or fail. I'm not unaware of theory, just unconvinced its application is working. Band-Aids don't fix broken bones.

[GGT]

Regarding the dollar, money supply, and "price stability"--

April 29, 2011

Thank God the Fed has a Strong Dollar Policy
By Michael Pento

The Fed has kept interest rates at zero percent for 27 months and has created--out of the blue--2 trillion new dollars in the last few years alone. If these actions constitute a strong dollar policy, Americans can only cringe at the thought of what a weak dollar policy on the part of the Fed would possibly look like!

Ben Bernanke's hour-long press conference was packed full of an amazing quantity of contradictions, and economic fallacies. For example, the price of gold soared by $25 during the conference as the dollar was falling to a new 52 week low. In fact, the U.S. dollar has lost 40% of its purchasing power as measured against a basket of foreign currencies in the last decade alone. And the price of gold has risen 400% during that same time frame.

Yet somehow Bernanke wanted investors to believe that these conditions are just transitory even though they have been in place for the last 10 years. How could they possibly be transitory if the Fed maintains its zero percent interest rate policy and refuses to reduce the size of its balance sheet?

He also had the temerity to suggest that stable prices actually engender rising unemployment and that inflation needs to be near 2% for an economy to function properly without the threat of deflation. But the former Princeton Professor never explained the economics behind how a strong and stable dollar can ever lead to increasing layoffs. Could it be that Bernanke is unaware that a stable dollar is absolutely necessary for a vibrant middle class and to have an economy that is balanced with the appropriate amount of savings and investment?

The Fed head finally uttered a truth when he correctly stated that low and contained inflation expectations are essential for a strong economy and that the FOMC would closely monitor those expectations of rising prices. However, Bernanke fails to understand that he is doing everything in his power to make sure those inflation fears become intractable. He blamed the uptick in inflation on rising commodity prices that are again supposedly "transitory". But he fails to associate those rapidly rising commodity prices with the fall of the dollar, which is directly the result of the Fed's monetary policy. He instead blames the 30% rise of the CRB Index in the last year on "global factors."

But the most egregious error made during the press conference was Bernanke's failure to acknowledge the Fed's aiding and abetting of our huge budget deficits. Although he correctly identified the biggest problem facing our nation is our overwhelming debt, he failed to realize that it is the Fed's sponsorship of an ever expanding money supply that enables our government to run up massive debts without sending interest rates so high that they render the nation insolvent.

The sad truth, however, is what will be transitory is the U.S. dollar's status as the world's reserve currency. The end of that condition coupled with rapidly rising inflation will eventually send interest rates much higher than any economic model Bernanke has ever seen.

http://www.realclearmarkets.com/arti...icy_98994.html

[wiggin]

Banks can make profits, even if they have to pay interest for their own short term Fed borrowing, and offer a better deal for using our deposits. They can learn to "do with a little less" just like everyone else. I'm not convinced we need to increase assets people own, especially not based on debt/credit, or for those close to/at retirement age. That's what I meant about relative safety of cash deposits/CDs, and savings not tied into stock market risk-volatility chasing 8% returns. We need to get off the debt train.

I don't think you get it. There is competition in our banking industry - if someone could offer higher interest rates while still making money, they'd attract a lot more depositors than someone offering lower rates. They don't do this, so clearly it doesn't pay off. You already see this with internet banks vs. bricks and mortar, where you can easily get over 1% in a savings account (which starts to approach parity with core inflation).

As for the rest, I don't get how you thought I was talking about investing on the margin, and assets can be a variety of classes (real estate, fixed income, stocks, etc.). Isn't owning more assets a good thing compared to the counterfactual of owning a depreciating asset like cash? Obviously you need to adjust your risk exposure for age/etc., but weighting heavily into cash is a bad idea both for personal finances and for the economy, since the money mostly just sits there without doing anything.

*That's what I said! NOT that number of jobs is fixed, and NOT that attrition means another hire. Productivity and technology means profits with fewer jobs. That doesn't mean we're creating enough jobs for all the people who want to work....especially newcomers out of school. You seriously need a source for that, even new jobless claims at 400,000 for March?

I didn't say we're 'creating' enough new jobs for every entrant into the workforce, but rather than employment is not a zero sum game. Your rhetoric about older workers working longer somehow being bad for younger entrants into the workforce assumes that such a situation exists.

It matters for all those comparing the 70s-80s-90s to today. Removing food and fuel made the numbers look better, by saying those things were too volatile. That's one of those moments for consumers vs economists. People are now spending almost 50% of their income on housing, food, fuel, and health insurance. Something like 18% of our nation is collecting food stamps, WIC, school lunch subsidies, housing subsidies, SCHIPs or Medicaid. Those are the things that matter to people. It's silly to strip those things out to make an academic proclamation that "Inflation hasn't taken hold yet...the recovery continues....the economy is on firmer footing...."

Core PCE/CPI matches a moving average of headline inflation pretty well. This seems to indicate that it's a good approximation for headline CPI with the volatility stripped out. The data agrees with me. Furthermore, if food/fuel start to actually affect things, you'll see that reflected in other price rises and upward pressure on wages.

And ooh, spending half of your income on pretty much everything you need to live? Oh noes! What are we going to do with the other 50%? The majority of that is housing and healthcare, which is very much included in core inflation.

[GGT]

I don't think you get it. There is competition in our banking industry - if someone could offer higher interest rates while still making money, they'd attract a lot more depositors than someone offering lower rates. They don't do this, so clearly it doesn't pay off. You already see this with internet banks vs. bricks and mortar, where you can easily get over 1% in a savings account (which starts to approach parity with core inflation).

You don't "get" what I'm saying about interest rates. When banks can borrow from the Fed at 0%, it's easy for them to make money when offering low-interest rate loans/mortgages. It's also easy for them to offer piddly amounts of compound-interest on deposits, which they also turn around and lend to borrowers. Sorry, but 1% doesn't do anything to protect against inflation. That's a pathetic and measly rate for the banks to pay for borrowing our deposits.

It could be as simple as banks paying 2-3% for using Fed funds, then banks paying their depositors 4-6% and charging their retail borrowers 8-10%. Bank competition would be in finding more customers and offering better services (including fractions of % more in interest), without gouging.

Federal Reserve was supposedly lender of last resort, a national bank to the bankers to cover panics/emergencies. Not use of "free money" for several years. Traditional banking was supposedly a way for depositors to get a little interest profit, in exchange for banks using that money to lend to others. I think there's still a need for that type of banking.

<It's sad that we don't even have the option to teach young savers about compound interest and the values of saving....when it means gaining a few pennies. >

As for the rest, I don't get how you thought I was talking about investing on the margin, and assets can be a variety of classes (real estate, fixed income, stocks, etc.). Isn't owning more assets a good thing compared to the counterfactual of owning a depreciating asset like cash? Obviously you need to adjust your risk exposure for age/etc., but weighting heavily into cash is a bad idea both for personal finances and for the economy, since the money mostly just sits there without doing anything.

Owning real estate with mortgages is risky, as we saw when the housing bubble popped. Owning lien-free RE can be risky in our unknown property tax schemes. Holding anything in the market can be volatile and have risk for loss, as we saw during the financial crisis (when even mutual funds and 401-Ks were destroyed). Homes and stocks can also depreciate, bonds can default or backfire, annuities can cost a lot up front and not transfer at death (they can be very complicated). No Free Lunch and no such thing as Risk-Free unless you're a bank or bank holding company?

You got my point right, though.....cash should never be considered a bad idea, because that means either our dollar sucks, or banks aren't solvent and protected by FDIC. Cash deposits don't just "sit there" if they become loans to others, pay some interest to the depositor.....who will make withdrawals to pay for things like new roofs, emergency medical expenses, vacations, etc. Being able to do that without using credit cards or home equity loans would go a long way toward peoples' financial security.

I didn't say we're 'creating' enough new jobs for every entrant into the workforce, but rather than employment is not a zero sum game. Your rhetoric about older workers working longer somehow being bad for younger entrants into the workforce assumes that such a situation exists.

It's not a general rule of thumb, but it exists in today's economy. At least in come sectors. Maybe not in business middle management (they just have one worker do the job of two), but in places like manufacturing or food services it's constricted by numbers. Don't take that one comment and run off with it.....

Core PCE/CPI matches a moving average of headline inflation pretty well. This seems to indicate that it's a good approximation for headline CPI with the volatility stripped out. The data agrees with me. Furthermore, if food/fuel start to actually affect things, you'll see that reflected in other price rises and upward pressure on wages.
And ooh, spending half of your income on pretty much everything you need to live? Oh noes! What are we going to do with the other 50%? The majority of that is housing and healthcare, which is very much included in core inflation.

*sigh* That's what Ben Baby says, too. Yes, you can find academic economists who would agree as well. I'm saying there's a disconnect between their data and technicals, their analyses and pronouncements, and what most people are experiencing in the real economy.

I'm saying I disagree with Fed's mandate to focus on full employment. It's contradictory, and they can't do it anyway. Also their policies effecting the dollar, their continuation of $600 Billion in treasury purchases, their flood of newly "created" money supply, keeping bank borrowing rates at near zero, holding ~$2 Trillion in "assets".....

Y'know, it's not their money. It's not the banks' money, and it doesn't belong to financial firms or market investors, either. It's OUR money as a nation of workers, tax payers, savers, and retirees.

[GGT]

Double post to share this article. More about economy in general than central bank specifically. wiggin, is this one hog wash, too?

Don't Mean To Be Rude, But The Economy Sucks
Henry Blodget

In the past couple of months, a disconnect has developed between the perception of the US economy and the reality.

The perception is that everything's just fine: The continuation of a solid if unspectacular recovery that began in the summer of 2009. Stocks continue to rise. Corporate profits continue to boom. The unemployment rate continues to tick down. Wall Street continues to coin money.

But the reality is that the recovery has never been strong and that many key metrics have recently turned south--despite the fact that the government still has its foot stomped on the stimulus gas.

What metrics have turned south?

Well, first and foremost, GDP growth.

We learned this morning that the economy grew at a pathetic 1.8% in Q1. That's way below the 3%-4% rate that most economists consider normal. And it's miles below the 5%-7% growth that normally follows a recession as sharp and severe as the one we just had.

Meanwhile, the Fed still has interest rates parked at zero, and is still conducting emergency stimulus measures like QE2. And the government's huge stimulus package from 2009 is still driving spending. And we're still spending an absolutely mind-boggling ~$1.5 trillion per year more than we take in (federal deficit)--and piling up humongous debts in the process. And, needless to say, none of this spending--"stimulus" or just normal spending we can't afford--has produced the desired private-sector growth.

1.8% GDP growth in the face of massive stimulus is the equivalent of your car sputtering down the highway at 45 miles per hour while you have the gas pedal floored. You might be glad that the car hasn't broken down completely, but you certainly won't conclude that all is well. And you also might conclude--wisely--that if 45 is the best you can do with the gas pedal floored, things may be about to get a whole lot worse.

And it's not just growth that blows.

In the past few weeks, initial jobless claims have ticked back above 400,000 per week, considerably higher than economists expected. Jobless claims above 400,000 are generally considered a sign of a contracting job market, not a growing one. If the recent jobless claims trends continue, the monthly jobs figures may soon go from "okay, not great" to downright lousy again.

And then there's the unemployment rate. It's still almost 9%! Imagine if, back in 2007, someone had told you that in 2011 the unemployment rate would be 9% and that some folks would consider that encouraging. You'd have dismissed them as a flat-earther or Armageddonist. But here we are.

What else?

House prices are falling again--so quickly that, in many parts of the country, they're now setting new post-bubble lows. Remember all the hand-wringing two years ago about how the economy would never really recover until we got a floor in house prices--and, therefore, how the government had to do everything possible to put a floor under house prices? Well, now the government appears to have given up. (And that's actually a good thing, because there's no government price intervention in history that we know of that has permanently prevented prices from reverting to the level the market will support. Governments can delay the inevitable, but they can't prevent it. And house prices are still "expensive" on a historical basis.)

Inflation is taking hold. As anyone who actually buys things knows, things cost a lot more than they did a little while ago. Things like gas (double the price of a couple of years ago, up nearly 40% this year alone), food, rent, healthcare, insurance premiums, and so on. (Yes, houses are getting cheaper, but most people don't have to buy houses.) Ben Bernanke can talk until he's blue in the face about how there's no inflation, or shouldn't be because of the "slack" in the system, but people who actually buy things know better. A rise in inflation means that you'll start hearing the word "stagflation" quite frequently. The word "stagflation" is not a happy word. It's the word that characterized the 1970s: Crappy economic growth combined with wild inflation. Stagflation destroys savers and those who lived on fixed incomes (many retirees). It also punishes anyone trying to run a business. And it's hell on stock prices.


Corporate profit margins are at near-record highs, but this party may finally be over. This morning, Procter & Gamble said that their margins are getting slammed by rising commodity prices. Like most companies, P&G will presumably try to pass these costs through to the rest of us, but given high unemployment, huge debt burdens, and crappy wage growth, it's unlikely that consumers will swallow them. So corporate profit margins, which have helped levitate the stock market for the past two years, may finally begin to compress. (Which, by the way, they always do--despite all the great arguments about why it's "different this time.")

Anything else? Yes, there are other things, too.

But the bottom line is, the economic recovery is not going well. It's going badly. And the recent signs suggest that it may be about to get worse--just as the Fed's latest emergency stimulus measure (QE2) begins to run out.

Read more: http://www.businessinsider.com/the-e...#ixzz1KxMT9lL2

[Nessus]

People working more and longer hours is good for the economy,

-Does this have any qualifiers

-Do people exist for the economy, or does the economy exist for the people

??

[GGT]

-Does this have any qualifiers

-Do people exist for the economy, or does the economy exist for the people

??

Long story short, that's the perfect question.

[LittleFuzzy]

-Do people exist for the economy, or does the economy exist for the people

??

Neither? It's apples and grounding. You're trying to mash together two entirely different perspectives and contexts, each addressing different things.

[Nessus]

Neither? It's apples and grounding. You're trying to mash together two entirely different perspectives and contexts, each addressing different things.

What an insight. Yes, I realize the economy is an emergent property of human society as we understand it, and therefore some causality and such are assumed with good reason. But, but. The Ender made a blanket statement, and I was curious as to its further meanings, and what he actually thought on the subject matter at hand; certainly not even you can deny that persons such as Stalin believed the people existed for the economy, and the same can be applied to non-thinkers such as Reagan. So my question was apt and purposeful, but I do ponder, what is the root of your objection? The insistence we cannot define certain things within the frame-work of a human being for that would ram ideological cock far too deep in real human ass? It's a fucking mystery alright.

[LittleFuzzy]

What an insight. Yes, I realize the economy is an emergent property of human society as we understand it, and therefore some causality and such are assumed with good reason. But, but.

Wasn't certain you did realize that. Was fairly certain that even if you did, you don't care. You have said or give the impression that one can look at something and think about it and talk about it, but if in doing so you ever once fail to ground it in achieving your idea of human utopia, the one doing so is a despicable human being. And if they're not despicable, if that sort of thing is ok, than the entire human race should be flushed down the toilet because the whole endeavor of existing is meaningless.

[GGT]

Neither? It's apples and grounding. You're trying to mash together two entirely different perspectives and contexts, each addressing different things.

No, she's not. Or are you just not thinking about the contexts between peoples' money, banks, central banks, and their governments?

[Nessus]

Wasn't certain you did realize that. Was fairly certain that even if you did, you don't care. You have said or give the impression that one can look at something and think about it and talk about it, but if in doing so you ever once fail to ground it in achieving your idea of human utopia, the one doing so is a despicable human being. And if they're not despicable, if that sort of thing is ok, than the entire human race should be flushed down the toilet because the whole endeavor of existing is meaningless.

Yet another reason why your continuous engagement of my ideas seems so utterly baffling. If in your hubris you are so convinced there is no one sane idea emerging from my noggin, why is it that you continue to debate me? The adoration of your anonymous fans?

I could, I suppose, try to counter your claims of anti-intellectualism, but what'd be the point? You have decided in your heart of hearts that I am beneath your kin, so... I mean what the Hell is a human utopia anyway? I certainly cannot fault the nigger for not voting national socialist, nor do I find Speer's semi-biographical works those of a genious. But we're talking past one another, as we're meant to, right?