Archive for the ‘Inflation’ Category

Century Old Fed Has Inflationary History

Friday, December 27th, 2013

With the Federal Reserve Board celebrating its 100th birthday, it’s a good time to look back on the past century to see how The Fed has fared.

We’ve been critical of The Fed’s quantitative easing program, but that accounts for only the past five years of Fed history.  How has it fared in the previous 95 years?  Overall, has its work improved life for Americans or has it been a negative force?Inflation

The Fed’s role is to ensure the safety and soundness of financial institutions, stability of financial markets, and equitable treatment of consumers in financial transactions.  But its activities are primarily focused on using America’s money supply to manage inflation, unemployment and interest rates.

If The Fed has performed its job well, America’s standard of living should be greatly improved today when compared with, say, 1938, when the country was still recovering from The Great Depression.

But MyBudget360 made some surprising discoveries when it compared 1938 prices with today’s prices after using the U.S. Bureau of Labor Statistics inflation calculator to adjust for inflation.

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Getting Your Bond Portfolio in Shape for 2014

Friday, December 13th, 2013

It’s time to start thinking about New Year’s resolutions.  It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.

But who are we kidding?  Such resolutions are made to be broken.  So this year, why not make a resolution and keep it?  This year, resolve to pay attention to bonds.

That’s right.  Boring old bonds.  They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives.  Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.Cost of zero interest rate

Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.

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The Queen of QE

Friday, October 11th, 2013

Amidst a government shutdown, a debt-ceiling crisis and other assorted financial turmoil, President Obama this week nominated Janet L. Yellen to chair the Federal Reserve Board.

As a Keynesian economist and academician who served as second-in-command at The Fed, her boost to the top spot was about as predictable as another budget crisis in Washington.  She still needs to be confirmed by the U.S. Senate, but confirmation there is also as predictable as another budget crisis in Washington.

So what can we expect from the first woman to ascend to one of the most powerful positions in the free world?

Janet Yellen

Janet Yellen

The presses will keep rolling.  Current Chairman Ben Bernanke has become the King of Quantitative Easing, but he has been in denial about it.  His roots are as a monetarist.  You wouldn’t know it by his record as chairman, but he is a follower of Milton Friedman.

Ms. Yellen, conversely, is a true believer.  As an “unreconstructed Keynesian,” which we assume is the opposite of a reconstructed Keynesian, she believes that stimulus is a cure-all.  If the government spends more and the Fed prints more, evidence to the contrary, the economy will boom.

As such, we can expect a continuation of QE.  The King is dead, long live the Queen.

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The Beat Goes On

Friday, September 20th, 2013


From a future article in The New York Times:

Janet Yellen, retiring chair of the Federal Reserve Board, announced that The Fed’s quantitative easing program, aka QE12, is close to meeting its goal of achieving a 6.5% unemployment rate. Yellen

With The Fed’s bond portfolio exceeding $10 trillion, The Fed is running out of government bonds to buy, but Chairwoman Yellen said she’s confident the U.S. Treasury will pick up the pace at which it issues new bonds.

Chairwoman Yellen praised the quantitative easing program, which she said has managed to bring the unemployment rate down to 6.8% from a peak of nearly 10% in just 12 years.  QE has also helped the economy grow at a rate of nearly 2% a year.

During a brief press conference, for the first time since the quantitative easing program began, she was asked, “How does buying bonds create jobs?”

She explained that QE obviously decreased unemployment, since the unemployment rate exceeded 9% when QE began and is now approaching 6.5%.

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The End of QE?

Friday, January 11th, 2013

The Fed’s quantitative easing program has been like that endless tub of popcorn or vat of soda that those with large appetites buy at the theater.  It goes on and on, but at some point, enough is enough.  Are you really ever going to refill that?

The Federal Reserve Board has gorged on bonds for years now and some board members are finally losing their appetite for continuing, according to minutes from the last meeting of the Federal Open Market Committee.

The supersized QE3, the third round of quantitative easing, was supposed to continue until the unemployment rate dropped to a reasonable number.  The only problem is that buying bonds doesn’t produce jobs.

Even accounting for Storm Sandy’s impact, job growth remains stalled, with the unemployment rate stuck at 7.8%.  While the rate is significantly lower than it was in 2009 (9.9%), it is nowhere near the 5.0% rate of 2007.  More troubling, much of the rate drop is due to people either dropping out of the workforce or taking low-paying part-time jobs.

That doesn’t mean that quantitative easing is without consequences.  The sudden nervousness of some Fed members reflects the fear that buying $85 billion in Treasuries and agency paper will destroy the dollar.

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This Is Progress?

Friday, September 28th, 2012

Economic growth for the second quarter of 2012 officially has been revised down to 1.25%, which is below the lowest previous estimate.

In an effort to stimulate the economy, the Obama Administration and the U.S. Congress have added $6 trillion to the federal debt, with annual deficits exceeding $1 trillion.  The Federal Reserve Board meanwhile has announced its third round of quantitative easing, on top of Operation Twist.

Yet the unemployment rate remains over 8% and, as we stated earlier this month, could be as high as 19% if you take a true and accurate count of everyone who is not working.

Since the current “recovery” began, real income for the average American has dropped 5.7%, and while inflation as a whole remains in check, the price of essentials such as oil and food has soared.  At least we can credit quantitative easing with taming deflation!

This all sounds pretty gloomy, but cheer up.  Alan Krueger, who chairs the President’s Council of Economic Advisors, says “we’re making progress.”

It’s All Relative

Progress, of course, is relative.  It’s true that the free fall that began in 2008 created the worst economic conditions we’ve encountered since The Great Depression, but in the past the rule has been the greater the recession, the greater the recovery.

Not so this time.  Cumulative growth for the past three years has been just 6.7%, according to the Congressional Joint Economic Committee.  In comparison, the average for all 10 post-World War II recoveries is 15.2%.

In other words, the economic growth we’re experiencing is well under half of what it has been historically after past recessions, even though it should have been among the best periods of growth ever, given the severity of the recession.

Worse still, we can look forward to the long-term impact of today’s failed economic programs.  Someday, the debt we’ve accumulated will have to be paid back.  And quantitative easing may keep the country’s debt payments manageable today, but it weakens the dollar and boosts inflation.

And sooner or later interest rates could rise to the point where our current tax revenues will not be enough to pay the interest on our debt, let alone support government programs.

So what do we do when the current economic programs produce the same results as they have in the past?  Prepare for a multi-trillion dollar stimulus package?  QE3, the third quantitative easing program is open ended and can last as long as The Fed wants it to last, so at least we don’t have to worry about QE4.

Let’s Hear It for Growth … A Little Louder, Please

Thursday, May 5th, 2011

You call this a recovery?

Typically, the rule is this – the bigger the recession, the stronger the recovery.  By any measure, the recent recession was a whopper.  Yet gross domestic product (GDP) grew by only 1.8% for the first quarter of 2011.

In comparison, after the big recession that ended in 1983, GDP grew by at least 7.1% for five consecutive quarters and even grew by 9.3% in one quarter.

Of course, there are major differences between the most recent recession and the recession of the early ’80s:

  • The recovery of the ’80s was marked by The Federal Reserve Board’s emphasis on keeping inflation in check.  This recovery is noteworthy for The Fed’s desire to increase inflation.
  • The recovery of the ’80s benefited from tax reform and free-market solutions.  This recovery follows record government spending, including an $800+ billion economic stimulus program, and major reform of the healthcare and financial services industries.  While Congress extended Bush-era tax breaks, higher taxes are anticipated, given that the federal deficit has soared to more than $14 trillion.

For those who remain jobless or who have seen their standard of living drop, a little more recovery would be appreciated.

What’s So Funny About Quantitative Easing?

Thursday, February 10th, 2011

There’s plenty funny about quantitative easing. This UTube computer-animated video explains QE2 much better than anything I’ve seen or read elsewhere. Check it out.

[youtube=http://www.youtube.com/watch?v=PTUY16CkS-k&feature=email]