Archive for the ‘Interest Rates’ Category

Doubling Down on Bad Ideas

Tuesday, September 6th, 2016

Uh oh.

Until now, about the only thing good you could say about the Federal Reserve Board in recent years is that it hasn’t followed central banks in Europe and Japan by lowering interest rates below zero.

But that may be where we’re going next.

Fed Vice Chair Stanley Fischer told Bloomberg Surveillance last week that he and his Fed colleagues believe that negative interest rates are a legitimate tool for central bankers to use in their efforts to achieve full employment and economic health.Fischer

If by Fed colleagues, he means his imaginary friends, we should be okay.  But if he means his gal pal Janet Yellen et al, look out below.  Over the cliff we go.

Negative rates would be doubling down on failed policies. If you’re a political figure, like Fed Chair Yellen and her Fed brethren, it would be anathema to admit that you’re wrong about anything, so if something doesn’t work, you rationalize that you just didn’t pour enough gasoline on the fire and you pour more.

Anyone who has to pay for health insurance will recognize the doubling-down approach being used in the coming election by the Democrats who gave us Obamacare. The Affordable Care Act, to the surprise of no one who is not a Democratic member of Congress, has become unaffordable, with a majority of exchanges shutting down because they are losing money. But, with premiums increasing by about 30% this year in some states, Democrats believe the answer is more government control of healthcare. The insurers, of course, are the bad guys, because they are no longer willing to lose billions propping up Obamacare. (more…)

The Fed’s Multi-Trillion Dollar Ponzi Scheme

Monday, August 22nd, 2016

“You loan me ten bucks. I photocopy the bill four times, give you back one of the copies, and announce that we’re square. That’s monetizing the debt.”                                                                                                                                                                         From Lionel Shriver’s The Mandibles

In the private sector, it would be called a Ponzi scheme.  When the Federal Reserve Board does it, it’s called “monetizing the debt.”

The Balance explained that, “The Federal Reserve monetizes debt any time it buys U.S. Treasuries. When the Federal Reserve buys these Treasuries, it doesn’t have to print money to buy them. It issues credit and puts the Treasuries on its balance sheet. Everyone treats the credit just like money, even though the Fed doesn’t print cold hard cash.”united-states-money-supply-m1@2x (1)

The process lowers interest rates, because the bonds taken out of circulation reduce supply, driving demand higher. But if reducing the supply of bonds drives prices higher and interest rates lower, shouldn’t more dollars drive the value of the dollar lower and the price of goods higher?

Logically, if you were to double the supply of money tomorrow, a dollar should be worth half of what it is worth today.  Prices would double, so the rate of inflation would be 100%.

And yet even with boatloads of new money, the inflation rate has barely budged.  The M1 money supply, which includes cash, checking accounts and other liquid monetary assets, is about 245% higher than it was eight years ago, when the Federal Reserve Board began its easy money policy.  Meanwhile, the Fed has been reluctant to increase interest rates in part because it has not been able to reach its targeted inflation rate of 2%. (more…)

Grading on a Curve

Monday, July 18th, 2016

 “We do not target the level of stock prices.                     That is not an appropriate thing for us to do.”

                                    Fed Chair Janet Yellen

 It’s the equivalent of social passing or grading on a curve. While the stock market is breaking new records, its recent performance is not a reflection of reality.

As Larry Fink, chairman and CEO of BlackRock, told CNBC’s “Squawk Box,” “I don’t think we have enough evidence to justify these levels in the equity market at this moment.” Buybacks

He said the recent rally has been driven by institutional investors covering shorts (i.e., hedging bets that stock prices would fall), and not by bullish individual investors. In fact, he noted that outflows in mutual funds show that individual investors are becoming squeamish about stock prices.

Institutional investors were short going into Brexit, but are recalibrating their portfolios, Fink said, given that the Brexit aftershock has not been as long-lasting as expected. While some may have been concerned about the economic impact of the United Kingdom voting to leave the European Union, ultimately its impact on markets was muted by the knowledge that Brexit would most likely keep the Fed from increasing interest rates anytime this year.  (more…)

Theater of the Absurd

Monday, June 20th, 2016

Vladimir: “Well? What do we do?”

Estragon: “Don’t let’s do anything. It’s safer.”

From “Waiting for Godot” 

In Waiting for Godot, two men spend more than an hour talking nonsense and it’s called Theater of the Absurd.

After last week’s Federal Open Market Committee (FOMC) meeting, Fed Chair Janet Yellen spent an hour talking nonsense and it was called a press conference. But, really, it could be argued that the Fed is at least as absurd as anything in Waiting for Godot. Much of the dialogue in Godot could, in fact, have come from the FOMC.  For example …

Vladimir: “I don’t understand.”

Estragon: “Use your intelligence, can’t you?”

Vladimir uses his intelligence.

Vladimir: (finally) “I remain in the dark.”

Janet Yellen: “Although the unemployment rate has declined, job gains have diminished.”talawa waiting godot

Estragon: “I can’t go on like this.”

Vladimir: “That’s what you think.”

The FOMC has continued ZIRP (zero interest rate policy) for 90 months. Estragon and Valdimir waited for Godot for only a couple of days.  (more…)

The Job Creation Snow Job

Monday, June 6th, 2016

Consider this headline from the U.S. Bureau of Labor Statistics: Unemployment rate declines to 4.7% in May; payroll employment changes little (+38,000).

Great news, right? The unemployment rate fell to just 4.7% in May, the lowest it’s been since before the financial crisis began.

But take a closer look.

The consensus was that the U.S. economy would create 160,000 jobs in May. That’s a pretty modest number—but not nearly as modest as the actual number. It turns out that the experts were off by about 420%. The U.S. economy created a meager 38,000 jobs in May.Employment

And, by the way, the BLS also announced that the economy created 59,000 fewer jobs in March and April than previously estimated. In other words, the BLS reported a net loss of 21,000 jobs. (more…)

Inflation: The Fed’s Red Herring

Monday, May 23rd, 2016

If you wanted to boost economic growth, which of the following would you focus on?

  • U.S. corporate taxes, which are the world’s highest and are driving businesses to relocate abroad
  • A regulatory environment in which new regulations are being issued at a record pace; for 2015, the Federal Register contained a record 81,611 pages of new regulations
  • Record government debt, which now exceeds $19 trillion
  • Falling household income, with wages down an average of 5.9% since 2007
  • Corporate profits, which fell 5.1% in 2015
  • Low productivity growth, with the average growth rate less than a third of what it was during the previous period of 1995 to 2010
  • The fact that, for the first time ever, more companies are failing in the U.S. than are launching
  • The fact that, with a dearth of initial public offerings, there are half as many public companies as there were in the 1990s
  • Low inflation

    Regulations have been the one growth industry during the Obama Administration. Above is a copy of new federal regulations for 2015. 

    Regulations have been the one growth industry during the Obama Administration. Above is a copy of new federal regulations for 2015. 

If you picked low inflation, congratulations. There is a place for you on the Federal Reserve Board.

The Fed’s focus on inflation is a result of its mandate to reduce or stabilize the unemployment rate and the rate of inflation. But its seeming obsession with a 2% rate of inflation is nonsensical. As we’ve pointed out, 2% appears to be an arbitrary number. Will the economy function better if the inflation rate is 2% instead of 2.5%? Why not 1.5%? (more…)

Upending the World

Monday, April 25th, 2016

Logic has taken a 180-degree turn, running at full sprint in the opposite direction from where it should be.

As one small example, consider the good fortune of Hans Peter Christensen, recently profiled in The Wall Street Journal, who is currently being paid by his bank to borrow money.  Christensen owns a home in Aalborg, Denmark, where negative interest rates resulted in his bank paying him the equivalent of $38 in interest for the quarter for borrowing money.

Meanwhile, in other countries with negative interest rates, some banks are charging customers for their deposits.  So the bank pays you to take its money and charges you to take your money. Zero Rates

Such is the logic of today’s central bankers in much of Europe and Japan, where rates have been negative for more than a year.

The United States has not adopted negative interest rates—but Fed Chair Janet Yellen said in February that the Fed is studying the feasibility of doing so, “to give the economy an extra boost,” according to The Wall Street Journal. (more…)

Something’s Rotten …

Monday, April 4th, 2016

“That it should come to this!”

                                  Hamlet, Act I, Scene II

Any student of Shakespeare will recall that Hamlet’s procrastination did not bode well for Denmark.

Centuries later, the Scandinavian country has Tivoli and perhaps the world’s best ice cream, but it’s not exactly a world power.  It may not be Hamlet’s fault–after all, Denmark is even more socialistic than the U.S. and Canada–but his hesitation was not a good thing for him or his country.YellenHamlet 2

So what does this have to do with Janet Yellen?  She chairs the Federal Reserve Board, which, like Denmark, has wielded its power clumsily, although it doesn’t even produce ice cream.  And, like the tragic prince, she will likely be remembered more for her inaction than for her action.

Even Hamlet didn’t procrastinate for years, although it may seem that way if you watch a poor production of the famous play. Also, like the melancholy Prince of Denmark, Ms. Yellen seems to be collapsing under the weight of the world and fretting over the potential consequences of her actions. And so, like Hamlet, she does nothing.

Her words before the New York Economic Club last week could have come straight out of Hamlet. Princess Yellen may be far less eloquent than the young prince of Denmark, but the parallels between what she said and what he said are significant. (more…)

Set. Down. No Hike.

Monday, March 21st, 2016

The economic outlook can be summed up in five words: Everything’s great, except what isn’t.

We’ll lead with the “everything’s great” part, as seen through the filter of the Federal Reserve Board.  As Fed Chair Janet Yellen reminds us after every meeting, the Fed has two goals—lowering the unemployment rate and stabilizing prices.

The Fed’s target unemployment rate is 4.7% to 5.8% and, if you believe the U.S. Bureau of Labor Statistics (see below re: why you shouldn’t), the Fed has accomplished that goal, as the current rate is at an eight-year low of 4.9%.  The Fed’s target inflation rate is 2% and, depending on how you measure inflation, it’s close to that number.Stock Prices

“The Fed’s preferred measure, the personal consumption expenditures price index, rose 1.3% in January from the previous year, and so-called core inflation—which excludes volatile food and energy prices—was 1.7%,” The Wall Street Journal reported. “The consumer-price index rose 1% in February from a year earlier, but core CPI was up 2.3% for the year, the largest 12-month increase since May 2012.”

So the Fed could have logically declared its mission accomplished and begun to gradually increase interest rates, as was expected after December’s initial miniscule rate increase.  So why was the vote at last wek’s meeting 10-1 against a rate hike? (more…)

Mutually Assured Destruction

Monday, March 14th, 2016

Iran, North Korea and the world’s other despots may be able to take over the world without going nuclear or even firing a single shot.

That’s because much of the free world seems bent on destruction from within, done in by a Keynesian death spiral.

Apparently, no one believes in capitalism anymore.  Instead, central bankers, who now control the economy in most of the world, are hell-bent on continuing to dig the negative-interest-rate hole ever deeper, until it is impossible to climb out.

While central bankers have only made matters worse with their easier-than-easy monetary policies, they’re so deeply invested, and so far down the rabbit hole of negative interest rates, they can’t turn back. Draghi

It may not be working, but admitting as much would bruise many strong egos, scare investors and sink stock prices.  So they keep digging.

A Bigger Bazooka

A year ago, Mario Draghi, head of the European Central Bank, announced the start of an asset-purchasing program similar to the Federal Reserve Board’s quantitative easing (QE) program through which the ECB would spend €60 billion a month on Eurozone government bonds.

(more…)