Archive for the ‘Bond Buying’ Category

Is This Any Way to Run a Country?

Monday, April 27th, 2015

For as long as any of us has been alive, America has had a better way.

Our free market economy, complemented by the freedoms documented in our Bill of Rights, have combined to make America the envy of the world.  Our economic strength has also translated into an ability to spread freedom in other parts of the world.  Based on the strength of our principles, our economy, our people and our leadership, America won the Cold War without firing a shot.

But what’s happening today? Obama

Growth is taking place at a glacial place, debt is out of control, incomes are down and unemployment has been chronically high.

“Compared with the average postwar recovery, the economy in the past six years has created 12.1 million fewer jobs and $6,175 less income on average for every man, woman and child in the country,” former U.S. Senator Phil Gramm wrote last week in The Wall Street Journal.  “Had this recovery been as strong as previous postwar recoveries, some 1.6 million more Americans would have been lifted out of poverty and middle-income families would have a stunning $11,629 more annual income. At the present rate of growth in per capita GDP, it will take another 31 years for this recovery to match the per capita income growth already achieved at this point in previous postwar recoveries.” (more…)

QE 4, 5, 6, 7, 8, 9, 10 …

Monday, April 20th, 2015

Why didn’t we think of this?

For years, we’ve been criticizing the Federal Reserve Board for buying too many bonds, keeping interest rates too low, boring us with talk about “macroprudential supervision” and doing precious little to actually help the economy.Fed Pyramid

We’ve also been critical of the federal government, state governments, municipal governments, foreign governments, U.S. consumers and U.S. corporations for carrying too much debt.

But, until now, we failed to put the two together.  The Fed loves to print money.  Governments love to spend it.  So maybe the problem isn’t that the Fed has been printing too much money – the problem is that the Fed hasn’t been printing enough money to keep up with government spending.

The Global Slant blog suggested that the Fed initiate a fourth round of quantitative easing (QE 4) and print enough money to pay off the federal debt (as well as the writer’s debt).  But why stop there? (more…)

Economic Dissonance

Monday, February 9th, 2015

In today’s economy, the theory of cognitive dissonance is itself dissonant.

Social psychologist Leon Festinger believed that humans strive for internal consistency, and that two or more contradictory beliefs cause mental stress.  Yet in today’s world, it seems that every policy, every vote, every executive order is designed to contradict rationality and add to our collective mental stress.

We’ve given a few examples of economic dissonance in the past:

The stock market.  During six years of quantitative easing (QE), bad economic news caused the stock market to rise and good economic news caused the stock market to fall.  That’s because bad news meant more Fed bond buying and good news made bond buying unnecessary.

Higher inflation.  Lower oil prices have done more to give the economy a boost than trillions of dollars in bond buying – yet the Federal Reserve Board has fretted that the U.S. is headed toward deflation.  Its policies were designed to increase inflation to the magic rate of 2%.  Why 2%?  No one seems to know.College Costs

The unemployment rate.  The widely used U-3 unemployment rate drops when people give up looking for work and leave the workforce.  As a result, we have absurdities such as this latest report from The Boston Globe:

“U.S. employers hired at a stellar pace last month, wages rose by the most in six years, and Americans responded by streaming into the job market to find work.

“The Labor Department says the economy gained a seasonally adjusted 257,000 jobs in January. The unemployment rate rose slightly to 5.7 percent from 5.6 percent.”

So Americans are “streaming into the job market” – causing an increase in the unemployment rate! (more…)

The United States of Europe

Monday, January 26th, 2015

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Does this look like deflation to you?

Does this look like deflation to you?

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets. (more…)