Posts Tagged ‘Treasury Securities’

Case Study: Misbegotten Federal Intervention

by Thomas E. Brewton on Tuesday, March 27th, 2012

This is article 258 of 393 in the topic economy

The Fed’s near-zero short-term interest rate policy distorts the market, with many ill effects and none of its proclaimed benefits.

In a speech today before the spring conference of the National Association for Business Economics, Federal Reserve Commissar Ben Bernanke, now an Obama re-election campaign mouthpiece, reaffirmed the Fed’s intention to continue imposing artificially low interest rates for short-term Treasury securities.  According to the Washington Post’s report, he admitted that the economy and employment remain weak.  But, he maintains, “the Federal Reserve’s existing policies will help boost economic growth.”

If that is true, one is entitled to ask why after nearly three years of this policy the economy remains in the doldrums.  Unemployment, taking the most favorable measure used by the government, remains north of 8%.  Using comprehensive measures from the government, measures that include people who have given up looking for jobs and have dropped out of the labor market, unemployment is running around 17%.

Nonetheless, the stock market again roared ahead today on Commissar Bernanke’s affirmation that the Fed will continue pumping excessive amounts of fiat money into the economy to keep interest rates low.  Meanwhile businesses remain cautious about expanding, and consumer spending, as in the housing bubble that burst in 2007, is being floated on increasing debt and declining savings.

The Obama administration gets a free ride.  If interest rates were not artificially depressed, the cost of funding our multi-trillion dollar deficits would soar when the Treasury markets new debt.  There is also the ‘benefit’ of facilitating inflation to enable the Treasury to pay off today’s debt in the future with dollars worth less than the amounts of debt retired.

Liberal-progressives’ Keynesian macroeconomics deals with abstract categories, such as consumers, rather than with individuals in the real world.  Keynesians expect to push policy buttons and get automatic responses from those abstract categories.  If the government increases deficit spending on anything, consumers presumably will immediately begin spending more and unemployment will drop as business activity revives.  That is why administration officials in 2009 promised, falsely as we have seen, that Obama’s first stimulus plan would keep unemployment lower that 8%.

The Austrian school of economics looks instead to incentives that produce myriad different responses from hundreds of millions of individuals, who do not in fact move like a herd of cattle directed by government prods.  Austrians also emphasize that, even if government deficit spending should add to consumer spending, that does next to nothing to revive basic and intermediate industry such as housing construction, which constitute a huge portion of the economy.  Companies making production equipment or producing basic raw materials will not increase production and hiring until costs and inventories up and down the line have been realigned.  Theirs is a long term perspective, because of their much heavier investment of fixed capital.  Consumer goods producers, in contrast, can quickly increase production of goods if demand increases and can as quickly shut down production lines when inventories build up.

What happens in the real world is that government stimulus spending and the Fed’s low interest rates benefit those groups who get the money first.  People down the line, workers and producers of production goods and raw materials, see few beneficial effects.

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Fed Feeds Distortion

by Thomas E. Brewton on Thursday, January 26th, 2012

This is article 28 of 56 in the topic Federal Reserve

Bernanke’s press conference announcement again booted the stock and bond markets, but did nothing to boost employment.

At his January 25, 2012, press conference, Federal Reserve Bank chairman Ben Bernanke stated that he expects the Fed to continue imposing near-zero interest rates well into 2014 on short-term Treasury securities. In response, the stock market surged, despite expectations of generally lower corporate earnings and reduced consumer spending. Loose credit and low interest rates usually facilitate stock market speculation.

However gratifying this may to individual investors and pension fund managers, it does little if anything to restore production of goods and services or to raise employment. It also continues to penalize increased savings, which alone provides a stable, long-term platform for economic growth. People living on fixed incomes have had their rates of income on saving chopped around 75% since the Fed first cut interest rates.

As Austrian school economists long have observed, central bank manipulation of interest rates and government deficit spending has an uneven impact on sectors of the economy. When unemployment is high and people are yet freighted with excessive personal debt, consumer spending will be among the last sectors to increase. Instead, deficit spending and loose money lead businessmen to over-invest in long term capital goods, because low interest cost for borrowed money makes even marginal investment projects appear profitable. When business finally revives and costs, including interest rates, increase, those marginal projects collapse and push the economy into recession.

Such was the genesis and progress of the housing bubble and subprime mortgage securities.

Contrary to the aggregate computer models of Keynesian economics, the economy as a whole never has been controllable via government stimulus spending. In fact, as reported recently, the 31% increase in business long-term investment over recent months has been largely concentrated in labor-saving equipment, which ironically adds to unemployment or postpones new hiring.

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Inflation At The Gate, The Fed Talks About Deflation

by Thomas E. Brewton on Tuesday, April 26th, 2011

This is article 148 of 393 in the topic economy

While flooding the banking system with excessive amounts of fiat dollars, Fed Chairman Bernanke has talked endlessly about the need to avert deflation.  Unspoken was the real reason: promoting inflation – robbing retirees and working people who are saving to support their retirements – in order to fund mounting federal debt.
It’s now clear that government stimulus spending, under George W. Bush and Barack Obama, and unending expansion of the money supply by the Fed, have prolonged our agonizingly slow economic revival.  That is hardly surprising, since no previous resort to Keynesian macroeconomics has worked as advertised.  At most they have promoted stock market bubbles, and all such essays, beginning in the 1930s Depression, have led to continual and ruinous inflation.

The New York Times, the nation’s premier voice of socialist propaganda, admits in a front page, lead article that Stimulus by Fed Is Disappointing, Economists Say.


The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

The Times may be correct that “most Americans are not feeling the difference,” but we will suffer the consequences increasingly over the next year or so.  The price of gasoline is a prominent harbinger.

As noted in The Price We Must Pay and The Weak Dollar Problem, the biggest factor in the oil price jump to around $110 per barrel is the Fed-induced devaluation of the dollar.  That, by any other name, is inflation.

A subtext to deliberate inflation, which President Obama obviously doesn’t wish to publicize, is that it destroys incentives to save.  In Keynesian dogma, saving is a social sin, on the false assumption that saving for future needs and future growth subtracts from consumer spending.  Keynesians, of course, neglect to note that savings are placed in financial institutions that then lend and invest those funds to power economic growth.

The real aim of deliberate inflation is debilitating private business and individual consumers to such an extent that they are forced into becoming wards of the collectivized, socialist political state.  New Deal economists, led by Harvard’s Alvin Hansen, propounded the Keynesian doctrine that capitalism had failed, and government would henceforth be required to take over employment and economic investment.

President Obama, former House Speaker Nancy Pelosi, and Senate Majority Leader Harry Reid made it abundantly clear that they aimed to create a New New Deal to finish FDR’s start at destruction of private enterprise and individual initiative.  Fed chairman Ben Bernanke, a worshipper of the secular religion of socialism and its Keynesian economic dogma, has happily supported their efforts.

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Debt Beyond Belief

by Alan Caruba on Tuesday, April 19th, 2011

This is article 143 of 393 in the topic economy

Have you noticed the many television advertisements urging you to buy gold, to refinance your home, to get a reverse mortgage, or to fix your personal credit score? There’s a reason for this, not just individuals are financially stressed, but the entire nation is broke.

The nation has not seen this level of debt since the end of World War Two. We have debt equal to the entire value of our Gross Domestic Product. The government cannot collect enough taxes to make a dent in it. It has to cut spending. It has to find ways to reduce the need to borrow.

Monday’s Standard & Poors’ downgrade, not of the nation’s triple-A rating for its treasury securities, but a warning that the nation’s “sovereign rating” has a “negative outlook” says that America has wandered into a dangerous area in which worldwide confidence in the dollar is slipping away.

For too long, too many of the economic advisors to presidents Clinton, Bush and Obama, have been allowed to cause this damage and then, as often as not, return to their ivory tower jobs secure in the knowledge that more knucklehead economists will fail to apply the brakes.

How does a nation engaged in two foreign wars do that? The answer is that it can’t. No matter how much government waste is exposed, it rarely translates to a reduction. The bureaucrats running federal departments and agencies understand that failure to spend as much of their current budget as possible threatens their ability to ask for and get more

The responses to the S&P news, as reported in Monday’s Wall Street Journal, demonstrate that economists, tightly wrapped in their favorite theories and masses of numbers, are clueless. Mark Thomas of the University of Oregon dismissed the S&P warning, airily saying “the political process will deal with this problem.” It is the political process, specifically decades of interfering with the nation’s housing market that caused the 2008 financial crisis.

Add in interference with the energy marketplace since the days of Jimmy Carter and you have $5.00 a gallon gas by June, maybe sooner.

It is the political process that is blathering about raising the debt ceiling when all it has ever done is raise the debt ceiling. The same political process has proven incapable of eliminating federal government agencies and programs that have ballooned the debt while slowing economic growth.

Dean Baker of the Center for Economic and Policy Research noted S&Ps “horrible track record for judging credit worthiness” and, considering that it “gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse”, he’s got a point. Much of the alleged structure in place to avoid banking failures has been a failure.

Steven Richhiuto of Mizuho Securities suggested the “political realities” will make it difficult “to achieve the type of entitlement and tax reform necessary to put the deficit on a credible declining trajectory.” You think? For decades Social Security and later Medicare have been the famed “third rail” of politics.

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Bailing Out Obama: The Federal Reserve’s New Mandate

by John Myers on Wednesday, January 19th, 2011

This is article 5 of 56 in the topic Federal Reserve

Bailing Out Obama: The Federal Reserve’s New Mandate

“Quis custodiet ipsos custodes?” (“Who watches the watchmen?”)

The Federal Reserve is a traitor to the American people and the nation it has sworn to protect. Recently, the Fed has acted less like a central bank and more like President Barack Obama’s personal piggybank. The Fed seems hell-bent on re-electing Obama for a second term regardless of what it costs.

How is the Fed doing this? By creating trillions of new dollars to re-flate a U.S. economy that is fundamentally flawed by the unprecedented spending of a President and Congress.

The Federal Reserve’s recklessness — orchestrated by Chairman Ben Bernanke — is putting at risk the savings of every American. His actions are straightforward — to create trillions in new aggregate dollars, making each existing dollar able to purchase less.

The central aim of America’s central bank seems simple: Hold together the economy until Obama is re-elected in November 2012. This month the Fed began a second round of quantitative easing, or QE2. This second round of cash creation is meant to jump-start the economy and silence Obama’s critics who complain he hasn’t engineered his promised recovery.

In December the Fed exceeded its authority for the first time when it began purchasing $600 billion in U.S. Treasury securities. Besides flooding the world with fresh money, Bernanke announced in January that he wants to keep interest rates low so the fledgling recovery can fly.

According to Forbes, the Fed’s actions have drawn opposition around the world.

“China, Russia, Brazil, Germany and the U.K. all believe that it will seriously weaken the dollar, possibly forcing other countries to devalue their own currencies and impose more trade restrictions against the U.S. Brazil and other emerging economies also fear that by loosening credit, the Fed could cause new destabilizing asset bubbles abroad.”

Forbes doesn’t point out that none of this is in the Fed’s charter. Instead the job of the Federal Reserve is to faithfully manage the economy and create stability for world markets.

I stumbled upon one of my old textbooks which said: “One of the statutory goals of the Federal Reserve System is to ensure stable prices. This goal can only be achieved if the public believes that the Federal Reserve is taking effective measures to ensure them.”

That is how the Fed is supposed to operate. Created in 1913, the Federal Reserve System had two prime directives: “The dollar over the President; the economy over the Party.”

And for nearly a century the Federal Reserve followed that code of conduct. It was through such actions that the Fed helped establish American economic dominance.

Even after President Franklin D. Roosevelt made it so citizens could not redeem dollars for gold, there have been extended periods when Americans trusted in the dollar more than they trusted gold. Consider President Ronald Reagan’s two terms and the decade that followed. During most of those years, Paul Volcker was Chairman of the Federal Reserve. The result was that between January 1980 and June 1999, the price of gold fell from $850 per ounce to $253 per ounce.

But that was a different era.

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