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Tag: Federal Reserve
The Myth of Insufficient Demand
Following the ideas of Keynes and Friedman, most mainstream economists associate economic growth with increases in the demand for goods and services.
Both Keynes and Friedman felt that The Great Depression of the 1930’s was due to an insufficiency of aggregate demand and thus the way to fix the problem is to boost aggregate demand.
For Keynes, this was achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman advocated that the Federal Reserve pump more money to revive demand.
There is never such a thing as insufficient demand as such, however. An individual’s demand is constrained by his ability to produce goods. The more goods that an individual can produce the more goods he can demand, and thus acquire.
Note that the production of one individual enables him to pay for the production of the other individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).
Note again demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.
In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require.
According to James Mill,
This post was published at Ludwig von Mises Institute on Dec 29, 2017.
Squeezing The Consumer From Both Sides
The Federal Reserve raised the Federal Funds rate on December 13, 2017, marking the fifth increase over the last two years. Even with interest rates remaining at historically low levels, the Fed’s actions are resulting in greater interest expense for short-term and floating rate borrowers. The effect of this was evident in last week’s Producer Price Inflation (PPI) report from the Bureau of Labor Statistics (BLS). Within the report was the following commentary:
‘About half of the November rise in the index for final demand services can be traced to prices for loan services (partial), which increased 3.1 percent.’
While there are many ways in which higher interest rates affect economic activity, the focus of this article is the effect on the consumer. With personal consumption representing about 70% of economic activity, higher interest rates can be a cost or a benefit depending on whether you are a borrower or a saver. For borrowers, as the interest expense of new and existing loans rises, some consumption is typically sacrificed as a higher percentage of budgets are allocated to meeting interest expense. On the flip side, for those with savings, higher interest rates generate more wealth and thus provide a marginal boost to consumption as they have more money to spend.
This post was published at Zero Hedge on Dec 27, 2017.
The Rich Got Richer In 2017… One Trillion Dollars Richer
2017 has been a banner year for the world’s richest individuals.
Pumped by a tidal wave of central-bank driven liquidity and corporate buybacks, equity indexes around the world climbed to all-time highs this year – a phenomenon that has disproportionately benefited the world’s wealthiest, particularly the 500 individuals included in Bloomberg’s billionaires index.
By the end of trading Tuesday, Dec. 26, the 500 billionaires controlled an aggregate $5.3 trillion, a $1.1 trillion increase from their holdings on Dec. 27 2016.
Unsurprisingly, the biggest beneficiary of this Federal Reserve inspired rally was Amazon.com Inc. founder Jeff Bezos, who added a staggering $34.2 billion to his net worth in 2017 as Amazon shares soared above $1,000.
This post was published at Zero Hedge on Dec 27, 2017.
The Fed Plays the Economy Like an Accordion
We talk a lot about how central banks serve as the primary force driving the business cycle. When a recession hits, central banks like the Federal Reserve drive interest rates down and launch quantitative easing to stimulate the economy. Once the recovery takes hold, the Fed tightens its monetary policy, raising interest rates and ending QE. When the recovery appears to be in full swing, the central bank shrinks its balance sheet. This sparks the next recession and the cycle repeats itself.
This is a layman’s explanation of the business cycle. But how do the maneuverings of central banks actually impact the economy? How does this work?
The Yield Curve Accordion Theory is one way to visually grasp exactly what the Fed and other central banks are doing. Westminster College assistant professor of economics Hal W. Snarr explained this theory in a recent Mises Wire article.
The yield curve (a plot of interest rates versus the maturities of securities of equal credit quality) is a handy economic and investment tool. It generally slopes upward because investors expect higher returns when their money is tied up for long periods. When the economy is growing robustly, it tends to steepen as more firms break ground on long-term investment projects. For example, firms may decide to build new factories when the economy is rosy. Since these projects take years to complete, firms issue long-term bonds to finance the construction. This increases the supply of long-term bonds along downward-sloping demand, which pushes long-term bond prices down and yields up. The black dots along the black line in the figure below gives the 2004 yield curve. It slopes upward because a robust recovery was underway.
This post was published at Schiffgold on DECEMBER 27, 2017.
The Dark Power Behind the Financial Asset Bubbles – Whose Fool Are You?
“While everyone enjoys an economic party the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term saving rate, a seemingly random distribution of wealth, and the diversion of financial human capital into the acquisition of wealth.
As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights. Whenever we do it, it is going to be painful, however.’
Larry Lindsey, Federal Reserve Governor, September 24, 1996 FOMC Minutes
‘I recognise that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on…. We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.’
Alan Greenspan, September 24, 1996 FOMC Minutes
“Where a bubble becomes so large as to pose a threat the entire economic system, the central bank may appropriately decide to use monetary policy to counteract a bubble, notwithstanding the effects that monetary tightening might have elsewhere in the economy.
But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financi
This post was published at Jesses Crossroads Cafe on 27 DECEMBER 2017.
It’s Official: Government Report Says Market Risks are ‘High and Rising’
During Fed Chair Janet Yellen’s press conference on December 13, she had this to say about financial stability on Wall Street: ‘And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system, and we’re not seeing some worrisome buildup in leverage or credit growth at excessive levels.’
Where does Fed Chair Janet Yellen get her information on financial stability risks to the U. S. financial system? A key source for that information is the Office of Financial Research (OFR), a Federal agency created under the Dodd-Frank financial reform legislation of 2010 to keep key government regulators like the Federal Reserve informed on mounting risks.
On December 5, the OFR released its Annual Report for 2017. It was not nearly as sanguine as Yellen. In fact, it flatly contradicted some of her assertions. The report noted that numerous areas were, literally, flashing red and orange (OFR uses a color-coded warning system) – raising the question as to why Yellen would attempt to downplay those risks to the American people.
This post was published at Wall Street On Parade on December 27, 2017.
Stockman: US Fiscal Path Will Rattle the Rafters of the Casino
As we’ve reported, the US government is spending money like a drunken sailor. But nobody really seems to care.
Since Nov. 8, the US national debt has risen $1 trillion. Meanwhile, the Russell 2000 (a small-cap stock market index) has risen by 30%. Former Reagan budget director David Stockman said this makes no sense in a rational world, and he thinks the FY 2019 is going to sink the casino.
In a rational world operating with honest financial markets those two results would not be found in even remotely the same zip code; and especially not in month #102 of a tired economic expansion and at the inception of an epochal pivot by the Fed to QT (quantitative tightening) on a scale never before imagined.’
Stockman is referring to economic tightening recently launched by the Federal Reserve. It’s not only the increasing interest rates. By next April the Fed will be shrinking its balance sheet at an annual rate of $360 billion and by $600 billion per year as of next October. By the end of 2020, the Fed will have dumped $2 trillion of bonds from its books. Stockman puts this into perspective.
This post was published at Schiffgold on DECEMBER 26, 2017.
2017: A Review Of The Fed, Treasuries, Mortgages and Housing (Volatility and Velocity)
This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.
2017 has been an interesting year. Donald Trump was elected President and seated in January 2017. The Federal Reserve kept rates near zero with a massive balance sheet for almost all of Obama’s 8 years as President, then started to raise rates and unwind their massive balance sheet AFTER Trump was elected. Note the decline in M2 Money growth after Trump’s election.
This post was published at Wall Street Examiner by Anthony B Sanders ‘ December 23, 2017.
Don’t Just Do Something, Sit There!
Have you heard of the depression of 1920-21?
Unless you’re a pretty hard-core economics geek, you probably haven’t.
The most striking aspect of this depression was its duration. It lasted just 18 months. And how did the US get itself out of this sharp economic downturn?
By essentially doing nothing.
A collapse in GDP and production led to a sharp spike in unemployment to double-digit numbers. Modern policymakers would immediately launch economic stimulus. Consider the 2008 crash. On top of government programs such as the $700 billion TARP and $800 billion in fiscal stimulus, the Federal Reserve pumped $4 trillion in new money into the system. For 165 out of 180 months, the Fed pushed interest rates down or held them at rock-bottom levels.
The result? A tepid recovery at best with 2 million fewer ‘breadwinner’ jobs than during the 1990s. Oh. And a whole slew of bubbles waiting to pop.
Lew Rockwell compares this to the how things played out in 1920.
This post was published at Schiffgold on DECEMBER 20, 2017.
Jedi Mind Trick: The Disturbing, Destabilizing Abnormal Is Now Normal
Disturbing, destabilizing abnormalities are now accepted as normal life in America. Forgive me for wondering if the populace of America hasn’t fallen for a Jedi mind trick: *** Disturbing, destabilizing abnormalities are now accepted as normal life in America: 1. Sprawling tent camps of homeless sprout like flowers of poverty in U. S. cities, leaving mountains of trash that speak volumes about systemic failure, destitution and overwhelmed city services. 2. The Federal Reserve’s vaunted “Wealth Effect” that was supposed to be a tide that raised all boats at least a bit has concentrated wealth and power in the top 5%, 1%, and 1/10th of 1%, leaving the bottom 95% with diminished prospects and a thinning stake in The American Project. 3. The stock market’s year-long levitation while the real-world economy decays is a perverse counter-correlation that reflects the widening divide between those enriched by the asset bubbles and those left further behind.
This post was published at Charles Hugh Smith on MONDAY, DECEMBER 18, 2017.
Economic Stimulus Alive and Kicking in EU
Janet Yellen and company pretty much followed the script during last week’s Federal Open Market Committee meeting, raising interest rates another .25 percent and signaling three rate hikes in 2018.
We tend to focus primarily on Federal Reserve actions, but it’s important to remember the Fed isn’t the only central bank game in town. While it nudges interest rates slowly upward, the European Central Bank is standing pat on economic stimulus. And there’s no indication that is going to change in the near future.
With its latest rate hike, the Federal Reserve has pushed the Federal Fund Rate to 1.5%. That’s the highest we’ve seen since 2008. Even at that, we’re still well below the 5.25% peak hit during the last expansion.
Meanwhile, ECB chair Mario Draghi announced back in October that quantitative easing would live on in the EU.
This post was published at Schiffgold on DECEMBER 18, 2017.
Janet Yellen: Trump’s Tax Cut Could Play a Negative Role in Next Downturn
The outgoing Chair of the Federal Reserve, Janet Yellen, held her last press conference yesterday following the Federal Open Market Committee’s decision to hike the Feds Fund rate by one-quarter percentage point, bringing its target range to 1-1/4 to 1-1/2 percent.
Given the growing reports from market watchers that the stock market has entered the bubble stage and could pose a serious threat to the health of the economy should the bubble burst, CNBC’s Steve Liesman asked Yellen during the press conference if there are ‘concerns at the Fed about current market valuations.’
Yellen gave a response which may doom her from a respected place in history. She stated:
‘So let me start Steve with the stock market generally. Of course the stock market has gone up a great deal this year and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities we see ratios that are in the high end of historical ranges. And so that’s worth pointing out.
‘But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they’re necessarily overvalued.
This post was published at Wall Street On Parade By Pam Martens and Russ Marte.
European, Asian Stocks Slide But US Futures Rebound As Tax Deal Fears Ease
U. S. equity index futures point to a higher open, having rebounded some 10 points off session lows with the VIX stuck on the edge between single and double digits, while European and Asian shares decline as investors assess central banks’ shift toward tighter monetary policy and concern over tax overhaul ahead of final plan.
It has been a groggy end to what is still set to be a third week of gains for MSCI’s global stock index following more upbeat data and signs that central banks including the Federal Reserve will keep treading carefully with interest rate hikes.
On Thursday, US stocks closed 0.41% lower after Republican Senator Rubio said he intends to oppose the tax bill as written unless there was a larger child tax credit (currently $1,100). He said GOP leaders ‘found the money to lower the top (individual tax) rate’, but ‘can’t find a little bit’ more to help working class parents raising children. However, later on, President Trump said he is ‘very sure’ Mr Rubio will vote yes. So still lots of potential changes here before the bills gets voted by the Senate, potentially as soon as Monday, although on Friday, US equities appears sanguine about the risks and have faded most of Thuesday’s weakness.
This post was published at Zero Hedge on Dec 15, 2017.
Bonds Versus Economists: Reality & The Echo Chamber
As part of its effort to stress its own self-importance, the Federal Reserve conducts a survey of the Primary Dealer members through its New York branch. A written questionnaire is sent out to each bank in advance of every monetary policy meeting. The purpose is for monetary policymakers to make sure that there aren’t any big surprises, that the market, or, in this case, orthodox Economists working for one part of the market, is seeing things consistent with how the Fed wants them to.
In September 2013, the Primary Dealer Survey questions included a few pertaining to the then ongoing ‘taper tantrum’ roiling markets around the world. It was ‘reflation’ #2 and like the others, both the one before and the one after, it came on rather quickly and harshly. On the issue of benchmark interest rates, in the form of the UST 10s, the Primary Dealers all saw interest rates rising still further into the foreseeable future.
Of those surveyed, 65% believed that the 10-year yield would be above 3% by the end of 2014; more than three-quarters, 78%, thought the same for the end of 2015, including 15% who were expecting the 10s to get above 4.50% compared to just 6% who guessed, correctly, 2.01% to 2.50%.
This post was published at Zero Hedge on Dec 14, 2017.
Fed’s Janet Yellen: Stock Market Bubble Not Seen as Major Risk Factor
The outgoing Chair of the Federal Reserve, Janet Yellen, held her last press conference yesterday following the Federal Open Market Committee’s decision to hike the Feds Fund rate by one-quarter percentage point, bringing its target range to 1-1/4 to 1-1/2 percent.
Given the growing reports from market watchers that the stock market has entered the bubble stage and could pose a serious threat to the health of the economy should the bubble burst, CNBC’s Steve Liesman asked Yellen during the press conference if there are ‘concerns at the Fed about current market valuations.’
Yellen gave a response which may doom her from a respected place in history. She stated:
‘So let me start Steve with the stock market generally. Of course the stock market has gone up a great deal this year and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities we see ratios that are in the high end of historical ranges. And so that’s worth pointing out.
‘But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they’re necessarily overvalued.
This post was published at Wall Street On Parade on December 14, 2017.
It’s Central Bank Bonanza Day: European Stocks Slide Ahead Of ECB; S&P Futs Hit Record High
One day after the Fed hiked rates by 25 bps as part of Janet Yellen’s final news conference, it is central bank bonanza day, with rate decisions coming from the rest of the world’s most important central banks, including the ECB, BOE, SNB, Norges Bank, HKMA, Turkey and others.
And while US equity futures are once again in record territory, stocks in Europe dropped amid a weaker dollar as investors awaited the outcome of the last ECB meeting of the year: the Stoxx 600 falls 0.4% as market shows signs of caution before the Bank of England and the European Central Bank are due to make monetary policy decisions as technology, industrial goods and chemicals among biggest sector decliners, while miners outperform, heading for a 5th consecutive day of gains. ‘The Federal Reserve raised interest rates last night, but they weren’t overly hawkish in their outlook. This has led to traders being subdued this morning,’ CMC Markets analyst David Madden writes in note.
The stronger euro pressured exporters on Thursday although overnight the dollar halted a decline sparked by the Fed’s unchanged outlook for rate increases in 2018, suggesting “Yellen Isn’t Buying Trump’s Tax Cut Talk of an Economic Miracle.”
That said, it has been a very busy European session due to large amount of economic data and central bank meetings, with the NOK spiking higher after the Norges Bank lifted its rate path, while the EURCHF jumped to session highs after SNB comments on CHF depreciation over last few months. The AUD holds strong overnight performance after a monster jobs report which will almost certainly be confirmed to be a statistical error in the coming weeks, while the Turkish Lira plummets as the central bank delivers less tightening than expected. Meanwhile, the USD attempts a slow grind away from post-FOMC lows.
This post was published at Zero Hedge on Dec 14, 2017.
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