Archive for the ‘Interest Rates’ Category

THE MAGNITUDE OF THE MESS WE’RE IN

Tuesday, September 18th, 2012
The Wall Street Journal

  • September 17, 2012

The Magnitude of the Mess We’re In

The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.

By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor  –  The authors are senior fellows at Stanford University’s Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers

Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.

Where are we now?

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.

The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008. (more…)

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VIDEO – WHAT ARE THE DANGERS OF TOO MUCH DEBT?

Monday, March 26th, 2012

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OBAMA’S EXCUSES FOR OIL PRICE RISE

Friday, February 24th, 2012
The Wall Street Journal

  • FEBRUARY 24, 2012

‘Stupid’ and Oil Prices

Obama’s Forrest Gump analysis of rising gas prices.

‘The American people aren’t stupid,” thundered President Obama yesterday in Miami, ridiculing Republicans who are blaming him for rising gasoline prices. Let’s hope he’s right, because not even Forrest Gump could believe the logic of what Mr. Obama is trying to sell.

To wit, that a) gasoline prices are beyond his control, but b) to the extent oil and gas production is rising in America, his energy policies deserve all the credit, and c) higher prices are one more reason to raise taxes on oil and gas drillers while handing even more subsidies to his friends in green energy. Where to begin?

It’s true enough that oil prices can’t be commanded from the Oval Office, so in that sense Mr. Obama’s disavowal of blame is a rare show of humility in the face of market forces. Would that he showed similar modesty in trying to command the tides of home prices, car sales (“cash for clunkers”), or the production of electric batteries.

The oil price surge has several likely sources. One is the turmoil in the Middle East, especially new fears of a supply shock from a conflict with Iran. But it’s worth recalling that Mr. Obama also blamed the last oil-price surge, in spring 2011, on the Libyan uprising. Moammar Gadhafi is now gone and Libyan oil production is coming back on stream, yet oil prices dipped only briefly below $90 a barrel and have been rising since October. Something else must be going on. (more…)

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THE FED’S NEAR-ZERO INTEREST RATE AND ITS IMPACT

Tuesday, February 7th, 2012
The Wall Street Journal

  • FEBRUARY 6, 2012

The Fed Votes No Confidence

The prolonged—’emergency’—near-zero interest rate policy is harming the economy.

By CHARLES SCHWAB Mr. Schwab is founder and chairman of the Charles Schwab Corporation

We’re now in the 37th month of central government manipulation of the free-market system through the Federal Reserve’s near-zero interest rate policy. Is it working?

Business and consumer loan demand remains modest in part because there’s no hurry to borrow at today’s super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?

Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first “do no harm.” The same can be said of monetary policy. The Fed’s prolonged, “emergency” near-zero interest rate policy is now harming our economy.

The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money. It is sitting there, in banks all across America, unused. The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth—it simply isn’t being put to work fast enough.

Average American savers and investors in or near retirement are being forced by the Fed’s zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. They’re also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth. (more…)

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THE FEDERAL RESERVE AND THE ZERO DECADE

Saturday, January 28th, 2012
The Wall Street Journal

  • JANUARY 27, 2012

The Zero Decade

The Fed doubles down to reflate the housing market.

The two most powerful men in Washington have a big disagreement. No, not President Obama and Speaker John Boehner. We mean Mr. Obama and Federal Reserve Chairman Ben Bernanke, who can’t seem to agree on the health of the U.S. economy.

On Tuesday night, the President proclaimed that the “state of our Union is getting stronger,” employers are hiring faster than they can find skilled workers, and manufacturing is booming. Less than a day later, Mr. Bernanke and his Open Market Committee (FOMC) downgraded their already modest growth outlook and said the recovery is so vulnerable that the Fed must keep interest rates at near-zero for another three years.

The contradiction may not be as profound as it seems. Mr. Obama is running for re-election and this time he needs to sell audacity more than hope, while the Fed is still trying to reflate the housing market that it seems to believe is the main driver of economic growth. The Fed is straining to deliver the asset-price “stimulus” that Mr. Obama can’t any longer get out of Congress. (more…)

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ECONOMICS FOR THE LONG RUN – THE REAGAN YEARS

Saturday, January 28th, 2012
The Wall Street Journal

  • JANUARY 25, 2012

Individuals should be free to decide what to produce and consume, and their decisions should be made within a predictable policy framework based on the rule of law.

By JOHN B. TAYLOR

As this election year begins, a lot of people are wondering what we can do to restore America’s prosperity and create more jobs. Republican presidential candidates are offering their ideas, and at his State of the Union message on Tuesday President Obama presented his. I believe the fundamental answer is simple: Government policies must adhere more closely to the principles of economic freedom upon which the country was founded.

At their most basic level, these principles are that families, individuals and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others. Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government.

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Getty ImagesRonald Reagan: He and advisers such as George Shultz shunned the idea of stimulus and agreed on ?the need for a long-term point of view.? (more…)

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THE EURO ZONE, IS THIS REALLY THE END?

Saturday, November 26th, 2011
THE ECONOMIST
Unless Germany and the ECB move quickly, the single currency’s collapse is looming

Nov 26th 2011 |

EVEN as the euro zone hurtles towards a crash, most people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen.

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls (see article). The euro zone could shatter into different pieces, or a large block in the north and a fragmented south. Amid the recriminations and broken treaties after the failure of the European Union’s biggest economic project, wild currency swings between those in the core and those in the periphery would almost certainly bring the single market to a shuddering halt. The survival of the EU itself would be in doubt. (more…)

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EUROPEAN CRISIS

Saturday, November 26th, 2011
The Wall Street Journal

  • NOVEMBER 26, 2011

New Strains Hit Euro, Global Markets

Common Currency Falls After Italy’s Borrowing Costs Soar; Coming Week Poses Key Test of Sentiment

ROME—Uncertainty in financial markets deepened as Italy’s borrowing costs soared to euro-era highs and Prime Minister Mario Monti said European leaders understood an Italian collapse would mean “the end of the euro.”

Europe’s troubles weighed on markets world-wide: Stocks in the U.S. had their worst Thanksgiving week since 1942, the year the U.S. officially set the holiday at its current date. The Dow Jones Industrial Average has shed 7.6% the past two weeks. The common currency showed its own signs of strain, ending the week down 2.1%, its lowest level in almost two months.

Monday will see a significant test of investor sentiment when Italy holds another debt auction. Belgium, Spain and France are also scheduled to sell new debt during the week. All told, five euro-zone governments are together expected to sell about €19 billion ($25.36 billion) in debt over the week, more than double the past week’s amount. (more…)

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OBAMA’S PERPLEXING POPULISM – STAGFLATION ON THE HORIZON?

Monday, November 7th, 2011
The Wall Street Journal

  • NOVEMBER 4, 2011

Inflation hits lower-income people especially hard. So why is the president ignoring rising food prices?

Barack Obama spends much of his time these days running for re-election, campaigning as a populist, bashing millionaires and extolling the Occupy Wall Street movement. Although “populist” means different things to different people, the Oxford American dictionary says it describes a politician who seeks to represent the interests of ordinary people. So how does the president measure up as a true populist? Not well.

Food prices are an important component of the living expenses of ordinary people, especially the elderly or families struggling to make ends meet. Last week the U.S. Department of Agriculture forecast that food prices will rise by 3.5%-4.5% this year, the sharpest year-to-year increase since 1978. (That year, by the way, was prelude to 1979-80 double-digit inflation, when prices at one point in 1980 were soaring at nearly 15% annually.)

Commodity futures prices for animal feed staples like corn and soybeans are riding high. Oil and gold blipped upward again last week after a hiatus that followed the end of the QE2 monetary stimulus. Overall, dollar inflation is approaching an uncomfortable 4% annually.

So what else is happening? The economy picked up a little steam in the third quarter, growing at an annual rate of 2.5% on the strength of higher consumer spending and business investment. But personal disposable income, inflation adjusted, dropped 1.7%, the first decline since the 2009 recession. The personal savings rate fell back to the recession level, a meager 4.1% of personal income. Why should anyone save, when money-market accounts yield only a skimpy half a percentage point?

What we have here looks like the early stages of stagflation. (more…)

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A SLOW-GROWTH AMERICA CAN’T LEAD THE WORLD

Thursday, November 3rd, 2011
The Wall Street Journal

  • NOVEMBER 1, 2011

After World War II, the U.S. promoted international economic growth through reliance on the market and the incentives it provides. Times have changed.

When President Obama meets with his counterparts from other G-20 countries in Cannes later this week, American economic leadership will, unfortunately, largely be absent.

At the most recent meeting a year ago in Seoul, the G-20 rejected the president’s pleas for a deficit-increasing Keynesian stimulus and instead urged credible budget-deficit reduction and a return to sound fiscal policy. And on that trip he had to defend the activist monetary policy of the Federal Reserve against widespread criticism that its easy money was damaging to emerging-market countries, causing volatile capital flows and inflationary pressures.

With a weak recovery—retarded by new health-care legislation and financial regulations, an exploding debt, and threats of higher taxes—the U.S. is in no position to lead as it has in the past.

By contrast, in the years after World War II, the U.S. led the world in promoting economic growth through reliance on the market and the incentives it provides, the rule of law, limited government, and more predictable fiscal and monetary policy. It created a rules-based, open trading system by helping to found the General Agreement on Tariffs and Trade, which slashed tariffs multilaterally. The miraculous postwar European and Japanese recoveries came from greater adherence to these principles of economic freedom and direct support from the U.S. (more…)

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