Wednesday, July 23, 2014

Whoops on Obamacare

CNN Poll: Eighteen percent of Americans, or fewer than one in five, say they or someone in their family is better off because of the Affordable Care Act, according to a new poll by CNN. Nearly twice that number, 35 percent, say they or someone in their family is worse off. A larger group, 46 percent, say they are about the same after Obamacare as before.

Smart cards not helicopters

Beckworth wants to inject money into the consumer markets:
Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow [say due to central bank incompetence] and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households.
Well, any agreement between the Fed and Congress is worthless.  Second, if the Fed needs logistic support from the Treasury then the unit of account is already broken. The Fed is the monopoly fiat banker, if it has no access to the retail banker serving the consumer, then the Fed is already  useless. So we are dealing with a broken banking system, or we are dealing with a technology change in money, or we are dealing with a corrupt government in DC. Decide which one it is.

I take the positive assumption, money technology has changed.  The Fed needs to use its regulatory power to encourage the adoption of the universal smart card. An intelligent credit card that can handle any and all forms of digital currency. Does this disintermediate the retail banker? No, the Fed is just making monetary exchange more accurate and efficient.  The Fed really doesn't disintermediate until it offers rates on balances held on the cards, but it not need do that right away.

Noah Smith gets it wrong on stagflation

Noah Smith: The first was the stagflation of the 1970s.  Keynesian SEMs predicted that when the Federal Reserve lowered interest rates, it should have given the economy a boost; instead, all it did was create useless, harmful inflation.

On the chart, effective federal funds goes up, CPI (inflation) goes up.  And visa versa. The one exception is the recession of 1974.

The curious thing is that I always catch these errors, everytime, and point them out on the site where the error is made, then post the fraud on this site.  Yet some economists keep on telling fabrications, knowing they will be caught.

What is really happening here?

Well Milt Friedman mostly got it right, finally. But the cause is likely something simple, when the Fed raises rates, it loses income and is faced with laying off staff.  That is a speculation, but probably close to the truth. But the coefficients either are lagged, and the economists assumes cycles (John Taylor), or the economists are simply frauds. Brad Delong has finally figured out that economists do not have a valid pricing model. Solution? Hand the problem to the matematicians and get it right.

I had to get up off the couch.

Whenever I see this,I  think, how could an actual, supposedly educated economists get the sign backwards.  That is impossible! So I have to get up off the couch, look closely, double check all the up and downs, do I have the colors right, I even diagram the sentence the economists wrote. I do this twice! I wonder, how can sanity even prevail in economics school, how many  undergraduates are constantly having to check, "up is up; down is down;, and so on. How do they get through it?

Outright fabrication by the National Retailers Federation

NRF: WASHINGTON--(Business Wire)--The National Retail Federation today lowered its retail sales forecast for 2014 because of slow growth recorded during the first half of the year, but said sales are expected to grow significantly faster over the next five months. NRF forecasted in January that retail sales would grow 4.1 percent in 2014 over 2013, but today’s revision lowers the forecast to 3.6 percent.
This is called fabrication to keep their stock price high.  Customers in the store have fallen, there has been an outright decline in the number of sales. So, how do they get sales figures up? By closing unprofitable product lines and shrinking the number of stores.  They more than make up for the lost sales by forcing out their fellow competitors.  In other words, they will contract and the total value of retail stocks will drop and the remaining players will have higher profit margins.  Will the retail stock investor figure this out? Who knows, watch retail stock values.

Tuesday, July 22, 2014

Does Dave Kotok have the same definition of tightening?

Dave says tapering is now tightening. He is chairman of Cumberland asset management.
The process of tapering is a gradual one that has been discussed by Fed officials continuously, and it is clear that, in the absence of some extreme reaction, they are going to sustain this path. What does that mean? By autumn, we will see issuance of US government securities at a rate of somewhere close to $400 billion annualized, whereas Fed absorption will be at zero. The Fed will continue to replace its maturities, but that practice will not add duration or supply any stimulus. In July, August, September, and October, for the first time, the change in rate between what the Fed absorbs and what the Treasury issues will result in a shift. That shift is a tightening.

What is Dave going to do? He is holding cash in reserve so as to have liquidity available when the Fed exits the market.  But Uncle Milt just said that when capital managers have liquidity to use when the Fed exits the market, then that is loosening!

Is this nutty? No, just everyone is confused by definitions.
What happens when the Fed is done with taper? Money will flow and reveal the true cost of government, and that means a fight in Congress and every nutcase economist will pull out their 'I told you so" model. This process will likely start in election season, about now.

Milt Freidman talks about liquidity

Milt Friedman got a few things right. Here are quotes about the fallacy of rates, but the real subject is liquidity, why it flows and why it does not. When the Fed dominates the lending market with its monopoly power and low rates, it is disintermediating the banking system, reducing its ability to flow money. When it exits the market it leaves the short term lending business and allows private banks to reconstitute that network, that improves liquidity flow. Fiat bankers get mixed up, we dunno why and it may be because of their capital owners.
Here is Friedman on what he called the interest rate fallacy in 1997:
Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
.   .   .
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Freidman on Japan:
Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy. The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasirecession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?” It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

Matt OBrien, at Wonkblog, needs a bit more math

Wonk Blog: Dear inflation truthers: This is how averages work
Well, not if you know as much math as a third-grader. See, the inflation rate is just the weighted average of all the price changes in the economy.
Sure, but the weights are non-linear.  I look at that below, however, let us ask the more basic question.  A 2% inflation over 70% of the prices in the 20 trillion dollar economy comes to, 280 billion in more cash than sales. Where does that extra money come from?

Let me help Matt out. In the steady state, we have either fewer sales or more money. It is one or the other.  There is one source for the money, the Fed's digitizer.  The Fed is releasing some 75 billion per year in interest rate subsidies to Congress, that is free unencumbered money.  Any other borrowings by Congress is backed by market based interest payments.  So, we have some 200 billion in  extra prices to account for. Matt may think that extra money is a transient effect, soon to be returned after the downturn.  But that is a six year transient effect.  That is a long down turn.

The other cause of the inflation could be shortages, fewer producers and more demand. This chart, for example:
Fewer transactions for each dollar?

What about those weighted averages?
Well, Matt Obrien, you are going to need fourth grade math. Prices that drop have a shorter than linear shelf life, they get under counted. So, in the end, the 2% inflation needs some more work, more than we are getting from the wonkblog. The most likely cause of inflation is a continual supply shortage due to Congressional spending with multipliers less than one.

Inflation, 2.07% yearly

Rates, annual, for all consumer items this year:


The BEA says most of the inflation was energy and food (4/5 of it).  Half of the food inflation was likely the California drought. Is this bad or good? I think the price distortions were within reason, they were adiabatic, not likely to cause structural disruptions.

Will this inflation generate tax revenues in DC? The question here is; can Congress sneak by without a budget confrontation thru the mid term elections? Maybe. If we get a real GDP growth of 2.5% then Congress can fudge the budget issues. But the coefficient on tax income is not linear. It drops dramatically with low growth because the high income tax bracket is based on merchant income. If Congress dips into the market too swiftly, rates and prices rise. The Fed gets bounded.

Pelosi is the very definition of political pandering on immigration

BNews: In Washington, I see an embrace of the idea that this is a humanitarian crisis by people who are not politicizing the issue.
Nancy Pelosi is exactly the person who went on TV months ago and announced the she was pandering the immigrants to get votes.  She and Obama discussed the political pandering idea publicly.  

Not a very good recommendation

Talk with Barack Obama, and you’ll find that he has a basically Keynesian view of the world. It may have wobbled a bit in the past, at times when he seemed to buy into the Confidence Fairy, but it’s still his basic outlook — and his aides are very much IS-LM macro types. True, they haven’t gone all out to push for fiscal expansion in the face of opposition (but remember the payroll tax cut), but that’s mainly a political judgement on their part. It’s not a fundamental difference in worldview from friendly economists.
Barak presided over the most dismal growth period in recent history and is the most unpopular president in the post war period. So, if that is Keynes, no thanks.