Wednesday, December 17, 2014

The tradional US Federal reserve

Lets talk about the corridor fiat system.  First consider how the current system is supposed to work:

Assume the government does not take excess gains from the Fed and it used this system, the way it is supposed to
In the U.S., the Federal Reserve most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money, which offset temporary changes in the level of bank reserves.[4] The Federal Reserve also makes outright purchases and sales of securities through the System Open Market Account (SOMA) with its manager over the Trading Desk at the New York Reserve Bank. The trade of securities in the SOMA changes the balance of bank reserves, which also affects short-term interest rates. The SOMA manager is responsible for trades that result in a short-term interest rate near the target rate set by the Federal Open Market Committee (FOMC), or create money by the outright purchase of securities.
Now we think this might work, and it certainly works much better than having government hand in the excess inventory. The Fed should use its monopoly power to buy at high prices, and sell low; injecting money into the economy, or buy low and sell high extracting money. But it puts the primary dealers in an arbitrage battle with the Fed.

Instead lets make the Fed neutral, and let the borrowers and savers have an arbitrage battle between themselves.  Consider the corridor system as a queuing network. The Fed always wants the deposit balance and lending balance about equal.  It can always adjust both deposit and lending rates independently to make that happen.  But it also wants to make the transaction variance and mean equal for each of the two groups, moving both rates up or down in tandem to make that happen.  So it has two levers, the average rate and the differential rate.

Does this drive the system to zero mean inflation? I think so, even in the face of growth. When borrowers drive up the outstanding lending balances, the Fed raises deposit rates; and visa versa.  Savers will avoid inflation and borrowers will avoid deflation.

The backwards Fed system

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers declined 0.3 percent in November after being unchanged in October. The index for all items less food and energy increased 0.1 percent in November after rising 0.2 percent in October.
Raising the Fed deposit rates inject free unencumbered cash into the economy.  Lowering the fed lending rates extracts free unencumbered cash from the economy.  Letting Congress take all of the incoming flow just slams the Fed up against the boundary and it become useless.  We are confused because equilibrium times are thirty years.

The economy has reached its limit, some 2.5% of economic flows are dedicated to government interest payments. DC has to run a surplus and put some cash into savings so the Fed can raise deposit rates.

Good news

WASHINGTON (AP) — The United States and Cuba will start talks on normalizing full diplomatic relations, marking the most significant shift in U.S. policy toward the communist island in decades, American officials said Wednesday. The announcement comes amid a series of new confidence-building measures between the longtime foes, including the release of American Alan Gross and the freeing of three Cubans jailed in the U.S.
President Barack Obama was to announce the policy changes from the White House at noon Wednesday.
If DC can tolerate the California Legislature then it can tolerate Fidel and his beard.

Consumer inflation at 1%?

WSJ reports that Price Stats, an independent firm tracking consumer prices sees a 1% CPI. This chart from WSJ shows the official government number and price Stats over the recent past.

Tuesday, December 16, 2014

The man who intends to crash the economy

Here is is, the third in a line of Big Deficit Bush Republicans.  brother of the Bush who created the worst recession in post war times.  He intendes to do it again, father like son like brother.

The sad fact, the alternative is soms megalomaniac dingbat from Yawktown.

En serio, el gobierno de California es incompetente, pero estamos mejor dejar la unión de todos modos y hacer frente a la estupidez en Sacramento sin interferencia de DC.

Federal Reserve poetry analyzed.

Caroline Baum analyzes the Fed poetry. "considerable"? "patient", and  months and months of worthless poetry analysis. Finally she pinpoints the exact phrase, "The fed has no idea when it will raise rates"
Fed's Forward Guidance Amounts to a "Considerable (Waste of) Time"

To the list of reasons, I'd offer one more: Stanley Fischer. Fischer joined the Fed as vice chairman in May, and I've been waiting to see can sway his colleagues with his atypical —for a central banker, at least—views on forward guidance. At a September 2013 conference in Hong Kong, Fischer said the Fed can't spell out what it is going to do "because it doesn't know."

The Fed is not raising rates, the market raises them.  Even if the fed would rase rates, it would turn a profit and turn the profit over to the Treasury which then lowers rates by borrowing less!  Here is a clue to the dumbshits who try to decipher the nonsense.  Rates on the Treasury curve are denominated in Treasury notes for one simple reason, it is the Treasury who  is doing the borrowing! Anybody have a clue?

The Fed borrows from the member banks by paying rates on the excess reserves.  But not one economist, with the exception of John Cochrane and Tim Taylor has noticed that lending rates and deposit rates are opposite things!

Here is a clue to economists reading from the worn out recipe book.  Paying higher rates on deposits is a flow of new money from the printing press to the economy, that is inflationary.  Maybe not by much, it is only 10 billion a year, but it is not deflationary and some day economists will quit reading from the recipe book and actually think.

Lowering lending rates, if the Fed would ever lend money, mostly increases the gains by the Fed.  That is an increase in flow from the economy to the Fed, that is deflationary! Get a friggen clue, economists, try playing with a mud puddle with a flow in and a flow out, you might get the picture.

The economy looks fine to me

The Capital Spectator worries about this chart. Housing looks to be on track for the normal pre-bubble period.  Note the dip in 2010 was likely another result of the harmful stimulus.  Also note there was no over production all the way through the bubble years in 2006. The housing industry will well managed. The overall economy looks like it passed through its normal business cycle and our real down turn was a short Obamacare dip in the first quart of this year. 

How about the manufacturing PMI, a survey of manufacturing expansion or contraction?
I see a dip that is well within the range of any other dip we have had since the crash.  Note, we again see the stimulus take its toll in 2010.

I may be a contrary indicator, but right now it looks a lot like we are on our second business cycle since the almost recession of Q1 2014. If Obama can hold back the DC Boat Anchor he may well come out looking even better than Bill Clinton.

Mark Thoma still claims the stimulus wasn't big enough. But he has never put up one single piece of evidence.  Nor have any of the other stimulus activists for that mater, all the Keynesians does is quote unproven recipes. If you are from Illinois and want to see how the stimulus put your economy into a double dip, look at this unemployment chart.
There we have it, 2011, yet again, Illinois unemployment climbs again, right where the stimulus began driving up oil prices.  This now makes five years in which not one single shred of evidence has been produced showing any good result from the stimulus. Keynesians should be booted from our colleges for teaching fraud to young students.

A few other notes about the stimulus, it drove inequality up.  The stimulus drove inflation above 2%, and inflation to high nearly always crashes the economy. We do not have a working fiat banker and inflation is almost everywhere simply a distortion in prices and not really the result of too much money.

And, by the way, a note on QE. Its purpose was most likely to halt the danger from the California pension system, and it also drove inequality higher. So poor people everywhere can blame the California legislature for their problems.  California is just too much of a flounder for the economy.

Here is a much better chart that explains what is going on.  Government spending flat, the blue line. And producer prices flat, the red line.  I would worry about the Republican tendency to sign onto more spending and we see the spike in spending in the recent quarter.  Note the same spike in federal spending in 2010 almost caused a double dip, and that was due to the stimulus. So it remains to be seen, clearly, but the Q1 dip was the end of the Obama recession cycle and we did in fact survive Obamacare.  And, Obama has one more delay available if Obamacare causes problems in 2015. But we may have defeated the Keynesians and saved the economy, just watch out for the Republican spending machine.

Monday, December 15, 2014

The stupidity of central banking

Reuters: Client notes from Goldman Sachs, Citi and Bank of America/Merrill Lynch this week deal with expectations for the removal of the wording, roughly agreeing that however close the call is, it is more likely than not that the phrase will go away.
“They are going to remove it; I don’t think (Fed Chair Janet Yellen) is going to keep it in there just because of what we are seeing with the energy sector,” said Sean McCarthy, regional chief investment officer for Wells Fargo Private Bank in Scottsdale, Arizona.
“All the other data has been strong, whether you are looking at construction, at the ISM numbers, and especially the jobs data that she cares about most.”
Dunno where everyone was last week, but Goldman Sachs and company just did their own central banking in Congress, getting the right of member banks to escape the thumb of the federal Reserve. 

So what forecast should we expect from Janet? What in the frig do we really expect her to say that makes sense in the face of the establishment of our new central banker, Goldman Sachs.  GS won the job fair and square, Janet should have started a policy of ignoring the Keynesians and she might have saved her job.

Europe continues to deflate

ECB May Have to Buy Sovereign Bonds
VIENNA–With its key interest rates as low as they can go, the European Central Bank may have to buy sovereign bonds if the inflation rate remains low and economic growth weak over the long term, a member of the governing council said Monday.
“Interest rate policy has reached a lower zero bound, for all practical purposes. I personally don’t see the possibilities for further interest-rate cuts,” said Ewald Nowotny, head of Austria’s central bank.
The European Central Bank, like government operated central banks, has no way to issue fresh cash, they are broken fiat bankers. Hence, in Europe, Japan and the USA we get more money tied up in the interest repayment cycle and no fresh cash to accommodate growth.   This problem is simply Keynesian stupidity, there is no other name for it.

Post election polling shows Chuck Schumer was right

Chuck Schumer was right

In fact, Obama was carefully instructed to follow the Clinton policy. He knew the best policy even in the primaries, it was obvious. The Democratic catastrophe was entirely the result of Pelosi, Cristina Romer, Krugman and fraud at the UC Berkeley economic department.

Lesson: California is a Boat Anchor. If UC Berkeley does not like that, then talk to the California legislature; DC cannot help, the problem is endogenous to California politics.