Thank You Janet Yellen: New Fed Regs Mean Negative Interest On Bank Deposits

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“This proposal, which is supposed to promote financial stability, actually does the opposite,” said Thomas Quaadman, a vice president at the U.S. Chamber of Commerce.

 

 

Remember when we used to earn interest on our bank accounts? Ben Bernanke put a stop to that by printing money like it was going out of style. And now Janet Yellen is one-upping him. Forget zero interest, welcome to negative interest.

New Obama Administration reserve rules mean you’ll have to pay the bank to store your money.

As the WSJ reports, far from paying for the privilege of holding other people’s cash (and why would they with nearly $3 trillion in positive carry excess reserves sloshing around) US banks – primarily of the TBTF variety – “are urging some of their largest customers in the U.S. to take their cash elsewhere or be slapped with fees, citing new regulations that make it onerous for them to hold certain deposits.”

The change upends one of the cornerstones of banking, in which deposits have been seen as one of the industry’s most attractive forms of funding, said more than a dozen corporate officials, consultants and bank executives interviewed by The Wall Street Journal.

Banks aren’t using their deposits to make loans anymore because the Fed’s trillions in excess reserves have made all that cash completely irrelevant.

And in a truly through-the-looking-glass paradox, the Fed says they’re pushing this thievery in order to make bank deposits “safer.”

U.S. banking rules set to go into effect Jan. 1 compound the issue, especially for deposits that are viewed as less likely to stay at the bank through difficult times.

The new U.S. rules, designed to make bank balance sheets more resistant to the types of shocks that contributed to the 2008 financial crisis, will likely have little effect on retail deposits, insured up to $250,000 by federal deposit insurance. But the rules do affect larger deposits that often come from big corporations, smaller banks and big financial firms such as hedge funds. Hundreds of companies and other bank customers with deposits that exceed the insurance limits could be affected by the banks’ actions.

Overall, about $4 trillion in deposits at banks in the U.S. were uninsured, covering more than 3.5 million accounts, according to Federal Deposit Insurance Corp. data

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The rule primarily responsible involves the liquidity coverage ratio, overseen by the Federal Reserve and other banking regulators. The new measure, finalized in September, as well as some other recent global regulations, are designed to make banks safer by helping them manage sudden outflows of deposits in a crisis. The banks are required to maintain enough high-quality assets that could be converted into cash during a crisis to cover a projected flight of deposits over 30 days.

Because large, uninsured deposits would be expected to leave most quickly, the rule will now require that banks maintain reserves that they cannot use for profitable activities like making loans. That makes it much less efficient or profitable for banks to hold these deposits.

And what will the banks use to maintain these new reserves? Why the very financial instruments you’d want to move your now unprofitable deposits into.

Some argue that while it is a good policy on its face, the rule potentially magnifies problems in a recession by encouraging banks to hoard high-quality assets, potentially paralyzing markets for these assets such as Treasury securities and some corporate bonds.

“This proposal, which is supposed to promote financial stability, actually does the opposite,” said Thomas Quaadman, a vice president at the U.S. Chamber of Commerce.

The Obama Administration doesn’t want “stability.”

They want your money in the stock market, to keep the Dow and Nasdaq and S&P indexes artificially high. The only thing holding their illusion of a “recovery” afloat is the bubble in equities. It’s gotta stay pumped up until Obama leaves office (in order to cement his “legacy”) regardless of the risk to individual savers like you and me.

Practically speaking, it means that before all is said and done, banks will be charging usurious rates of interest on even the smallest bank deposits, in a push to get every last “saver” to reallocate their wealth away from pieces of fiat paper into pieces of paper promises (held by the DTCC no less) to be paid by increasingly more cash-flow deficient companies.

The inevitable crash is going to be epic.

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“Punishment Interest”: A Sign Of The Times

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Because there will be no shortage of bloggers talking about the mid-term elections today, Asylum Watch will offer up some other insanity, about which you need to aware.

The doldrums of the Great Recession are still with us nearly five years after we were told the economy had returned to recovery mode. The Federal Reserve takes credit for saving the US economy from a total economic collapse. Apparently, the nearly $800 billion the taxpayers ponied up to bailout various banks and financial institutions (TARP) and another $800 billion you ponied up for President Obama’s “stimulus plan” was just so much fluff.

The Fed, led at the time by Ben Bernanke, came up with a two-part plan to energize the economy and put people back to work.

The first part of the plan was dubbed Quantitative Easing (QE). Under QE, the Fed created trillions of dollars out of thin air to relieve (purchase) banks of toxic assets on their books (sub-prime mortgage-backed securities). This gift to the banks would make their balance sheets go from unhealthy to healthy. The Fed, also, created a few trillion to help the federal government continue to grow their debt by purchasing US Bonds.

The second part of the plan goes by the snappy acronym, ZIRP, which stands for Zero Interest Rate Policy. The idea behind ZIRP, so we were told, was to give the Too Big To Trust banks essentially free money which they, in turn, would lend to businesses and individuals. The businesses would use their low-interest loans to expand their production of goods and services and would hire more workers. Individuals would use their low-interest loans to consume the additional goods and services that the businesses were generating. In other words, the Fed was counting on you, the consumer, to go deeper in debt and to indirectly finance the business expansion and the hiring of more workers. Also, ZIRP was to act as a disincentive to save and if retirees dependent on interest income got hurt, well it was for a good cause.

Had QE and ZIRP resulted in the economy roaring back to live and growing at 4% or more and the good paying jobs came back, the Fed would have ended their programs in a year or so and most of us might have agreed had it had all been for a good cause. Unfortunately, it has not work out as advertised. In spite of the manipulated unemployment numbers and job growth numbers, everyone, including the Fed, knows that this has been the worse “recovery” in American history.

Fed Chair, Janet Yellen, has all but admitted that QE and ZIRP haven’t worked as planned and the Fed recently end the QE part of their recovery plan. Many professional Fed watchers and other pundits have said the Fed is all out of tricks. They may be wrong. There have been rumors and whispers for along time that central bankers were consider the possibility of negative interest rates. Seriously! Maybe they’ll call it NIRP.  The idea, I guess, is if the prescribed medicine doesn’t produce the desired results, give the patient a stronger dose; i.e., make depositors pay to keep their money in banks. It may sound like a crazy idea, but our cousins across the Big Pond, have recently cracked open the door to negative interest rates (some people call it punishment rate). If the ZIRP club wasn’t big enough to get businesses to borrow and invest and consumers to borrow and spend, then the central bankers will just pull out a bigger club. The excellent Wolf Street blog fills us in on the latest insane measures:

Last summer, the ECB imposed negative deposit rates on member banks. At first, it was 0.1%, which has now doubled to 0.2%. The reason? The ECB dragged out its “mandate,” which is, as it said, “to ensure” that “price stability” is “below but close to 2% inflation,” which in turn is “a necessary condition for sustainable growth in the euro area.” Whatever. There is not a scintilla of evidence that inflation is required for economic growth; however, there is plenty of evidence thateconomic growth can stir up inflation. The good folks at the ECB know this. It’s just the official pretext for using inflation to eat up debt – along with savers.

And now, one of Germany’s smaller banks, Deutsche Skatbank, a division of VR-Bank Altenburger Land, has decided to introduce “punishment rates” on some of their client accounts:

Retail and business customers with over €500,000 on deposit as of November 1 will earn a “negative interest rate” of 0.25%. In less euphemistic terms, they have to pay 0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.

It looks an awful lot a tax the rich scheme and for now it is. But, what will happen over time is that the threshold for the punishment rate will fall and the punishment rate will become more severe. No doubt Janet Yellen will be watching this trend very closely. You, too, should keep an eye on this bit of insanity and you may want to be thinking of alternatives to conventional banks for keeping your money safe from the money grabbers.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

Henry Ford

 

Well, that’s what I’m thinking. What are your thoughts?

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Somebody Is Going To Have To Pay For This!

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The title of today’s post is a refrain we’ve all heard countless times in one context or another. When that context pits the government or a pseudo-government agency like the Federal Reserve against you, the taxpayer, the ‘somebody” that pays is always you.

If this story run by the Wall Street Examiner doesn’t make you mad as hell, something is seriously wrong with you. I highly recommend you read this article, but for let me summarize it for you.

First, as you know, the federal government pays the Federal Reserve, with your tax dollars, for all those Federal Reserve notes, aka, dollars that they manage for your benefit. At the end of the fiscal year, The Fed returns to the US Treasury all the dollars paid by you in excess of the Fed’s unaudited expenses; i.e., it’s like the government getting a rebate of some of your tax dollars.

Second, as you know, the Federal Reserve is effectively a private entity that is owned by the big Wall Street Banks and other major foreign banks. Since the 2008 financial crisis, the Federal Reserve has been showering the Wall Street Banks with nearly free magically created money visa a vi their Zero Interest Rate Policy (ZIRP). During these six years, these banks have built up trillions of dollars of what is called “excess reserves” with the Fed. The banks have gotten fat by borrowing at ZIRP rates and gambling it at the rigged Wall Street casino, aka, stock market “investing” it for quick profits. Well, at least, the Fed isn’t paying the banks any interest on their excess reserve.

Third, what you and I didn’t know, until the Wall Street Examiner informed us, is that the Fed is using another program to give the banks free money. This time it is not magic money. It’s your money.

The Fed has expanded its Term Deposit Operations, moving more spaghetti around on the plate, the plate being the liability side of its balance sheet- aka “money.” The Fed announced that it would do 8 weekly operations with its member banks beginning on May 19. The first 4 are at approximately 26 basis points, then the next 4 at 30 basis points. These deposits are like bank CDs with a term of 7 days.

What this means is the banks can take some of their excess reserves, which earn no interest, and put  in these Term Deposit accounts where their money earns a “small” interest rate. That “small” interest rate resulted so far in 69 banks receiving $219 billion. That is $219 billion _ so far _ that will not be rebated to the US Treasury.

The bottom line is that the fat cat bankers will get their multi-million dollar bonuses, which they will use to exercise their generous stock options and, thereby, make even more millions. Somebody is going to have to pay for this! That somebody is you. Are you mad yet?

Well, that’s what I’m thinking. What are your thoughts?

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Does the truth matter anymore? Does voting matter anymore?

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This humble observer of the asylum we all have to live in believes the answer to both questions is no. The percentage of people, who care enough to seek the truth or who will accept the truth and act on it when exposed to it, is too small. The percentage of people who take their responsibility as voter seriously is, also, too small. And sadly, this has been true for a very long time.

Here are a few examples of truth that is leaking out that shake this country to its core and bring on immediate change. It won’t for the reasons listed above.

Barney Frank admits the governments role in the sub-prime mortgage bubble.

In a recent meeting with the Council on Foreign Relations, Barney Frank–the chair of the House Financial Services Committee and a longtime supporter of Fannie and Freddie–admitted that it had been a mistake to force home ownership on people who could not afford it. Renting, he said, would have been preferable. Now he tells us.

Long-term pressure from Frank and his colleagues to expand home ownership connects government housing policies to both the housing bubble and the poor quality of the mortgages on which it is based. In 1992, Congress gave a new affordable housing “mission” to Fannie and Freddie, and authorized the Department of Housing and Urban Development to define its scope through regulations.

Shortly thereafter, Fannie Mae, under Chairman Jim Johnson, made its first “trillion-dollar commitment” to increase financing for affordable housing. What this meant for the quality of the mortgages that Fannie–and later Freddie–would buy has not become clear until now.

Ben Bernanke admits that Dodd-Frank’s is a failure.

‘Just between the two of us,” Bernanke told Moody’s economist Mark Zandi at a recent conference, “I recently tried to refinance my mortgage, and I was unsuccessful.” Though played for laughs, it was no joke.

“I’m not making that up,” Bernanke said. “I think it’s entirely possible (lenders) may have gone a little bit too far on mortgage credit conditions.”

Ya think?

It’s a stunning admission of failure, coming from the nation’s one-time chief bank manager, who was given enhanced powers over the banking system under the Dodd-Frank financial reforms.

It shows that few of the actions that Bernanke’s Fed took — including the zero-interest-rate policy and quantitative easing, which added trillions of dollars to the banking system — did what they were supposed to.

More broadly, it’s also a reminder that following the government-created financial crisis and subsequent “fixes” — in particular, the Dodd-Frank law — our financial system remains dysfunctional.

What should be a block buster story is related in these articles. I will provide a quote from the last one.

How Goldman Controls The New York Fed: 47.5 Hours Of “The Secret Goldman Sachs Tapes” Explain

The Secret Recordings of Carmen Segarra

Inside the New York Fed: Secret Recordings and a Culture Clash

The US Has No Banking Regulation, And It Doesn’t Want Any

The newly found attention for ProPublica writer Jake Bernstein’s series of articles, which date back almost one whole year, about the experiences of former Fed regulator Carmen Segarra, and the audio files she collected while trying to do her job, leaves no question about this.

What’s going on is abundantly clear, because it is so simple. The intention of the New York Fed as an organization is not to properly regulate, but only to generate an appearance – or illusion – of proper regulation. That is to say, Goldman will accept regulation only up to the point where it would cut into either the company’s profits or its political wherewithal.

What the ‘Segarra Files’ point out is that the New York Fed plays the game exactly the way Goldman wants it played. Ergo: there is no actual regulation taking place, and Goldman will comply only with those requests from the New York Fed that it feels like complying with.

So, will these newly exposed truths result in a general outrage that will change the way our government and regulators do their jobs? Of course not! There are not enough of us who care. These truths serve only to vindicate what some us have been writing about for years _ you know, those of us in the tin-foil hat brigade. I suppose that I should be feeling good for that much. I don’t!

What about voting? Does it really matter if we vote or not? If it does, where is the evidence? Congress passes laws they’ve never read, which were written by their staff. Congress has abdicated most of what powers it had the the Executive branch.  Although the Congress has about a 13% approval rating, history tells us that 90% of them will win reelection. Presidents bypass congress and the constitution with their Executive Orders. The real power is in the hands of unelected bureaucrats who are accountable to no one. If Congress doesn’t read their own bills, what is the chance they read any of the thousands of regulations the bureaucrats produce each year? If, by some miracle, we could replace all 535 of our federal politicians in the next elections cycles with honorable conservatives, do you believe they could roll back decades of bad laws and regulations and survive the next election? Our elections have become multi-million dollar shows put on to make us feel like our votes matter. How can they matter when both parties promote growth of government power over the citizens?

Well, that’s what I’m thinking. What are your thoughts?

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Stop Hoarding Your Money!! And While You’re At It, Get Rich, Would Ya?

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The economy isn’t growing because you’re hoarding money. Also, if you had any brains you’d get rich.

That’s what the Federal Reserve thinks of you folks not living on Wall Street.

The Great Facilitator of big government Federal Reserve is finally having to admit that, after six years of printing trillions of dollars and giving essentially free to the too big to fail or trust banks on Wall Street, their Quantitative Easing and Zero Interest Rate Policy program has failed to stimulate the economy and put people back to work (it did do fantastic job, however,  of making the rich much richer). So, like all personalities or entities in Washington, D.C., they are looking for someone else to blame Not surprisingly, that someone else is you. Those that live in the rarefied air of the Fed have little to no respect for people who are not rich and they have a couple of messages for you:

Stop hoarding your money!

The  St. Louis Federal Reserve had this explanation for why the economy sucks for everyone other than the One Percenters:

So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP?

The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money. _ (Source)

Hoarding? Seriously? Some of you on Main Street are doing well to stay even these last six years. Most of you, however, are seeing your standards of living declining. What money could you possibly be hoarding? I guess the Fed’s thing is that if they are going to lie about who’s to blame, it may as well be a big lie.

Janet Yellen: America’s Marie Antoinette

Marie Antoinette, when informed that the French had no bread to eat, supposedly responded : “let them eat cake.” Janet Yellen, Chair of the Federal Reserve, also has a message for the teeming masses:

Speech–Chair Janet L. Yellen

The Importance of Asset Building for Low and Middle Income Households

At the Corporation for Enterprise Development’s 2014 Assets Learning Conference, Washington, D.C. (via prerecorded video) _ (Source)

In other words, what she said was : “Let them get rich.” Why didn’t you think of that? If six years ago you had sold everything you owned and lived like paupers, you could have invested most of your income on Wall Street and you would all now be rich. But, instead you apparently hoard all of your money. There’s probably a good reason she gave her message by prerecorded video.

I suggest you all send a reply message to the Fed. Please stand up and face in the direction of Washington, raise your right hand with the back of your facing away from you, and, at the count of three, fold all of your fingers except the middle one. 1 … 2 ….

Well, that’s what I’m thinking. What are your thoughts?

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Are The Central Bankers Planning To Try A Controlled Collapse?

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Federal Reserve Chair Janet Yellen

This Zero Hedge article suggests that the central bankers are, at least, talking about the idea of a controlled financial collapse. The article includes this quote from the recent annual report of the Bank for International Settlements (BIS); aka, the bank of the central banks.

The risk of normalizing too late and too gradually should not be underestimated… The trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on .

Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms,” …

“The road ahead may be a long one. All the more reason, then, to start the journey sooner rather than later.

Wow! Can’t be any clearer an honest than that. When the BIS speaks of the risk of “normalizing” too late or too slow, they are saying that what the central banks have been doing these last years was not “normal”. In other words, the BIS is admitting the it is the central banks who have created these financial bubbles. Then the BIS says that “bringing forward the downward leg of the cycle”, starting the collapse now, will cause less suffering than if they wait for things to run their natural course. In the second paragraph, the BIS admits that the policies the central banks have been using have made everyone feel “illusively richer” and that the quick fixes they would like to use will only add fuel to the already raging fire. In the last paragraph, the BIS is saying that the recovery from the coming collapse is going to be a long haul so it is best to get started sooner rather than later.

So, will Janet Yellen and our illustrious Federal Reserve be a party to a scheme to bring on the coming financial collapse sooner than it would otherwise occur? Apparently responding to the BIS suggestion, Ms. Yellen had this to say at a recent IMF meeting:

“At this point, it should be clear that I think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a ‘bubble’ and whether policymakers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.”

Hmmm. Ms. Yellen seems to the more obtuse in her statements than Ben Bernanke was. She is apparently saying that she doesn’t think popping bubbles is the proper thing for the Federal Reserve to be doing. Maybe she just doesn’t want to admit that the Federal Reserve and other central banks are responsible for creating the current financial bubbles. Or, maybe as the Zero Hedge article suggests, politically she can not say publicly that the Federal Reserve will aid in bring on the next financial crash. Of course, there is always the outside chance that she is being honest and plans to let the bubbles burst on their own even if the consequences will be worse.

I guess we have no choice but to wait and see what the Fed really does. One thing is for sure. The bubbles that many of us have been talking about are real and they are going to burst either by design or otherwise. Either way, we mere mortal are the ones who will pay the consequences.

Well, that’s what I’m thinking. What are your thoughts?

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Leftwaaard..Maaaarch! Left….Left…Left…

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While we on the Right have been enjoying some well deserved Schadenfreude at the expense of President Obama and the Democrats over the diasterous rollout of Obamacare, with some of our pundits going so far as to claim that the public’s awakening due to Obamacare will be the end of liberalism in America, the Left has been planning their counter attack. Rather than concede that Obama’s program to provide health insurance to everyone, including those with preexisting conditions, was too big of a move to the Left, the left Left-wing of the Democratic Party is looking at Barack Obama and his potential replacement, Hilary Clinton, and finding them wanting. The left Left-wing is thinking that Barry and Hilary are not far enough to the Left. They are not planning on conceding anything to the Right. To the contrary, they are planning a big push further to the Left.

“More liberal, populist movement emerging in Democratic Party ahead 0f 2016 elections” is the title of this Washington Post article. The author points out that left Left-wing rising stars, like Elizabeth Warren and Bernie Sanders, are not happy the Mr. Obama has indicated a willingness to consider some reforms to the rapidly failing Social Security system in exchange for more taxes and more spending. Sen. Warren is instead supporting a bill to expand Social Security benefits.

And, you may want to read this article about the movement to raise the minimum  wage to 15 per hour.

From my years living in South America, I can tell you that populism is an easy sell. Blame everything on the rich and promise the poor everything under the sun. I use to think that Americans were different; in that they would never fall for that populist garbage. I’m not so sure that’s true anymore.

Think about the 2016 presidential election. It’s not that far away. For whom are the retired and about to retire Baby Boomers going to vote? The Republican that is promising to fix (reform) Social Security or the Democrat who is promising to expand Social Security benefits? Who are the growing numbers of minimum wage workers going to vote for? The Republican that says increasing minimum wage results in higher unemployment or the Democrat who is promising to double the minimum wage? And, what about the college students and recent graduates? Are they going to vote for the Republican who promises them nothing or the Democrat that promises to forgive part of their student loans?

Populism really is an easy sell. And, please don’t worry about how they could possibly pay for all of their largess. Remember that we have a very accommodating Federal Reserve that can and does create money out of thin air. It’s called Quantitative Easing or what I like to call QEasy, where the “Q” stands for quantity of money. Every time the Treasury runs low, the Fed makes an accounting entry and all is well again. (Think Japan)

In 2016, we will learn what America is made of once and for all.

Well, that’s what I’m thinking. What are your thoughts?

Original Post:   Asylum Watch

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What Recovery? Part I: Velocity of Money

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The recession officially ended in 2009. Government reports tell us that the United States has been in recovery for four years now. The vast majority of Americans don’t feel as if they experienced any recovery. Is it because the rate of economic growth has been the slowest in US history? Shouldn’t the average American feel some benefit from an average GDP growth of 2%? Unemployment is the same today as it was in 2009. Why? The Federal Reserve  has used a policy called Quantitative Easing to pump trillions of dollars into the economy over those four years.  At the same time, the Fed has maintained a Zero Interest Rate Policy (ZIRP). Federal Reserve Chairman, Ben Bernanke, has said on numerous occasions that these policies are designed to help the economy grow faster by providing low-interest loans to home buyers and businesses, which would in turn cause businesses to invest and, thereby, create jobs.

Well, job growth is not keeping up with the number of people who have dropped out of the workforce nor with the number young people entering the potential workforce. So, where is all of that QE money. After all, through its QE policy, the Fed has created and put over $3 trillion into a $15 trillion economy. Adding 20% to the economy must be showing up in somebody’s pocket, right?  And, why do most Americans not feel the 2% growth in the economy?

To answers those questions, we need to understand some terms used in analyzing economic data. So, let’s se if we can get a handle on three terms: Gross Domestic Product (GDP), Money Supply, and Velocity of Money. We are going to see that Velocity of Money tells us more about the economy than the GDP does.

Gross Domestic Product (GDP)

The GDP is calculated by summing consumer spending with government spending and business investment spending plus the difference between exports and imports. If exports exceed imports, there is a positive impact on the GDP calculation. The opposite is true if exports are less than imports. Not all economist agree that exports and imports should be part of the GDP calculation, but that the subject of another post some day. We must deal with GDP as it is calculated. To repeat:

GDP = Cons. spending + Gov Spending + Bus Investment Spending + Exports – Imports

Currently, the United States GDP is about $15 trillion. Government spending, under the Obama administration, has been about 25% of GDP. Unfortunately, the governments income has been only about 18% of  GDP, which is why the national debt is now over $16 trillion.

Money Supply

In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time. In the US the money supply depends on how it is defined. We will look the two most common, M1 and M2, and  a lessor known way of defining the money supply called MZM.

M1 Money Supply: When economist refer to M1, they are talking about  all the notes and coins in circulation plus travelers checks, demand deposits, and other checkable deposits.

M2 Money Supply: The M2 money supply includes M1 plus savings deposits and Time deposits less than $100,000 and money-market deposit accounts for individuals.

MZM Money Supply: The MZM money supply includes M2 plus all money market funds.

Because MZM money supply is the broadest measurement of the money that is easiest to use in economic activity, we will use MZM for our discussion of money velocity. But, first we need an explanation of what money velocity is and why is important to us.

Money Velocity

Joshua Kennon helps understand the velocity of money.

The velocity of money is one of the most important economic concepts you can ever learn.  It isn’t perfect, and it doesn’t fully capture vital influences on the way a nation’s money supply behaves as driven by behavioral economic considerations such as mass panic, fear, overoptimism, et cetra, but it does have very important implications for determining an appropriate taxation policy to generate the optimal amount of governmental revenue from the population.  This is meant to be a very basic, simplified explanation so beginners can grasp the velocity of money, and how it interacts with the so-called Laffer Curve.

What Is the Velocity of Money?

Simply defined, the velocity of money is a measure of the economic activity of a nation.  It looks at how many times a unit of currency ($1 in the case of the United States) flows through the economy and is used by the various members of a society.

All else equal, the faster money travels (the higher the velocity of money) and the more transactions in which it is used, the healthier the economy, the richer the citizens, and the more vibrant the financial system.  The velocity of money tells you how efficient $1 of money supply is at creating economic activity.

In simple terms, the velocity of money of money velocity is equal the GDP of an economy divided by the money supply. And, the more times money circulates through an economy, the higher will be its GDP for the same supply of money. Mr. Kennon gives a very simple example of an economy of only three people where there is no government spending or business investment spending or exports or imports to worry about.  Let’s take a look.

Imagine that a farmer, a grocer, a doctor, and a scientist live in the world’s smallest country.  Between all of them, they have $1,000 in money supply.  Over the course of a month, the following transactions take place:

  • The farmer sells $500 worth of food to the grocer.
  • The grocer marks up the price and sells $700 worth of food, split among the doctor and scientist who are his two customers.
  • The grocer falls and hurts his knee.  He goes to the doctor and pays $200 to the physician.
  • The scientist needs fertilizer for an experiment.  He goes to the farmer and pays him $300.
  • The physician is working on a liquid band-aid product with the scientist.  He pays him $300.

The total value of the transactions in our time period is $2,000.  We have $1,000 in money in our economy, so the velocity of money is 2.

In this little example the GDP was the consumer spending or $2000. The money supply was $1000. When the GDP is divided by the money supple, we see that the velocity of money was 2.0. If we had our three person economy do many more transactions with each other, we could get the money velocity up to 3.0 or even more. They would be enjoying a very rapidly growing economy (GDP).

In this example, the money supply was fixed over the time frame of the analysis. Things get more complicated when the money supply is constantly growing. When banks use fractional reserve accounting, they create credit and ,thereby, the amount money in circulation. Also, when the Federal Reserve uses Quantitative Easing to buy mortgaged back securities or US Bonds with money they don’t have, they are effectively creating money. Since they started QE, they have created over $3 trillion in just the last four years. So, let’s look at how America’s money supply *MZM) has increased over time.

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Graph of MZM Money Stock

We see that the broadest form of easily available  money, MZM, has increased from less than a trillion dollars in 1980 to nearly twelve trillion in early 2013. If you are interested, you can look at the growth of the M1 money supply here and M2 money supply here. The patterns are much the same.

The Federal Reserve in Saint Louis also has a graph of what the velocity the MZM  money supply over time. Here it is.

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Graph of Velocity of MZM Money Stock

We see that except for a spike in the velocity of money in the early 1980?s, the velocity was a fairly constant 2.5 from 1975 to 1995. Since then it has fallen to about 1.4 in January of this year. That, my friends, explains why most Americans do not feel that the economy is getting better. The GDP is growing, but the money supply is growing even faster. This trend started, however, not in the Obama or the Bush presidencies; but in the Clinton Presidency. According to this graph the velocity of money is now much lower than it was in 1960. But, this article has the same graph going back to 1920 and the current velocity of money, at 1.4, is worse than the years of the Great Depression and World War II. Are you beginning to understand just how bad our economy is today?

But, wait a minute.  Something doesn’t jive. The S&P 500 index is back to 1400; regaining its loses from the 2008 financial collapse. Look at what this CNBC article says:

The stock market has gone from wealth destroyer to the nation’s largest manufacturer of new millionaires and billionaires. The market moves are creating a new virtuous cycle of confidence for the wealthy. A new survey from Spectrem Group shows that millionaire confidence in the economy hit the highest level in two years, led by their bullishness on the economy and corporate earnings.

Corporations and the big banks are making big profits and paying management big bonuses. Wall Street investors are doing well, aren’t they. The Feds velocity of money graph doesn;t tell the whole story. The graph is an aggregate for the entire economy and doesn’t show what is going on with different segments of the economy; such as, the part made up by big corporations and banks and big Wall Street investors. That segment of the economy is doing very well. The velocity of money they are seeing is much higher than the aggregate 1.4. And, that of course means that the velocity of money you are experiencing is less than the aggregate 1.4. In fact, most people on Main Street are probably experiencing  a velocity of money of less than 1.0, which explains why the folks on Main Street, you and I, are not experiencing the same recovery as the big boys.

So, do you now understand why the income gap keeps growing at an accelerated rate? The Fed’s efforts to stimulate the economy by printing money Quantitative Easing has done nothing to reverse the trend that started in the Clinton era. WHAT IS GOING ON!

In Part II, we will investigate further why the economy for the middle class appears to be in systemic decline. We will also look at what a pessimistic pundit has to say about structural changes in our economy that mean high unemployment will be the norm, for the foreseeable future. But, in Part III, we will look at what an optimistic pundit has to say about increasing freedom and innovation in the world, which he says will be positive for the United States.

Well, now you know what I’m thinking. What are your thoughts?

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Money For Nothing

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“The common denominator to all of history is that all governments almost universally act irresponsibly to debase their currency.” — Robert T. Lutts

“The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.” — Alan Greenspan

Ah, the coin of the Realm … t’was a time when our specie was fashioned of precious metals — silver, gold even — back before America’s elected larcenists decided to mint money from materials with the same intrinsic worth as a Tijuana bus token.  Debasing the currency, of course, is an ancient racket, engaged in by official chiselers from Nero to Nixon. The only thing that ever changes is the names of the thieves.  To wit:

H.R. 6162: Coin Modernization, Oversight, and Continuity Act of 2010

111th Congress 2009- 2010

To provide research and development authority for alternative coinage materials to the Secretary of the Treasury, increase congressional oversight over coin production, and ensure the continuity of certain numismatic items.  Status: Signed by the President

Even such a staunch Keynesian as Keynes himself said, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” Adulterating our mintage, however, is small potatoes compared to the abuse perpetrated upon the once sound dollar by the charlatans entrusted with its stewardship.  The venerable greenback has lost 96% of its value since the creation of the so-called Federal Reserve system (a consortium of banks which are not federal and have no reserves).  A wise saver would have been better served over the years by hoarding tuna fish.  The modern dollar, stripped of its convertibility, is nothing more than a political promissory note, one which we are ordered by law to accept, despite the fact that the promises of politicians are never worth even the cheap paper on which they’re printed.

Our “legal tender” has been a convenient illusion since 1971, a bit of showy legerdemain, like the mangy rabbit a carnival magician pulls from a previously empty hat.  The primary difference is that when times get tough, you can always eat the rabbit.

Original Post:  Be Sure You’re Right, Then Go Ahead

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Arthur Laffer: Economic Statistics, Some Matter and Some Are Deceiving

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At Real Clear Politics the other day, I came across an article by economist, Arthur Laffer in theWall Street Journal. the same Arthur Laffer whom developed the Laffer Curve during the Reagan administration. As I often do, I scanned the article and bookmarked it as a possible source for a post. Then this morning I had an e-mail in my in-box from Pat Slattery of The Free Market Projectsuggesting that I consider doing a post on an article by John Hayward about the Laffer article. And, I thank him. So, I will discuss both the Laffer and Hayward articles in today’s post on economic statistics.

Economic Statistics that Deceive

With good reason, we mere mortals, without a PhD, have to wonder if government agencies and politicians, including the President, are lying to us. Well, of course, they lie to us. That is a given. But, when it comes government generated statistics, they don’t so much lie to us as they don’t tell us all that we need to know. In other words, they tend to cherry-pick data to put the economy in the best possible. With today’s economy, that is more difficult than usual.

One example of government cherry-picking data is the reported inflation rate. According to the Federal Reserve, inflation is negligible. We know that is not true. The reason reported inflation appears low is that they do not include price changes in oil, gasoline, and food. The items that impact the budgets of 90% of the  population the most are not included in the calculation of inflation.

Anther example of the government only telling us part of the story are the monthly employment numbers. I watched a news video the other day Debbie Whatshername-Schultz say how proud she was of Obama because under his leadership we have had 29 consecutive months of job growth. PROUD!  Give me a break.! The workforce participation rate is getting smaller by the month! The July jobs report announced that non-farm jobs increased in July by 163,000. This was more than what was expected. The stock market went wild.  If you want to know what really happened with the jobs market, check out this article at PJ  Media and this article at Inform the Pundits. You will find out that there was a net loss of jobs in July. Just ask yourself why the unemployment rate increased to 8.3%?

So, with all the efforts to put our economy in the best possible light, our GDP is growing at an abysmal rate of 1.5%. That is pathetic! Let’s find out why our economy is so anaemic.

Some Economic Statistics Matter

The Obama administration, more than any administration in my memory, has based their economic policies on nothing more than tax and spend. Obama has set the all time record for government spending “crapweasels” like Paul Krugman and Democrats in general and the main stream media keep calling for more and more stimulus. (Crapweasel is a term Kurt Silverfiddlealways uses when referring to Paul Krugman.  It fits.)

One of the best ways to measure the success or failure of an economic policy is to look at the empirical results where that policy has been tried. This is exactly what Arthur Laffer has done and reports on his findings in this Wall Street Journal article and suggest that:

Policy makers in Washington and other capitals around the world are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.

Dr. Laffer looked at 34 countries that implemented stimulus programs after the 2008 financial crisis. The results weren’t very stimulating:

It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

There is a table in Laffer’s article show just badly stimulus worked for these countries. John Hayward in his Human Events’ article about the Laffer report, like this quote from Laffer:

Often as not, the qualification for receiving stimulus funds is the absence of work or income – such as banks and companies that fail, solar energy companies that can’t make it on their own, unemployment benefits and the like. Quite simply,government taxing people more who work and then giving more money to people who don’t work is a surefire recipe for less work, less output and more unemployment.

” a surefire recipe for less work, less output, and more  unemployment.” This reminds me of a conversation back in the eighties, to which I was present, between brother-in-law and two of his friends. They were all UAW members and employees of the Chevrolet plant in Flint, Michigan. They were all in their middle fifties and they had been doing some sharp penciling about whether it made sense for them to take early retirement at age 58.  They concluded that with their General Motor’s pensions and Social Security (in those days you could opt for early Social Security at a reduced rate at 58) that it made no sense to keep working 40 hour weeks for just a few hundred dollars more. I’m thinking that the same thinking applies to many of our citizens on welfare and other government assistance. They are likely figuring why should they take a forty-hour a week job when they can do nothing for only a few hundred dollars less..

John Hayward would add something to Laffer’s analysis:

The other obfuscating factor I would add to Laffer’s analysis is that government spending is treated as highly significant by the media, while private investment is either ignored or criticized.  The financial papers might carry tales of business success, and once in a while the public imagination is captured by a company like Apple… but none of that compares to the front-page, above-the-fold coverage given to huge government spending initiatives.

We know what Obama and his team are up to. With the support of the main stream media, they want to pull the wool over the eyes of those that still have a job (the majority of voters) by convincing them that the economy, however slowly, is steadily growing and now is no to change horses. Economic statistics do matter and it is going to be up to us, the conservative bloggers, to get the truth out there.  It won’t come from the media, that is for sure.

Well, that’s what I’m thinking. What are your thoughts?

Original Post:Conservatives on Fire

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Raising Cain: Political Outsider, or Federal Reserve Apologist?

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In response to my post last week, Raising Cain: Wins SC Debate, some of the comments revealed information that I had not known.  Apparently, not only did Herman Cain serve as the chairman the Federal Reserve Bank of Kansas City, he has dismissed demands to audit the source of our funny money.  I will openly admit that I had not done my homework, however, I can correct that oversight now.  For starters, here is some audio from Mr. Cain…

That was posted on 1-8-11.  The next video was posted on 1-27-11…

I think people will have to listen to both clips, and decide for themselves.

Also, it is confirmed that Cain supported the TARP bailouts.  Here is an excerpt from Mr. Cain…

But some of us wanted to own a bank because that’s where the money is!

Wake up people! Owning a part of the major banks in America is not a bad thing. We could make a profit while solving a problem.

But the mainstream media and the free market purists want you to believe that this is the end of capitalism as we know it. It is not for several reasons that they have conveniently not explained.

First, instead of buying toxic mortgage-related assets of banks as originally proposed, the Treasury has changed tactics and will buy equity positions called preferred stocks, which gives us as taxpayers an ownership stake in their success for a limited period of time.

Preferred stock means we get paid a dividend before any other stockholders get paid a dividend when they make a profit. You got a problem with that?

Second, the purchase agreement between the Treasury and the participating banks has an incentive for the banks to re-purchase the stock back from the Treasury within five years.

If the banks do not re-purchase the stock in five years then we get a bigger dividend until they do re-purchase the stock. That’s a good deal!

The free market purists’ objection to this is that it smacks at government control of the banking industry, which is called nationalization. They are correct. It smacks, but it is not nationalization because that would require the government to own at least 51 percent of the entity for an indefinite period of time.

The ownership by the taxpayers is going to be relatively small and nowhere near the amount needed to be called nationalization. So what’s the problem?

The problem is economic illiteracy and media incompetence. Some people want to continue to fan the flames of anger and outrage over how we got into this mess in the first place. Anger and outrage will not solve the problem.

Again, you will have to judge for yourself.

This puts Mr. Cain in a potentially undesirable position.  He is very popular with the Tea Parties, but his participation in the Federal Reserve, and support of TARP could very well alienate him from that same demographic.  While he has not hidden is chairmanship of the Kansas City Fed, it can, conceivably, come back to haunt him.

If you want to know how the Fed operates, here are some videos from the Ludwig von Mises Institute.

What do you think?  Drop a comment, and I’m sure a debate will ensue.

H/T: Left Coast Rebel, United Liberty

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Steve Brenan Dislikes America, or So I Imagine He Does

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Steve Brenan of the Washington Monthly (which I found via memeorandum) begins his blog post ‘None Dare Call it Sabotage’ this way…

Consider a thought experiment. Imagine you actively disliked the United States, and wanted to deliberately undermine its economy. What kind of positions would you take to do the most damage?

Let’s play the game! Close your eyes and take a minute to think about the policies you would put in place if you disliked America- the kind that would really do the most damage. What did you come up with?

In my mind, those positions that you would take to do the most damage to America would be those positions that damaged our long-term economic strength, eroded our historical values, weakened our security, opened up our borders to invasion, piled up debt, moved people from jobs to welfare, and granted other nations power over our domestic and foreign affairs. To be honest, the stimulus bill might have helped provide employment for people in favored union industries, but long-term, it is a policy designed to do considerable damage to America. Obamacare appears nice to some groups and rewards those who don’t take care of themselves, but in the long term will be costly for the government to provide and will encourage structural irresponsibility, and includes death panels and money for abortions, both of which I also consider damaging positions for America. Letting pot be legalized, letting illegal immigrants flow into America, suing states that try to close the borders, encouraging gay marriage, doing little to stop the breakdown of the traditional family structure, funneling more money to killing unborn babies, working to remove firearms from law-abiding citizens, stealing money from my children and grandchildren to give higher salaries to government employees today, and letting Iran get nuclear weapons I would also consider positions taken to harm America by those who dislike our nation.

The funny thing is, after much thought (for a liberal), Steve arrived at a much different conclusion than I did. This is what he imagined:

You might start with rejecting the advice of economists and oppose any kind of stimulus investments. You’d also want to cut spending and take money out of the economy, while blocking funds to states and municipalities, forcing them to lay off more workers. You’d no doubt want to cut off stimulative unemployment benefits, and identify the single most effective jobs program of the last two years (the TANF Emergency Fund) so you could kill it.

You might then take steps to stop the Federal Reserve from trying to lower the unemployment rate. You’d also no doubt want to create massive economic uncertainty by vowing to gut the national health care system, promising to re-write the rules overseeing the financial industry, vowing re-write business regulations in general, considering a government shutdown, and even weighing the possibly of sending the United States into default.

You might want to cover your tracks a bit, and say you have an economic plan that would help — a tax policy that’s already been tried — but you’d do so knowing that such a plan has already proven not to work.

It’s almost as if there really is a bizzaro world out there, where up is down, left is right, and wrong is right. Every liberal program that I said was bad (because it was paid for by debt, encouraged unemployment, discouraged private initiative and hard work and responsibility, and was contrary to the historical values on which our nation was founded) he said was good. Every policy item that he pointed as something that would be good for America I saw as being bad for America.

I guess there is only one way to really test this stuff out. Let’s let the Republicans run things for a couple years and then compare that to when Democrats ran things…. oh my word, we’ve done that (2000-2006 vs 2008 to 2010 is the only real comparison, although if you want to compare Michigan’s growth from 1990 to 2002 vs 2002 to 2010, that’d be fair too) and based on that evidence, liberals like Steve are wrong and conservatives like me are right. See my posts Graph Comparing Unemployment Rate For GOP and Democrat Senators, Democrats=Higher Poverty, or my lengthy personal statistical analysis post Employment-Population Ratio Drops to 58.5%.

The data don’t lie. Steve doesn’t like America. I imagined it so.

UPDATE: For more of my thoughts about bizzaro world, please check out my earlier post 100 Years of Trying- Communism Wins in the End Though or my more indepth analysis of bizzaroness Bizarro World and the Israeli-Hamas Conflict.

Original Post: A Conservative Teacher

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