PeakTrader.com

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PeakTrader said...

"Since 2008, household interest income has fallen by about $400 billion annually (MP: From $1.4 trillion to $1 trillion). That’s $400 billion each year that families have not had to spend."

Low interest rates induce demand. That $400 billion annually was spent instead of saved.

Without the additional spending, output and employment would be even worse.

Monetary policy has been compensating poor fiscal policy.

The U.S. government needs to cut spending, cut taxes, and deregulate enough to jolt the economy into a self-sustaining cycle of consumption-employment (where consumption generates employment and employment generates consumption, etc.).

Then the Fed can raise interest rates to slow the expansion and maintain sustainable economic growth.

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Some people give the Fed too little credit.

Ever since the Fed had to tighten the money supply in the early 1930s to stop foreign outflows of gold (since the U.S. was on the gold standard), which worsened the Great Depression, it has increasingly improved in raising U.S. living standards, by smoothing-out both long-wave and short-term business cycles.

Monetary policy has been appropriate in this recovery. It was fiscal policy that failed.

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Morganovich, obviously, you don't even have a rudimentary understanding of central banking, along with the data.

The Fed prevented a deep depression in 1973-82 (similar to the 1930s), and engineered one of the greatest eras of prosperity from 1982-07.

The recession that began in Dec 2007 was caused by the biggest oil shock in U.S. history (bigger than the Arab oil embargo), and it turned out, monetary policy was too restrictive in 2007 (the opposite of your belief).

The Fed doesn't care how many booms and busts take place in asset markets. It cares about sustainable growth (of goods & services) through price stability.

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When politicians force banks to lend to people who aren't creditworthy, there's almost nothing the Fed can do, because it doesn't micromanage the economy.

It directs the economy with its crude tools, including dealing with positive and negative shocks, e.g. in recent years: Y2K, 9-11, technology shocks, oil shocks, a massive "creative-destruction" process, etc..

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Juandos, do you believe inflation will accelerate with so much slack in the economy, e.g. a $1 trillion a year output gap, or what year do you believe the output gap will close and cause economic strain?

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Hydra, you didn't have to meet a politician to buy a house with no income, credit, or money.

And you didn't have to meet a politician to live in that house for free for years.

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Juandos, I agree with Taylor's statement below. I've stated before monetary policy is now constrained by the 2% inflation target, and fiscal policy (which is also now constrained by budget deficits) has been offsetting monetary policy.

"We have to get away from all these temporary things--rebates, monetary policy, quantitative easings, we have to get back to a strategy like we had in the 1980s--monetary policy and fiscal policy. I believe that will get the strong growth...There is a lot of evidence that that kind of policy works. Steady as you go, getting the tax rates down and keeping it there, not doing all of these temporary stimulations."

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So, I don't believe a QE3 is appropriate.

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I think, fiscal policy, or the ineffective and negative policies from the Administration and Congress, forced the Fed into the quantitative easings.

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Article links and full comments:

http://www.blogger.com/comment.g?blogID=28997633&postID=4582826938959355329

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PeakTrader said...

I guess, a retired American, who saw his U.S. Treasury bond rise from $10,000 to $13,000 over the past year, can sell the bond and buy an affordable new car, i.e. spend instead of save.

Also, he can get a part-time job, to further stimulate the economy, to make up for the additional spending and low interest income on his other bonds, instead of rebalancing his portfolio.

Praise to the Fed.

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Jon Murphy said...

a 3.8% increase in TPI in a year when CPI averaged what, 3.5% is really very little improvement.

Right Morganovich,

If you'll forgive me for playing some semantics, I said incomes were rising, not real incomes were rising. Also, when you consider the long run average for income growth is 7.0%, the 3.8% number is even more stark.

As far as inflation goes, I half agree with you on the CPI. I agree it doesn't accurately measure inflation; it only focuses on price. I like an almost heretical notion of inflation: labor hours required. You may remember Prof. Don Bordeaux doing a blog post about what items cost in terms of hours worked and that it has fallen over the years (with few exceptions, cars being one of them). I like this measure of inflation better as it better reflects the cost of living and quality of life. Also, in my humble opinion, it makes international comparisons a hell of a lot easier.

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PeakTrader said...

Morganovich says: "they (BLS) apply totally subjective hedonic adjustments for quality...not only is it totally arbitrary, but they assume that ever(y) product only gets better."

Common Misconceptions about the Consumer Price Index
BLS

Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI.

On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes.

A recent article by BLS economists estimated that the hedonic models currently used in the CPI outside of the shelter and apparel areas have increased the annual rate of change of the All Items CPI.

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It's not just improvements in auto affordability, household balance sheets, and the labor market:

Car loans coast down low-rate lane in 2012
Bankrate.com

Credit standards easing

Beyond low rates, the biggest news for car buyers in 2012 may be how much easier it will be to get a loan than it was a few years ago, when the financial crisis led to a collapse in lending to consumers with less-than-perfect credit.

"One thing we certainly are seeing is a loosening ... of credit standards," Zabritski says. "We are seeing more subprime financing being written."

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http://www.blogger.com/comment.g?blogID=28997633&postID=6595887162676159662

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Auto Affordability Chart:

http://1.bp.blogspot.com/-K-_o5_oAuPo/Tzp_-D1Hl_I/AAAAAAAAQ2E/d3t0mS_FAR4/s1600/cars.jpg