PeakTrader.com

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PeakTrader said...

After a slow start easing the money supply from Aug '07 through early '08 (the Bush tax cut in early '08 gave the Fed time to catch-up), the Fed has completed the easing cycle.

There's now plenty of liquidity. However, lending remains tight, which is reflected in excess reserves:

http://research.stlouisfed.org/fred2/series/EXCRESNS

The Fed started paying interest on reserves in 2008 (creating another policy tool). So, if lending increases too quickly, the Fed can raise interest rates on excess reserves to slow lending (in effect, tighten the money supply).

I suspect, high levels of reserves are being kept, because banks believe the government no longer has enough money or is willing to bail-them out (e.g. another TARP) and they have little confidence in the future economy.

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Banks Ease Rules On Some Lending
May 1, 2012

The survey found that banks eased their standards for credit-card, auto and other consumer loans, as well as loans for commercial real estate, the Fed said. However, standards for home mortgages and business loans were largely unchanged despite a pickup in demand.

About a third of the banks surveyed said they were participating in the Obama administration's Home Affordable Refinance Program, or HARP, and "were satisfying most demand." About half, however, said they had "very little participation" in the program, the Fed said.

Banks also cited a fear that they would be forced by mortgage giants Fannie Mae and Freddie Mac to repurchase troubled loans as a reason for decisions to keep credit tight.

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Larry, before the recession, we had restrictive monetary policy (the Fed Funds Rate was too high for too long at 5 1/4%) and fiscal policy was contractionary (the budget deficit shrunk to $161 billion in 2007).

So, Wall Street "recycled" dollars to keep the U.S. economy expanding and diversified the risk globally.

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Larry, actually, they were relatively cheap wars and relatively decisive too.

It was unnecessary to raise taxes for those wars, in part, because foreigners (i.e. our trading partners) were indirectly financing them through trade deficits.

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Larry, that's a one-sided chart that excludes the benefits, e.g. the subsequent steep rise in U.S. living standards, up to $800 billion a year trade deficits, a substantial increase in net wealth or real assets, etc.

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Larry, the problem is too many idle resources for too long, in recent years, which is unnecessary.

The chart ignores the benefits in the 2000s.

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http://www.blogger.com/comment.g?blogID=28997633&postID=1997914180468713295

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PeakTrader: I wrote the following in early 2009 on to prevent an annual economic contraction in 2009:

1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $750 billion for the 150 million workers), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.

2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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PeakTrader said...

"...it's another sign that the labor market is gradually improving..."

It's possible, the labor market is deteriorating at a slower rate.

Using full employment as a benchmark for potential output, we may be further away from potential output than two years ago.

The output gap based on a 10-year moving average makes the gap smaller.

The exact potential output growth rate in the chart below is uncertain:

http://stateofworkingamerica.org/charts/output-gap-real-gdp-compared-to-potential-gdp-2000-11/

However, some average annual real GDP growth rates are:

1946-2010 3.16%
1982-2007 3.30%
2001-2010 1.60%

Also, I may add, the larger an economy becomes, the slower the growth rate (similarly, smaller firms can grow faster than larger firms).

Perhaps, 3% annual real growth is realistic. Last quarter, real growth at an annual rate was 2.2%.

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