PeakTrader.com

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PeakTrader:

We should praise Bernanke and the Fed for lower interest rates to raise borrowing and spending, and reduce saving and the cost of capital, while creating a Wealth Effect in asset markets, to further induce demand.

If Obama and Congress got rid of $1 trillion of the $2 trillion a year in federal regulations, cut spending several hundred billion dollars, and cut taxes several hundred billion dollars, we’d be out of this depression quickly, the output gap would close, and state and federal tax revenues would rise substantially.

Then the Fed could raise interest rates to slow the economic boom, to a sustainable rate.

A “middle class” tax cut would be most effective, to stimulate demand.

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If they’ve been holding U.S. Treasury bonds, they’d be way up on capital gains.

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Morganovich, so, you believe people will borrow and invest more when interest rates are high?

And, when people have negative equity in their houses and small 401(k)s, they’re more likely to spend?

Moreover you view monetary policy as “jelly donuts” rather than water in a drought?

Nothing you say can be supported mathematically and empirically.

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Ken, I don’t have to explain when people are saving instead of spending and no one is shopping at your store, you’re not going to hire another employee.

The Fed was tightening the money supply, raising the Fed Funds Rate from 1% to 5 1/4%, in the mid-2000s.

Congress created the moral hazard for banks to make risky loans.

I stated before, it was a giant social program that Congress believed it didn’t have to pay for.

And, now, banks and corporations are hoarding cash, because they know “too-big-to-fail” won’t fly anymore.

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Even your statement that’s close to the truth is inappropriate: “running up debt and reducing savings when they are already too low further depresses future output and consumption.”

Promoting output and employment raises both consumption and saving, and when the country closes the output gap and reaches full employment, a tightening cycle, by the Fed, can slow the expansion of consumption and saving to a sustainable, or optimal, rate.

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Morganovich, there’s lots of misinformation written by people with little or no economics, certainly no economics degrees (you posted two of them here already).

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Also, I stated before, the federal government has one foot on the brake and the other foot on the accelerator, which is why we have expensive and slow growth. You can’t blame the Fed for that, although many people try.

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Morganovich, economics has its own terminology, which is extensive, and yet you hardly use any. I would’ve guessed english or literature was your field.

No one can fully explain a large macroeconomy, for example, with hundreds of major forces pushing and pulling the economy, in a few sentences or even in a condensed book, like “The General Theory of Employment, Interest and Money.”

There are no contradictions in my statements, If you see any, they are only your illusions.

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Ron says – fiction version: “Unlike you, who must keep claiming to have degrees in economics and making vague references to secrets of the universe not understood by mere mortals, morganovich is able to discuss economics in English, as many here don’t have advanced degrees in econospeak, and wouldn’t benefit from its use.”

Non-fiction version: Unlike you, I must keep trying to tell everyone you don’t have degrees in economics and continue to make ridiculous statements not understood by mere rational people, while Morganovich is able to discuss english in some form of economics unknown to mere mortals, as many of us don’t have advanced degrees from other universes, and wouldn’t benefit from its use.

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http://www.aei-ideas.org/2013/05/tuesday-afternoon-links-3/#comments

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PeakTrader:

A third option for the Fed’s exit strategy (which I heard from Bob Brinker), besides selling bonds or raising interest rates on excess reserves, is allowing the bonds to expire, without new buying.

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The Fed could also raise the required reserve ratio.

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I think, Scott Grannis has shown long-run M2 growth is 6% a year, although some of it is absorbed by foreigners.

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I stated before, in the equation MV = PT, if M and P are constant, then V = T, i.e. V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged. T can be represented by real GDP.

The goal of monetary policy should be to keep actual GDP close to potential GDP, which smooths-out the business cycle creating optimal growth (since there’s neither strain nor slack in the economy). The fact that there are monetary tightening and easing cycles, to close output gaps, are attempts to smooth-out T in the short-run. V and T fluctuate in the short-run, which require adjustments in M to stabilize P and smooth-out T. For example, if people decide to hoard money, then V and T will fall (in the short-run). So, M needs to rise (higher than a constant growth rate).

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Vangel, the Fed helps markets clear. The Fed is stimulating demand, because demand is below (potential) supply.

Through lower interest rates, borrowing and spending rise, and saving and the cost of capital fall, while a Wealth Effect in asset markets further induce demand.

We can thank the Fed for much faster per capita real growth. Before the Fed, per capita real GDP growth averaged 1.36% a year from 1814-1910, and after the Fed, it averaged 2.13% per year from 1914-2010.

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That’s why per capita real growth has been faster with the Fed, except in the Great Depression when the country was on the gold standard and the Fed had to tighten the money supply to stop foreign outflows of gold. A deeper recession will create more “weak players” in itself, like an economic boom will create more “strong players” in itself.

Keynesian economics hasn’t been discredited, improper use of Keynesian economics has been discredited. And I’ve shown you the solid economics of shale oil production.

If the economy is already producing at potential output, then accommodative monetary policy may cause only inflation.

You continue to confuse monetary policy with fiscal policy.

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In the equation MV = PT, dividing both sides you get V = PT/M. One of the things government does best is collect information.

The Fed doesn’t micromanage the economy, to determine winners and losers, and doesn’t redistribute wealth. It creates or destroys money, to smooth out business cycles.

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GDP, prices and the money supply are measured accurately and consistently, although inflation for example is likely overstated, because of slow and small adjustments, and the velocity of money can be compared to past values, for example.

Purchasing power increased faster under the Fed, because income grew even faster than inflation. People with better credit get cheaper credit. Without income, both consumption and saving fall.

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I’m not surprised you believe math is dumb. Also, T represents real GDP. PT represents nominal GDP.

I also stated before: Changes in fiscal policy can change the velocity of money, MV = PT. However, in the long run, V and T are constant. So, M equals P.

When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run.

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Morganovich, your statement is just a bunch of talking points that have no meaning or no economic relationships.

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Sprewell, you say my view is simplistic and then give your own simplistic example of what you think is going on, which contradicts the Fed’s track record. At least you aren’t in complete denial and make believe like Morganovich and Ron.

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Sprewell says: “Except that I didn’t give any “simplistic example” or “cite the Fed’s track record.””

Based on his statement: “The problem is that we don’t know what the “potential” is and therefore what the gap is, simply measuring an average of 3% GDP growth over the last 30 years and extrapolating it out into the future forever is just silly.”

That’s how you believe the Fed operates? And what makes you assume the equation of exchange is all the Fed uses? Moreover, you should cite the Fed’s record, the complete record.

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Also, I may add, the 1970s was a long-wave bust phase of a long-wave business cycle, similar to the 1930s. Would you rather have inflationary growth or deflation and depression?

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The U.S. was on the gold standard in the 1930s. So, the Fed had to tighten the money supply to stop foreign outflows of gold, which worsened the depression.

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Moreover, there are positive and negative shocks to the system in the short-run that require adjustments in the money supply, e.g. in recent years, technology (at the height of the Information Revolution), Y2K, 9-11, oil shocks (or commodities in general), the creative-destruction process (mostly from 2000-02), the financial crisis, etc..

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Also, I may add, inflating asset prices helps raise nominal GDP (real GDP and inflation, of goods & services) to raise real GDP, particularly when actual output is well below potential output.

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Your statement completely contradicts the Fed’s track record in smoothing-out both long-wave and short-term business cycles to raise per capita real growth.

Before the Fed, there were many periods of economic booms and busts.

List of recessions in the United States – Wikipedia

Recessions in the Industrial Revolution – 1871-1914

Period – Percent Decline of Business Activity

1873-79 – 33.6%
1882-85 – 32.8%
1887-88 – 14.6%
1890-91 – 22.1%
1893-94 – 37.3%
1895-97 – 25.2%
1899-00 – 15.5%
1902-04 – 16.2%
1907-08 – 29.2%
1910-12 – 14.7%
1913-14 – 25.9%

Recessions in the Information Revolution – 1982-2007

Period – Percent of Contraction

1990-91 – 1.4%
2001 – 0.3%%

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http://www.aei-ideas.org/2013/06/rising-stock-market-and-housing-recovery-bring-us-household-net-worth-to-a-new-record-high-in-q1-2013/#comments

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PeakTrader:

Neoclassical synthesis: “Mainstream economics…Keynesian in macroeconomics and neoclassical in microeconomics.”

Keynes: “His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself…The bulk of decision making would remain with the decentralized market rather than with the central planner.”

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Expansionary fiscal policy, under Obama, was inefficient. There was too much spending and squandering, and not enough tax cuts, e.g. to reduce household debt. The tax cuts were too slow and too small to jolt the macroeconomy into a self-sustaining cycle of consumption-employment.

Substantial tax cuts worked under Kennedy in ’61, Reagan in ’81, and Bush in ’01 [and the Bush tax cut in early ’08 gave the Fed time catching-up easing the money supply, which placed the country on a path to a mild recession at worse, until Lehman failed in Sep ’08].

In 2013, we began contractionary fiscal policy, of tax hikes and spending cuts. We need to start deregulating, rather than adding more regulations. Cutting half of the $2 trillion a year in federal regulations will spur economic growth and raise tax revenue. Then, the Fed can begin a tightening cycle, to slow the expansion.

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There’s good news on the federal deficit front:

U.S. Budget Deficit Shrinks Far Faster Than Expected
New York Times
May 14, 2013

“…nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015.

Just three months ago, the Congressional Budget Office projected that the current-year deficit would be $845 billion, or about 5.3 percent of economic output.”

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