Federal Reservations

I've gone on about this elsewhere, but thought I should bring it up front and center here.

While everyone hyperventilates about government debt, they don't seem to be aware of the massively greater load of private debt, and its spectacular runup compared to government debt:



This from Steve Keen's latest. (It's not very long. There are lots of pictures. It makes every kind of sense. Read the whole thing.) The blue line is publicly held debt -- not including money the government owes itself (on the consolidated budget) for Social Security and Medicare.*† The red line is debt of 1. households and nonprofits, 2. nonfinancial businesses, and 3. financial businesses.

Here's how those sectors break out:



Again, you hear all sorts of hyperventilating from the morality-based school of economics about households/consumers going on a debt-financed spending binge, especially in the 00s. And that definitely happened. With the financial industry begging them to borrow -- almost literally throwing money at them -- and telling them authoritatively that it's free because house prices always go up, it's not surprising. Humans will be humans; who's gonna turn down money when the powers that be -- who presumably know a lot more about finance than a high-school-educated homeowner working at a lumber mill -- say it's free?

But that ignores the really massive runup: financial corporations' debts. Starting at a little over 10% of GDP in 1970, they hit almost 80% by 2000, and when the crash hit they were over 120% of GDP -- a 10x, order-of-magnitude increase over 40 years.

The story explaining these pictures was told long ago -- notably by Irving Fisher in 1933 (only after he had driven his Wall Street firm to ruin and lost everything, including his house, by clinging, Polyanna-like, to the kindergarten-ish Price-Is-Right! nostrums of classical economics). Minsky told it in cogent and convincing detail.

The basic story is very simple. It goes like this (in my words):

• Banks (and shadow banks) make money by lending. Bankers have every incentive to increase their loan books, even by extending questionable loans, because bankers don't personally bear the eventual, down-the-road losses from loan defaults -- they've gotten their money already.

• When banks run out of real, productive enterprises to lend to -- enterprises that can pay back loans and interest from the production and sale of real goods that humans can consume -- they start lending to speculators (gamblers) who are buying financial assets in hopes that their prices will rise.

• That lending -- extra money being pumped into the system -- does indeed drive up the price of financial assets, far beyond the value of the real assets that (according to most economists you listen to) supposedly underpin those financial assets' value.

• Eventually people realize that the value of financial assets far exceeds the value of real assets -- and far exceeds the capacity of the real economy to service the loans that drove up those financial asset prices. Prices of financial assets plummet, borrowers default because there just ain't enough real income to service the loans, financial-asset prices plummet some more, all in a downward spiral -- with all sorts of collateral damage to the real economy.

There's your (economy-wide) Ponzi scheme. Households and nonfinancial businesses definitely participate (the financial industry makes it almost irresistible not to), but it's driven by the financial industry, and a huge proportion of the takings go to players in the financial industry.

But as Keen points out, the powers that be almost completely ignore that simple story. He quotes one of Bernanke's extraordinarily rare mentions of either Fisher or Minsky:

Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects… (Bernanke 2000, p. 24; emphasis added)

The rarity -- inexplicable to me, at least -- speaks even more loudly and eloquently than this blithely dismissive quotation does.

When really smart people like Ben Bernanke constantly ignore an elegant, simple, even obvious explanation that's been lying on the ground, ready to pick up, for at least 75 years, you gotta figure they've got some incentive -- whether they're conscious of it or not. That's what I talked about the other day.

Again, read Steve's whole piece. And if you have any interest in economics and haven't bought the new edition of his book yet, do.

* Please don't try to dismiss this by pointing to the net present value of SS/Medicare liabilities extending into the infinite future. 1. Including those intra-government debts doesn't change this picture much at all. 2. It's a completely separate discussion, about whether we choose to provide those services out of current GDP over future years and decades. 3. If charges by health-care providers were rising at the same rate as inflation, even that future cost would not be a terrible burden. 4. Social Security is actuarily solid on a cash-flow basis for decades, and beyond the foreseeable future (75 years ) if we simply Scrap The Cap on the payroll tax, requiring high earners to pay their full share.

† I'm not clear whether he includes bonds held by the Fed -- again, money the government owes itself, if you view Treasury and Fed as both being part of the government -- which total a whopping $1.6 trillion or so, more than 10% of GDP, last I checked. I don't actually know if Fed holdings are included in "debt held by the  public." (You gotta wonder whether the Fed counts as "the public.") Little help, so I don't have to go Google it up myself?

Cross-posted at Asymptosis.

Originally from Angry Bear

About a month ago, I posted in regard to what I called “the euthanasia of the saver.” This comment had to do with the fact that nominal interest rates in the United States for financial investments such as bank certificates of deposit and bank savings accounts—the kinds of investments traditionally employed by retired persons and small savers, who wish to gain income without exposing their funds to great risk of capital loss—now fall considerably below the rate of inflation, and hence the real (or inflation-adjusted) yield on such investments is negative. That is, the nominal payoff is insufficient to offset the loss of purchasing power of the money invested.

About a month before I wrote my commentary, my old friend Richard Rahn had, without my noticing, written on the same issue in a commentary article published in the Washington Times, but he had gone beyond the simple point I made. Rahn notes that besides suffering the loss of wealth occasioned by the negative real yield on such investments, the investor has to pay tax on the nominal yield—truly a case of the government’s adding insult to injury. He notes that given the currently prevailing rates of interest, rate of inflation, and tax rates, a small investor who earns a nominal yield of 1% and pays a 20% marginal tax rate, while the rate of inflation is 3.5 %, actually ends up paying a real tax rate of 370%. For example, an investor buys a $100,000 CD, earns $1,000 in annual interest, pays a tax of $200, and incurs a loss of $3,500 in purchasing power on the invested principal. Total (nominal) income is $1,000; total real tax (nominal tax plus inflation tax) is $3,700.

This expropriation of private wealth is not accidental.

It is the joint product of the Fed’s near-zero interest-rate policies, the Fed’s money supply increases that underlie the current rate of inflation, and the tax rates established by Congress and administered by the IRS, including the taxation of nominal interest earnings even when they amount to real losses of capital, rather than genuine earnings. The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.

The expropriation amounts to a huge sum. For example, the value of the Non-M1 component of the monetary aggregate M2—consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts—currently amounts to more than $7.5 trillion. If investors lose 2.7% on this investment each year (nominal yield minus the sum of the amount lost via taxation of nominal interest and the amount lost via the inflation tax), the loss amounts to about $204 billion. Because this type of investment is not the whole of the investments subject to this effect, the total amount the government is expropriating comes to a much larger sum.

Because this taking continues year after year, so long as current conditions persist the continuation of this expropriation for another year or two will bring the cumulative amount expropriated in this fashion to more than $1 trillion since the onset of the recession and the Fed’s adoption of the near-zero interest-rate policies, along with its allowance of substantial growth of the money stock and the consequent decrease in the money’s purchasing power. This is a rough calculation for the purpose of illustration. My point does not hinge on a precise estimate, because any well-founded estimate is sure to amount to a gigantic sum.

In sum, the government’s monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investors—especially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement years—are being steadily wiped out. Astonishingly, this de facto robbery is being committed by a government that misses no opportunity to shed crocodile tears over how single-mindedly it seeks to protect the weak and helpless among us.

Originally from Big Government

NEW YORK (Reuters) - Private employers added more jobs than expected last month, though the lack of robust labor market growth reinforced the Federal Reserve's view that economic progress will likely be "frustratingly slow."

Originally from Reuters: Business News

NEW YORK (Reuters) - Private employers added more jobs than expected last month, though the lack of robust labor market growth reinforced the Federal Reserve's view that economic progress will likely be "frustratingly slow."

Originally from Reuters: Business News

NEW YORK (Reuters) - Private employers added more jobs than expected last month, though the lack of robust labor market growth reinforced the Federal Reserve's expectations for moderate economic growth.

Originally from Reuters: Business News

NEW YORK (Reuters) - U.S. private employers added more jobs than expected last month, though the lack of robust labor market growth reinforced the U.S. Federal Reserve's expectations for moderate economic growth.

Originally from Reuters: Business News

NEW YORK (Reuters) - U.S. private employers added more jobs than expected last month, though the lack of robust labor market growth reinforced the U.S. Federal Reserve's expectations for moderate economic growth.

Originally from Reuters: Business News

If any one thing estimated in the Commerce Department’s National Income and Product Accounts may be described as the engine of economic growth, private domestic business net investment is that thing. This variable has such tremendous importance because, if accurately gauged, it tells us better than any other measure how many resources are being devoted to building up the private business capital stock and improving it by innovation. An economy that has anemic private business net investment almost certainly will falter soon, if it is not doing so already.

Notice that every aspect of this awkwardly named variable is critical.

• First, it has to do with private investment, not so-called government investment. The latter, which looms fairly large in the official accounts, ought never to have been labeled as investment, because it comes about not as a result of wealth-seeking motives and rational economic calculation, but as a result of political motives, calculations, and actions that often clash with the creation of real wealth, rather than contributing to it.

• Second, we are looking here at business investment, excluding what the Bureau of Economic Analysis calls private “household and institutions” investment, which has somewhat murky underlying objectives, determinants, and consequences.

• Third, we are examining net, rather than gross, investment. The latter includes a large element of expenditure aimed merely at compensating for the wear and tear and obsolescence of the existing stock of private business capital. For example, even at the most recent peak for gross private domestic business investment, in the third quarter of 2007, it was running at $1,661 billion (annual rate), whereas net private domestic business investment was only $463 billion (annual rate), or about 28 percent of the total. (The investment data cited in this article are taken from Table 5.1, Saving and Investment by Sector, in the National Income and Product Accounts, accessed 02/16/11.)

It is obviously important that businesses compensate for ongoing depreciation of their existing stock of capital goods, which includes structures, tools and equipment, software, and inventories. But unless firms do more than make up for depreciation, they do not expand their productive capacity except to the extent that they can embed improved technology in their replacements for worn-out or obsolete capital goods. In general, economic growth requires net investment, and more rapid economic growth requires a greater rate of net investment.

With that essential idea in mind, let us examine what has happened recently to private domestic business net investment, which I will henceforth call simply net private investment. Such investment reached its recent cyclical peak in the third quarter of 2007, at $463 billion (annual rate). It then fell steadily for the next four quarters, reaching $336 billion in the third quarter of 2008. At that point, it plunged steeply, falling to only $159 billion, or by 53 percent, in the fourth quarter of 2008.

Although the financial-market panic that had flared up in late September 2008 began to subside early in 2009, net private investment continued to fall, becoming negative (-$53 billion, annual rate) in the first quarter of 2009 and even more negative in the second quarter (-$119 billion). Although some improvement began in the third quarter of 2009, net private investment remained negative during the third and fourth quarters. For the entire year 2009, the amount of net private investment amounted to a large negative amount (-$69 billion). So, in other words, the value of the private business capital stock fell by that amount. Hardly by coincidence, real GDP also fell substantially in 2009, by 2.6 percent.

In 2010, net private investment increased smartly for three quarters, reaching an annual rate of $270 billion in the third quarter, then contracted sharply—by almost 47 percent—to $144 billion in the fourth quarter. For the entire year, the amount of private net investment was $177 billion. Whether the collapse in the final quarter of 2010 will turn out to have been a fluke or the beginning of a longer-term decline, we shall have to wait to see.

According to the National Bureau of Economic Research, the most recent business-cycle peak occurred in December 2007, and the trough was reached in June 2009. As we have seen, net private investment peaked slightly sooner, in the third quarter of 2007. So, we are now more than three years past the economy’s overall peak and some 20 months past its trough, yet net private investment in the most recent quarter was running at only 31 percent of the annual rate at its previous peak.

Private net investment is currently running far below the rate required to sustain a rapid rate of economic growth. Real consumer spending, in contrast, peaked in the fourth quarter of 2007, fell only slightly (about 2.5 percent) to the second quarter of 2009, and by the fourth quarter of 2010 exceeded its previous quarterly peak (by almost 1 percent). Despite the wailing and gnashing of teeth among Keynesian economists and politicians with regard to allegedly inadequate consumption, a collapse of consumption is not to blame for the economy’s anemic recovery to date. However, looking elsewhere for the cause, we find that the economy’s true engine of growth—private business net investment—continues to sputter, running in the most recent quarter at less than a third of its previous peak rate and, for the entire year 2010, at only 40 percent of its rate for the entire year 2007.

Unless net private investment recovers more rapidly, the overall economy’s recovery is sure to remain slow, at best, certainly too slow to bring down significantly the high unemployment rate that has been stuck for a long time between 9 percent and 10 percent (and would be substantially greater if we took into account the millions who have left the labor force recently because they did not believe they could find a job even if they searched for one). As matters now stand, real stagnation is a likely prospect and, given the Fed’s massive ongoing purchases of Treasury debt and the stupendous amount of excess reserves in the commercial banks’ accounts at the Fed, stagflation also seems to be a credible expectation.

Investors continue to view the future with major misgivings, owing to the unsettled condition of the government’s future actions with regard to health care, financial regulations, energy regulations, taxation, and other matters that have serious implications for business costs and the security of private property rights in business capital and its returns. Although ObamaCare and the Dodd-Frank bill have already been enacted, these massive statutes leave scores of important details awaiting determination by administrative agencies and courts whose actions will be fiercely contested at every step. Future tax rates also remain up for grabs in Congress.

Nor are the investment-paralyzing uncertainties confined to the United States. Europe in particular continues to wrestle with the aftermath of the malinvestments and other distortions wrought in its asset markets and financial institutions during the boom of 2002-2006, and several countries teeter on the brink of sovereign default. Given the close linkages of national markets in today’s world, U.S. companies will feel a great impact from any new crises in Europe—something else to worry about as they contemplate the desirability of increasing their investment spending.

Of course, the major trading countries and their governments may ultimately find a way to muddle through. They have eventually weathered major storms in the past. Yet, however the world’s economy moves in the longer term, the immediate prospect for investors in the U.S. economy remains troubled, at best. A substantial, rapid recovery of private business net investment must await the clearing of these clouds. Until such a recovery does occur, however, overall economic prospects must remain rather gloomy for the near and medium terms.

Originally from Big Government

The private sector should replace government programs in supplying most mortgages as the United States moves to reform a housing finance system that cratered during the recent crisis, a top Federal Reserve official said on Wednesday.

Originally from All News, Video and Posts related to TOPIC: Federal Reserve

Lifted from comments at Economix on the distorted comparisons of public versus private wages:

These BLS data have been frequently cited to support the claim that public sector workers are paid more than private sector workers. However, as described at a February 2009 conference sponsored by the Federal Reserve Bank of Chicago, the wage differentials shown above do not adjust for differences in the types of jobs in private and public sectors. According to an analysis of the 2008 BLS data presented at the Fed conference, the main reason for the wage discrepancy is that private sector jobs are generally lower-skilled and thus lower-paid retail jobs, while public sector jobs are generally higher-skilled and higher-paid professional positions, although lower-skilled positions pay more in the public than in the private sector due to higher levels of public sector unionization. Representatives of the BLS pointed out that "..roughly two thirds of public sector jobs are professional and administrative, while 51% of private sector jobs are; and retail sales and food service jobs, relatively low-paid and often part-time positions, represent 20% of private sector jobs, but only 2% of public sector jobs."


According to the conference summary, "in low-skill jobs, public sector wages exceed private sector wages, but in high-skill jobs, public sector wages significantly lag private sector wages (benefits are not in this analysis). This is what some academics call the 'double imbalance'...the public sector is overpaying low-skill workers while underpaying high-skill workers." He also showed that when gender, race, education, union membership, age, occupation, and state of residence are *not* controlled for, "public sector employees appear to receive an 18.6% wage premium over private sector employees..." But in controlling for those factors, "public sector workers have a 4.5% wage discount as compared with private sector workers."

The benefits gap between the public and private sectors shown in the data is due not so much to an increase in public sector benefits, but to an erosion of benefits in the private sector over the past 20 years, although public sector benefits are sure to follow.

As anyone who has worked in a skilled professional position in both the public and private sectors can attest, most private sector professional jobs at similar skill levels pay significantly more, which is why the public sector is continuously losing highly-skilled employees to the private sector. (I should know, I'm an economist who quit a public sector job for a higher-paying private sector one.)

The link to the Federal Reserve conference summary is here.

Originally from Angry Bear