Is the Federal Reserve Right About Inflation?

The Federal Reserve

The Federal Reserve serves as the Central Bank of the United States, and whether you realize it or not, it plays an active role in the lives of every American. It makes decisions about monetary policy and interest rates that have a direct impact on the market and an indirect impact on everyone. The FED uses inflation targets to determine how much they can devalue (inflate) the currency. Many people believe that they created a massive money printing scheme cryptically called “Quantitative Easing“since QE1 converted almost worthless mortgage backed securities into currency.

The Fed regularly issues statements about how inflation isn’t really as bad as everyone says it is. [Read more...]

How “Excess Reserves” and the Money Multiplier Could Trigger Inflation

Banks have $2.5 trillion parked in “excess reserves”. This is money on deposit with the FED. The FED pays a miniscule amount of interest on these reserves but the banks are willing to loan it to the FED because it is easy no risk income. But it is also the reason that the money multiplier is falling! And when the money multiplier is falling the FED has a very hard time increasing the money supply. So if the FED really wants to increase the money supply all it has to do is decrease the interest rate it pays on excess reserves and the banks will find some place else to deploy it. Which could trigger massive inflation. ~Tim McMahon,editor

A Fed Policy Change That Will Increase the Gold Price

By Doug French, Contributing Editor

Excess ReservesFor investors having an interest in the price of gold, the catalyst for a recovery may be in sight. “Buy gold if you believe in math,” Brent Johnson, CEO of Santiago Capital, recently told CNBC viewers.

Johnson says central banks are printing money faster than gold is being pulled from the ground, so the gold price must go up. Johnson is on the right track, but central banks have partners in the money creation business—commercial banks. And while the Fed has been huffing and puffing and blowing up its balance sheet, banks have been licking their wounds and laying low. Money has been cheap on Wall Street the last five years, but hard to find on Main Street.

Professor Steve Hanke, professor of Applied Economics at Johns Hopkins University, explains that the Fed creates roughly 15% of the money supply (what he calls “state money”), while the banks create “bank money,” which is the remaining 85% of the money supply.

Higher interest rates actually provide banks the incentive to lend. So while investors worry about [Read more...]

Inflation Expectations and the FED

As inflation expectations rise the FED has less and less “wiggle room” to stimulate the economy.  But how do you measure “inflation expectations”? In today’s article, Chris Ciovacco will show us. ~Tim McMahon, editor

Low Inflation Leaves Fed’s No Taper Door Open

Fed Lost Control In 2008

FED leaves door openIn early December, we used Japan as an extreme example of why central banks are terrified of allowing their respective economies to slip into a deflationary spiral. Do the same concepts apply to the United States? They do. The federal government offers standard Treasury bonds (IEF) and Treasuries that provide some protection against inflation (TIP). The law of supply and demand tells us that when demand for TIPS is greater than the demand for standard Treasuries, investors are concerned about future inflation. Conversely, when demand for TIPS is lagging demand for standard Treasuries, investors are not too concerned about inflation eroding the value of their interest payments. The chart below shows the S&P 500 (top) and the ratio of TIP-to-IEF below it. Demand for TIPS started to drop significantly in July 2008 (left of point A). As inflation fears plummeted, it helped foreshadow the big drop in equities between points C and D. The chart below helps us understand the Fed’s concerns about possible deflation. [Read more...]

FED Looks for New Ways to Crank Up Money Supply

With all the talk about “Tapering” you’d think the FED was actually considering reducing it’s money pumping. But in actuality that is not it at all. The FED is afraid that it is creating a a bubble in the stock market so it is looking for ways to continue its pumping but shift it enough so that the money goes somewhere besides just to the stock market. In other words, it is still worried about the economy and realizes that it is doing more harm than good but feels trapped, so it is looking for new ways that might work better. If the FED can figure out how to free up the log jam of “excess reserves” held by the banks, liquidity could be sloshing around the economy before you know it and inflation could be back big time. This is a result of the money multiplier (a function of bank reserves) so even though the FED increased the monetary base M2 actually fell in 2013. See Is Bernanke Shooting Blanks.  In today’s article Chris Ciovacco looks at what the FED is thinking now.  ~Tim McMahon, editor.

Fed Considering Even More Stimulus For Economy

Minutes Show Another Stimulative Tool Being Considered

We made the case on July 30 the Fed’s desire to taper is about bubble management rather than confidence in the economy. Hard evidence aligning with a “the Fed is still concerned about the economy” stance was included in the most recently released Fed minutes:

Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.

FED's new Strategy

According to an op-ed penned by former Fed governor Alan Binder, the text above from the October Fed minutes could be significant. From The Wall Street Journal:

I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that “most” members of its policy committee think a change “could be worth considering,” that’s almost like saying they love the idea. That’s news because they haven’t loved it before.

Why Should We Care About Excess Reserves?

Banks are required to keep [Read more...]

The FDA Thinks You’re Stupid

I always bristle when I hear that the government is doing something for my own good. Generally, I prefer to decide what’s best for me by myself. Obviously, there are exceptions relating to criminal behavior and dishonesty but in most cases, I figure I am a big boy now and I can make my own decisions and take care of myself. In today’s article Chris Wood looks at another instance of the Federal Government pushing business around. In this case, it’s the FDA. Take a look and decide for yourself if this is where  the FDA should be focusing its efforts. ~Tim McMahon, editor.

The FDA Thinks You’re Stupid

Does the FDA think you’re too stupid to have access to your own genetic information?

It sure seems so.

The Food and Drug Administration, which bills itself as “the oldest comprehensive consumer protection agency in the US federal government,” probably stirs up more emotion among citizens than any other federal agency (save perhaps for the IRS). For good reason. The range of activities into which the FDA is “mandated” to poke its supervisory fingers is vast and includes most prominently the regulation of most types of foods, dietary supplements, medical devices, human and veterinary drugs, vaccines and other biological products, and cosmetics.

And this time it’s really gone too far.

DNAOn November 22, 2013, the FDA sent a warning letter to the well-known consumer genomics company 23andMe, ordering it to “immediately discontinue marketing” its only product.

For those of you who are not familiar with 23andMe, the company provides a “DNA Spit Kit” and “Personal Genome Service” (PGS) that supposedly reports on 240+ health conditions and traits and helps clients track their ancestral lineage. Basically, you send a saliva sample in via the “Spit Kit,” and the company analyzes the sample using a DNA sequencing machine.

It doesn’t give you a full readout of your genome, but tests for [Read more...]

What Causes Unemployment?

I recently received the following question about unemployment from a gentleman in Tanzania and I thought it was a good question and I would share the answer with you.

What Causes Unemployment?

I have been thinking on that situation of unemployment. Why does the rate of unemployment increase day after day? Does it mean that people have decreased the rate of thinking on creating jobs or there is any other reason? ~ Lioba from Dar-es-Salaam Tanzania.

What causes Unemployment?Here is my Response:

Lioba, That is a very good question. Unemployment is a function of how efficient the marketplace is. In a purely agricultural economy, there is no unemployment, everyone has to work, if they don’t work they don’t eat. So everyone including children work. But as systems become more complex there is more opportunity for “friction” or market inefficiencies. Theoretically, an efficient market would support every person who could produce more than he cost. In other words, if someone could be paid $10 but produced $12 worth of goods, any business would be happy to hire them. On the other hand, if the government sets a minimum wage of $12 the market is no longer efficient and anyone who cannot produce at least $14 worth of goods would not be hired. Therefore after an increase in the minimum wage, those producing $10, $11 and $12 worth of goods would now be uneconomical for the employer so they would be fired.

So the first cause of unemployment is minimum wage laws.

But there are other inefficiencies as well. If the government [Read more...]

Pushing on a String, Velocity of Money and Money Multiplier Conspire Against the FED

Under certain circumstances such as high national indebtedness, fear of bad economic times or when interest rates approach zero, monetary policy becomes ineffective in enticing consumers into spending more money.  Economists refer to this as “Pushing on a String” because if the basic demand doesn’t exist to induce people to spend money, it can’t be forced through monetary policy. Prime examples of this are during the Great Depression in the United States and in Japan since the 1990s. And as Lacy Hunt explains we are once again facing this problem in the United States since 2008. ~Tim McMahon, editor

Federal Reserve Policy Failures Are Mounting

By Lacy H. Hunt, Ph.D., Economist

The Fed’s capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve.

Federal Reserve Bank ChicagoHowever, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.

Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP): [Read more...]

BLS Recovering From Shutdown

The government shutdown is over and the U.S. Bureau of Labor Statistics is recovering from their unscheduled vacation. The United States federal government shutdown of 2013, lasted from October 1 to 17, 2013. Unemployment data for the month of September was due to be released on October 4th i.e. four working days into the shutdown.

Capitol-SenateSo the employment data is now scheduled for release on October 22nd. And the Consumer Price Index which is used to calculate the September inflation rate, which was scheduled for release on October 16th is now scheduled for release on October 30th. Although the shutdown inconvenienced vacationers wanting to see National Monuments and the National Zoo, did it really save any money? If past shutdowns are any indicator… probably not. Government employees will probably…  Read More

What’s So Bad about Shutting the Government Down?

It all seems a bit silly. On Monday the National Park Service declared that the open-air Veterans Memorial would be closed during the shutdown. After all they have to prove there is some “pain” involved in shutting down the government. But a bunch of 80-90 year old veterans would have none of it and they tore down the blockades.

So the park service made a 180-degree turn and declared their visits now constitute protected “First Amendment activity” .

Basically they had no choice, what were they going to do? Shoot the old war heroes? Put them all in jail? It’s like a bit of a joke. No their backs are against the wall, somehow they must impress on us common rabble how important the Government is… after all without the government the Bureau of Labor Statistics website isn’t being updated and the Washington Zoo is closed.  Somebody must do something quick… after all without the BLS we have no Inflation Data to publish… worry, worry, worry oh my what will we do?
Perhaps we will have to go to other free market sources like Gallup and MIT… hmmm, maybe the data will even be more reliable. The government better hurry up and reopen before everyone figures out they are better off with it closed.  ~Tim McMahon, editor

The Default Nobody Wants – Except Us!

by Bill Bonner

veterans memorialAll the commentators are talking about is the looming clash in Washington over the debt ceiling.

We didn’t read about it in any detail; it seems trivial. But if Congress doesn’t get off its collective butt and pass another law the government will have to shut down. That’s because a previous law requires the feds to stop borrowing when they reach a certain limit. [Read more...]

Taper Caper: The Consequences of Institutionalizing Q.E.

By Ben Hunt, Ph.D.

Previously, we discussed the Bureaucratic Capture of the FED and the institutionalizing of QE.

QE is adrenaline delivered via IV drip … a therapeutic, constant effort to maintain a certain quality of economic life. This may or may not be a positive development for Wall Street, depending on where you sit. I would argue that it’s a negative development for most individual and institutional investors. But it is music to the ears of every institutional political interest in Washington, regardless of party, and that’s what ultimately grants QE bureaucratic immortality.

It is impossible to overestimate the political inertia that exists within and around these massive Federal insurance programs, just as it is impossible to overestimate the electoral popularity (or market popularity, in the case of QE) of these programs. In the absence of a self-imposed wind-down plan – and that’s exactly what Bernanke laid out in June and exactly what he took back on Wednesday – there is no chance of any other governmental entity unwinding QE, even if they wanted to.

Oz_the-great-and-powerfulThe long-term consequences of this structural change in the Fed are immense and deserve many future Epsilon Theory notes. But in the short to medium-term it’s the procedural shifts that have been signaled this week that will impact markets. What does it mean for market behavior that Bernanke intentionally delivered an informational shock by forcing uncertainty into market expectations?

First, it’s important to note that this is not really an issue of credibility. The problem is not that people don’t believe that Bernanke means what he said on Wednesday, or that they won’t believe him if he says something different in October. The problem is that the Fed is entirely believable, but that the message is not one of “constructive ambiguity” as the academic papers written by Fed advisors intend, but one of vacillation and weakness of will.

From a game theory perspective, [Read more...]