Money/inflation, the Fed, Banking, Monetary Policy, Dollar, BTC, crypto, Gold

[DougMacG]

http://www.realclearpolitics.com/articles/2012/01/23/why_the_fed_slept_112849.html

January 23, 2012
Why the Fed Slept
By Robert Samuelson  Newsweek

WASHINGTON -- The recent release of the 2006 transcripts of the Federal Reserve's main policy-making body stimulated a small media frenzy. "Little Alarm Shown at Fed at Dawn of Housing Bust," headlined The Wall Street Journal. The Washington Post agreed: "As financial crisis brewed, Fed appeared unconcerned." The New York Times echoed: "Inside the Fed in '06: Coming Crisis, and Banter."

Comments from members of the Federal Open Market Committee (FOMC) now seem misguided. The first 2006 meeting was the last for retiring Fed Chairman Alan Greenspan. Janet Yellen -- then president of the Federal Reserve Bank of San Francisco and now Fed vice chair -- said "the situation you're handing off to your successor is a lot like a tennis racket with a gigantic sweet spot." Treasury Secretary Timothy Geithner -- then head of the Federal Reserve Bank of New York -- called Greenspan "terrific" and suggested his already exalted reputation might grow even more. There was no sense of a gathering crisis.

All true, but it begs the central question: why? The FOMC members weren't stupid, lazy or uninformed. They could draw on a massive staff of economists for analysis. And yet, they were clueless.

It wasn't that they didn't see the housing boom or recognize that it was ending. At 2006's first meeting, a senior Fed economist noted "that we are reaching an inflection point in the housing boom. The bigger question now is whether we will experience (a) gradual cooling ... or a more pronounced downturn."

At that same meeting, Fed Governor Susan Bies warned that mortgage lending standards had become dangerously lax. She explained that monthly payments were skyrocketing on mortgages with adjustable interest rates. She worried that many borrowers couldn't make the higher payments. The flagging housing boom concerned many Fed officials.

But they -- and most private economists -- didn't draw the proper conclusions. Hardly anyone asked whether lax mortgage lending would trigger a broad financial crisis, because America had not experienced a broad financial crisis since the Great Depression. A true financial crisis differs from falling stock prices, which are common. A financial crisis involves the failure of banks or other institutions, panic in many markets and a pervasive loss of wealth and confidence.

Such a crisis was not within the personal experience of members of the FOMC -- or anyone. Nor was it part of mainstream economic thinking. Because it hadn't happened in decades, it was assumed that it couldn't happen. There had been previous real estate busts. From 1964 to 1966, new housing starts fell 24 percent; from 1972 to 1975, 51 percent; from 1979 to 1982, 39 percent; from 1988 to 1991, 32 percent. Declining home construction had fed economic slowdowns or recessions. So the natural question seemed: Would this happen now? The answer seemed "no." The overall economy was strong. This is the most obvious reason for an oblivious FOMC.

But it is not the main reason, which remains widely unrecognized. Since the 1960s, the thrust of economic policy-making has been to smooth business cycles. Democracies crave prolonged prosperity, and economists have posed as technocrats with the tools to cure the boom-and-bust cycles of pre-World War II capitalism. It turns out that they exaggerated what they knew and could do.

There's a paradox to economic policy. The more it succeeds at prolonging short-term prosperity, the more it inspires long-run destabilizing behavior by businesses, banks, consumers, investors and government. If they think basic stability is assured, they will assume greater risks -- loosen credit standards, borrow more, engage in more speculation, relax wage and price behavior -- that ultimately make the economy less stable. Long booms threaten deep busts.

Since World War II, this has happened twice. In the 1960s, the so-called "new economics" promised that, by manipulating the budget and interest rates, it could stifle business cycles. The ensuing boom spanned the 1960s; the bust extended to the early 1980s and included inflation of 13 percent, four recessions and peak monthly unemployment of 10.8 percent. The latest episode was the so-called Great Moderation, largely paralleling Greenspan's Fed tenure (1987-2006), when there were only two mild recessions (1990-91 and 2001). We are now in the bust.

The Fed slept mainly because it overlooked the possibility of boom-bust. It didn't recognize that its success at sustaining prosperity -- for which Greenspan was lionized -- might sow the seeds of a larger failure. It bought into an overblown notion of economic "progress."

The Great Moderation begat the Great Recession. One implication is that an economy less stable in the short run becomes more stable in the long run by reminding everyone of risk and uncertainty. Sacrificing long booms may muffle subsequent busts. But this notion appeals to neither economists nor politicians. Ironically, the central lesson of the financial crisis is ignored.

[Crafty_Dog]

By DAVID MALPASS
On Wednesday the Federal Reserve shared its thoughts on the course of interest rates—but not on the implications for the value of the dollar. The two can't be disconnected. The Fed's rationale on interest rates determines the stability of the dollar, which is the economic bedrock for price stability, capital inflows, growth and jobs.

Obfuscation on the dollar works fine for Wall Street, which reaps billions in profits from the Fed's unstable dollar policy. It trades currencies and volatility, and makes a bundle protecting investors from the Fed by selling complex derivatives, interest-rate swaps, even triple-leveraged gold and currency funds pitched on television.

After the Fed's statement, markets bid gold above $1,700 per ounce, the latest insult to the Founders' clear intent for the dollar's value to be strong and stable relative to gold and silver over the life of our republic.

Dollar weakness doesn't work at all for economic well-being. The corollary to the Fed's policy of manipulating interest rates downward at the expense of savers is declining median incomes. It's no coincidence that inflation-adjusted median incomes rose in the sound-money booms of the Reagan and Clinton administrations and fell in the weak-dollar busts during the Carter, Bush and Obama years. When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.

The economy and median incomes would do much better if the Fed said simply that it would set interest rates as best it could in order to keep the dollar's value strong and stable in coming decades, with the goal of attracting capital, maintaining price stability and encouraging full employment.

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 .Yet the Fed is adamant that somehow business confidence will benefit by the Fed sharing its guesses on equilibrium interest rates—which after all are far from a science—but not its vital thinking on the future value of the dollar.

The Fed's status in Washington is unique and practically unassailable. It alone is a colossal self-funder operating outside the congressional appropriations process. Even the CIA and Navy Seals don't enjoy the Fed's unlimited spending power, checked only by its handpicked board and senior leadership.

Americans know this is a big problem but can't stop it. Texas Congressman Ron Paul has created an intensely popular presidential campaign around the need for stable money and limitations on the size (the Fed employs 22,000 people) and power of the Fed.

Yet legislation is moving in the opposite direction. Dodd-Frank's open-ended mandate has added another layer to the Fed's power, instructing it to control bank risk (good luck), protect the financial welfare of consumers, and even advise on mortgage bailouts.

Wednesday's meeting result could have been worse. The Fed might have announced more purchases of U.S. Treasurys and mortgage securities. It already owns nearly $2 trillion worth and has no limit on its expenditures, which fall completely outside the federal budget. Bond traders have been pleading with the Fed to announce further purchases so they can buy first and score big profits.

Stopping Fed asset purchases would help growth by allowing market distortions to subside. Its clear there's been no benefit from the Fed's unprecedented balance-sheet expansion, up 250% since 2008: no increase in private-sector credit (flat since 2009) and no impetus to the economy, which has been particularly weak in the quarters following Fed asset purchases.

Near-zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries. One of the most fundamental principles of economics is that holding prices artificially low causes shortages. When something of value is free, it runs out fast and only the well-connected get any. Interest rates are the price for credit and shouldn't be controlled at zero. It causes cheap credit for those with special access but shortages for those without—primarily new and small businesses and those seeking private-sector mortgages.

The economy's exit from Fed dominance of bond markets wouldn't be traumatic. The Fed has been fully sterilizing its asset purchases, meaning all the cash it has used to buy bonds is still contained at the Fed, not multiplied in the private sector. The Fed accomplishes this through bank regulation and by borrowing from banks at above-market interest rates—$1.5 trillion as of Jan. 18.

The Fed can reverse this process, letting its bond portfolio mature and the private sector smoothly reabsorb the debt by drawing down the excess reserves it has on deposit at the Fed. Other bond holders may see price pressure as the Fed finally sells its portfolio, but principal losses on bonds are small compared to fluctuations in equity markets. If the Fed adopts the pro-growth stance of letting markets allocate capital and the dollar stabilize, equity market gains will heavily outweigh bond market losses, lowering the cost of capital in the private sector.

The Fed's responsibility is to create confidence in price stability and the dollar, thus providing the best monetary policy environment for full employment. Most central banks operate on this principle. Instead, the Fed has systematically undermined economic confidence by promising to maintain zero interest rates for privileged borrowers. That policy will have to stop if the U.S. is to again achieve impressive growth.

Mr. Malpass, a deputy assistant Treasury secretary in the Reagan administration, is president of Encima Global LLC.

[Crafty_Dog]

Maybe he knows something?

http://money.cnn.com/2012/02/02/news/economy/federal_reserve_stocks/index.htm?iid=HP_LN

[Crafty_Dog]

Tuesday, February 07, 2012
Text Size:   
From Porter Stansberry in the S&A Digest:

Most people still don't understand the risks we face as a nation because of our feckless leaders and their reckless ignorance of basic economics.

What follows are facts. Nothing in this essay will be conjecture or opinion. I will make no forecast – at least not in this essay. So please, stop the political name-calling... and grow up. The problems we face are ours. All of ours. It doesn't matter how we got here. It only matters that we begin to deal with these issues – soon. If we don't begin to solve these core financial problems, they will certainly destroy our country.

Today, our national federal debt far exceeds $15 trillion. This alone is not a serious problem. The interest we pay on these debts is small – thanks to the trust of our creditors, who, for the moment, continue to believe America is a safe bet.

So… what's the problem? The main problem is the amount of debt we owe continues to increase at a faster and faster pace. This is exceptionally dangerous for two simple reasons. First, there's simple math. When numbers compound, the result is geometric expansion. And that's happening right now with our national debt because we continue to borrow money to pay the interest. And we have done so for about 40 years. Think about it this way: How big would your debts be today if you'd been using credit cards to pay your mortgage for the last several decades?

Even worse, our debts are compounding at an accelerating pace because we lack the political ability to limit the federal government's spending. Please understand… I'm not pointing the finger at any politician or either political party. I'm simply pointing out a fact: This year's $3.6 trillion federal budget is 20% larger than the entire 2008 budget.

And while our government has grown at a record pace, our economy hasn't. It has hardly grown at all. Thus, this will be the fourth year in a row we set a record for deficit spending. Never before in peacetime has our government borrowed this much money. And now, it's borrowing record amounts every year.

This combination of borrowing record amounts of money (during peacetime) and continuing to borrow the money we need to pay the interest is setting the stage for a massive increase in total federal debt levels. Why is this happening? Don't our leaders realize they can't continue on this path?

Well… the problem isn't so simple to fix. What we face isn't a $15 trillion problem. It's actually much, much bigger…

The $15.3 trillion we owe today is really only a minor down payment on promises the federal government made to its most important creditors – the American people. Not yet included in our debt totals are the $15 trillion shortfall in Social Security (thanks to the Democrats), the $20 trillion unfunded prescription drug benefit (thanks to the Republicans), or the $115 trillion unfunded Medicare liability (thanks to the Democrats and Republicans).

Most people ignore these looming liabilities because they obviously will never be paid. In fact, the federal government's total obligations today – including all future obligations – is more than $1 million per taxpayer. And that's if you assume all 112 million taxpayers really count. (They don't. Only about 50 million people in the U.S. pay any substantial amount of federal income taxes.)

But here's the funny part… While everyone seems ready to ignore these obligations, we've already begun to pay them. Our spending on Medicare and Social Security already greatly exceeds the $800 billion in payroll taxes we're collecting to pay these benefits. (Total spending on Social Security and Medicare last year was more than $1.5 trillion.) And that means our actual debts will continue to compound faster and faster every year, assuming nothing is done to curtail these benefits.

I want to make sure you understand this fact: It doesn't matter how much (or how little) Congress chooses to cut its discretionary budget. The promises we've already made to Americans in the form of Social Security and Medicare guarantee that our debts will continue to compound faster and faster, every year. How do I know?

Once again… let's return to basic math. Right now, we're spending (at the federal level) $2.4 trillion per year on transfer payments and interest on our national debt. That doesn't include any of the other functions of the government – nothing else. Meanwhile, we are only collecting $2.3 trillion a year in income, payroll, and corporate taxes.

Let me make sure you understand this: Even if we cut every other government program – including the entire military budget – the federal revenue collected still wouldn't be enough to merely cover the costs of our direct transfer payments. Not even close. And every year, these payments will automatically grow.

Here's another way to look at the same basic numbers, but on a macro scale. Right now, total government spending in the U.S. equals $7 trillion per year. (That's federal, state, and local.) Total interest paid in the U.S. economy on all debts, public and private, equals $3.7 trillion. The size of our total economy is only $15 trillion. Thus, we are currently spending $10 trillion (out of $15 trillion) on our government and debt. This is unprecedented in all of American history. This financial structure is unsustainable – and extremely unstable, given our debt levels.

There's the bigger problem (yes, it gets worse). The political solution to our soaring deficits will most likely be higher taxes. Yes, technically that's a prediction… And I promised no predictions in this piece. But let's face it. You will never see the federal government make dramatic, meaningful cuts to its promised benefits – not when half the country pays no federal taxes and more than 40 million people are on food stamps. So it's not really a prediction – it's a political reality. Will higher taxes save us?

No. You cannot squeeze blood from a stone. The federal debt isn't the largest obligation we suffer under. Americans hold nearly $1 trillion in credit card debt. We hold nearly $1 trillion in student loans. Total personal debt in America is larger ($15.9 trillion) than all of the federal debt. In total – adding up all of our debts, public and private – Americans owe close to $700,000 per family. It is not possible to finance our federal government's spending via taxes because the American people are broke. Total debt levels in America are the highest – by far – of any developed nation.

Tax the rich, you say. Well, of course. But marginal rates in many places are already greater than 50%. Tax rates this high don't work… They actually reduce tax revenues as people move their economic activities elsewhere to avoid taxes… or even simply forgo working.

Don't forget, the very wealthy can simply leave. James Cameron – director of blockbuster movies Titanic and Avatar – recently did just that, buying a 2,500-acre farm in [New Zealand]. John Malone, chairman of Liberty Media, likewise told the Wall Street Journal that he bought a farm on the Canadian border specifically so that he could leave the country whenever he wanted. "We own 18 miles on the border, so we can cross. Anytime we want to, we can get away."

Think I'm exaggerating the risks of real capital flight from the U.S.? Well… let's look at the facts. According to the latest IRS report, the number of Americans renouncing their U.S. citizenship has increased ninefold since 2008.

How then will the government's spending be financed? Well, I promised no predictions. Not today. But I will remind you that since 2008, the Federal Reserve has expanded the monetary base from roughly $800 billion to nearly $3 trillion. That, again, is a fact. Feel free to draw your own conclusions about what the Federal Reserve is likely to do in the future if the U.S. Treasury is faced with a financial need that can't be met.

You may do whatever you'd like with [this essay]. Feel free to pass it around to your friends – or anyone else who may be interested in these ideas. Be prepared for lots of nonsense about making the rich pay their "fair share" and pie-in-the-sky projections about how the entitlement system could easily be reformed.

[ccp]

"In fact, the federal government's total obligations today – including all future obligations – is more than $1 million per taxpayer. And that's if you assume all 112 million taxpayers really count. (They don't. Only about 50 million people in the U.S. pay any substantial amount of federal income taxes.)"

This answers the questions under the government spending thread about the burden on "real" taxpayers who are supporting not only themselves and family but several others.

Otherwise it sounds like the crises in Kally4rnia is the same as the Federal Government.

It is so bad or about ready to be so bad -

What is amazing man in the MSM look at people who write articles like this and laugh and smirk and belittle them. 

Well health insurance in NJ goes up 10% every year.

Prescription drug program under Bush cost more than SS?  I didn't know that.  And we have some pushing for Jeb Bush?
No thanks.  The first brought us Clinton the second brought us Brock.  Enuf said.

[G M]

The hard reboot is coming. Plan accordingly.

[Crafty_Dog]

WSJ:

By LIAM DENNING
Fondlers, as Warren Buffett might call them, now wander the corridors of the world's central banks. Show them some love, gold bugs.

The identity of who buys gold has changed radically, as the latest report from the World Gold Council confirms. Just five years ago, jewelry accounted for two-thirds of gold demand. Last year, it represented less than half. Yet gold demand increased 13% overall in that time, and the price more than doubled.

Beyond dental crowns and those fancy cables that electronics retailers are always pushing on you, gold's utility is limited largely, paraphrasing the Oracle of Omaha, to fondling. As an investment, it yields nothing.

But if bridegrooms and rappers aren't buying, then who is? Fearful investors are one critical group. Between 2009 and 2011, demand for physical gold and exchange-traded funds jumped by 9.4 million troy ounces, more than offsetting the 6.6-million-ounce drop in jewelry consumption.

Most of that surge in investment demand happened in 2009, however. Flows into ETFs, in metal terms, slumped in 2011.

Increasingly, central banks, especially in emerging markets, have been the marginal buyers of gold. In 2011, an incremental 6.2 million ounces of supply came from miners and recycling. Demand for jewelry and industrial and dental applications, however, dropped by 1.8 million ounces.

 
Investors bought just 2.4 million ounces—enough to offset the drop in demand elsewhere, but nowhere near enough to absorb growing supply. Enter the central bankers, who purchased 11.7 million ounces. Having bolstered gold by debasing the paper money they print, they now help by buying the metal itself.

For gold bugs used to vilifying central bankers, it must be discomfiting to rely on them for support. And given how central-bank buying masks the impact of weak jewelry demand, slowing increases in investment flows and higher supply, it probably should.
========
MARC: Given the huge cost increases, it makes perfect sense that jewelry, industrial, and dental application demand has dropped.

[ccp]

I don't know if this accounts for the price but China is buying large amounts.  Indians are buying too though I don't know if as much:

http://www.forbes.com/sites/gordonchang/2012/01/29/why-are-the-chinese-buying-record-quantities-of-gold/

[G M]

Wyoming House advances doomsday bill
 
 

By JEREMY PELZER Star-Tribune capital bureau | Posted: Friday, February 24, 2012 6:00 pm |

CHEYENNE — State representatives on Friday advanced legislation to launch a study into what Wyoming should do in the event of a complete economic or political collapse in the United States.
 
House Bill 85 passed on first reading by a voice vote. It would create a state-run government continuity task force, which would study and prepare Wyoming for potential catastrophes, from disruptions in food and energy supplies to a complete meltdown of the federal government.
 
The task force would look at the feasibility of
 
Wyoming issuing its own alternative currency, if needed. And House members approved an amendment Friday by state Rep. Kermit Brown, R-Laramie, to have the task force also examine conditions under which Wyoming would need to implement its own military draft, raise a standing army, and acquire strike aircraft and an aircraft carrier.
 
The bill’s sponsor, state Rep. David Miller, R-Riverton, has said he doesn’t anticipate any major crises hitting America anytime soon. But with the national debt exceeding $15 trillion and protest movements growing around the country, Miller said Wyoming — which has a comparatively good economy and sound state finances — needs to make sure it’s protected should any unexpected emergency hit the U.S.
 
Several House members spoke in favor of the legislation, saying there was no harm in preparing for the worst.
 
“I don’t think there’s anyone in this room today what would come up here and say that this country is in good shape, that the world is stable and in good shape — because that is clearly not the case,” state Rep. Lorraine Quarberg, R-Thermopolis, said. “To put your head in the sand and think that nothing bad’s going to happen, and that we have no obligation to the citizens of the state of Wyoming to at least have the discussion, is not healthy.”
 
Wyoming’s Department of Homeland Security already has a statewide crisis management plan, but it doesn’t cover what the state should do in the event of an extreme nationwide political or economic collapse. In recent years, lawmakers in at least six states have introduced legislation to create a state currency, all unsuccessfully.
 
The task force would include state lawmakers, the director of the Wyoming Department of Homeland Security, the Wyoming attorney general and the Wyoming National Guard’s adjutant general, among others.
 
The bill must pass two more House votes before it would head to the Senate for consideration. The original bill appropriated $32,000 for the task force, though the Joint Appropriations Committee slashed that number in half earlier this week.
 
University of Wyoming political science professor Jim King said the potential for a complete unraveling of the U.S. government and economy is “astronomically remote” in the foreseeable future.
 
But King noted that the federal government set up a Continuity of Government Commission in 2002, of which former U.S. Sen. Al Simpson, R-Wyo., was co-chairman. However, King said he didn’t know of any states that had established a similar board.
 

Contact capital bureau reporter Jeremy Pelzer at 307-632-1244 or jeremy.pelzer@trib,com


Read more: http://trib.com/news/state-and-regional/govt-and-politics/wyoming-house-advances-doomsday-bill/article_af6e1b2b-0ca4-553f-85e9-92c0f58c00bd.html

[Crafty_Dog]

A U.S. Boon in Low-Cost Borrowing

http://www.nytimes.com/2012/02/28/business/era-of-low-cost-borrowing-benefits-federal-government.html?nl=todaysheadlines&emc=tha25

WASHINGTON — These are the best of times for the world’s most ravenous borrower, the United States of America.
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A combination of unusual and unsustainable forces has pushed the cost of borrowing as low as it has ever been, so low that many investors effectively are paying to lend money to the government.
Investors buying five-year federal debt are accepting such low interest rates that inflation is on pace to reduce the value of their investments by more than 1 percent each year. Yet demand for United States Treasuries remains much greater than the supply.
The glut of cheap money has allowed the government to keep its annual deficits much smaller than it had expected, holding down the growth of the federal debt.
The Treasury Department, seeking to milk the moment, may start issuing debt with negative interest rates, making investors pay for the privilege of lending money to the government.
But a wide range of experts agrees that the bubble will eventually pop. The question, they say, is not if but when. There are signs that the era of low borrowing costs may be approaching its end, as the domestic economy shows signs of strength and Europe pulls back from economic immolation.
“We are in an unusual period right now in which net interest expense is temporarily depressed,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech last week. “This will not last.”
People have been predicting that rates will rise ever since the 2008 financial crisis sent investors piling into the safe haven of federal debt, driving down rates.
But what looked like a brief plunge has become a broad trough. The average rates that the government pays to investors in its debt have declined in each of the last five years, from 4.92 percent at the end of 2006 to 2.24 percent at the end of 2011. Rates have edged even lower so far this year. Adjusting for inflation, the government is borrowing at virtually zero cost.
As a result, while the size of the public debt more than doubled over the last five years, from less than $5 trillion to more than $10 trillion, the government’s annual interest payments remained about the same.
In 2006, the bill was $226.6 billion. Last year, the bill was $227.1 billion. The numbers exclude debt held within the government, by the Social Security trust fund, and the cost of interest on those debts.
The danger, Mr. Dudley said last week, is that the current situation may lead some to underestimate the long-term cost of the debt when rates inevitably rise. The administration’s recent budget projects that rates will increase gradually over the next decade, including about 1 percentage point this year. If the increase is just 1 percentage point larger this year, the deficit will grow by $13 billion. If the same higher trajectory holds over 10 years, the additional interest payments would approach $1 trillion.
The basic reason to expect higher rates is that investors usually demand compensation as a borrower’s debts increase. And the government projects that its debt will grow rapidly in coming years.
The ratings agency Standard & Poor’s last year removed some categories of United States debt from its list of the world’s least risky investments, citing its concerns about the ability of the government to contain the growth through cutbacks in planned spending or increases in federal revenue.
So far, however, investors have grown only more clamorous for Treasuries.
The demand reflects the weakness of the domestic economy, and the Federal Reserve’s determined campaign to drive down the cost of borrowing by purchasing more than $1.6 trillion in Treasury securities.
One less obvious benefit is that about 10 percent of federal interest payments are now collected by the central bank, which returns almost all of the money to Treasury because it is required by law to remit its profits.
The United States also has benefited from concerns about the health of European governments. The International Monetary Fund estimates that the benefits of investors fleeing Europe to buy Treasuries have roughly offset any other damage to the American economy from the struggles of the euro zone.
“There’s a good argument that the net impact on the U.S. economy is zero, a little more or less,” the I.M.F.’s chief economist, Olivier Blanchard, said in a recent interview.
All of this has prompted a flight to safety so determined that investors are lining up to accept the near certainty of small losses on Treasuries to avoid the possibility of larger losses on stocks, corporate bonds or the debt of other countries.
This month, when the government auctioned off one-year debt, Treasury agreed to pay 14 cents for every $100 that it borrowed, or 0.14 percent. Last week at the most recent auction of five-year debt, it agreed to pay 88 cents a year for every $100 that it borrowed. At a 2 percent inflation rate, investors would need to be paid $2 for every $100 they lent just to keep pace.
Treasury is now reviewing whether to let prospective lenders offer negative interest rates, meaning that they would pay the government rather than vice versa. It is expected to make a decision by May.
Some economists say they believe rates will remain low for years. David Greenlaw, an economist at Morgan Stanley, forecasts little change through 2013.
“While there have been some bright spots in the data, the economy probably won’t be strong enough to justify rate increases,” Mr. Greenlaw said.
Other economists expect that rates will begin to rise later this year, as the domestic economy improves and fears about Europe abate.
John Ryding, chief economist at RDQ Economics in New York, expects rates on 10-year Treasuries to reach 3.75 percent this year, up from about 2 percent now, as investors awaken from what he described as “extreme risk aversion.”
But he added that he didn’t understand why rates had remained low for this long.
“I have to say that it’s a bit of an enigma,” Mr. Ryding said. “It’s a conundrum.”

[Crafty_Dog]

Fed Done: So Is Gold To view this article, Click Here
Brian S. Wesbury - Chief Economist
Date: 3/1/2012
It was a Fed-watchers delight when Ben Bernanke told the US Congress that there would be no QE3 and that the next move by the Fed would be to tighten monetary policy.
Oops! That’s not what he said. There were no quotable quotes to that affect. In fact, lots of people thought he said the opposite. A Wall Street Journal headline read Recovery Worries Weigh on Stocks, as “Bernanke took a cautious view of the U.S. recovery.” The Washington Post said “Bernanke Strikes Cautious Tone….” If you take these headlines at face value, Bernanke was dour and his testimony was about a weak economy and the potential for more ease.
 
But the gold market did not miss the message – gold futures fell $77 yesterday. And stocks were down on disappointment about the potential for more quantitative easing (QE3). We agree with gold and read the testimony in the opposite way of the popular press.
 
Bernanke’s testimony actually showed incredulity at the strength of the economy. He explained that job growth has been strong, but then said that the “decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected.” The Fed is still stuck in the potential GDP trap. It believes the economy is well below its potential and not growing at its trend. As a result, the Fed is surprised that inflation remains above its forecasts, and it is incredulous that job growth has been strong.
 
Many look to the Fed for the final word on the economy and, therefore, this incredulity is interpreted as a dour outlook. In fact, the Fed, along with many forecasters, has been way too pessimistic on the US economy. But the data keeps coming in more strongly than the Fed thinks it should and it can no longer deny it.
 
What this means is that Bernanke cannot possibly justify QE3. He wants to justify it, but he can’t. This can be understood clearly by analyzing an answer to a question in the House Financial Services Committee, when Bernanke said “it is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can’t go below zero.”
 
What he is talking about here is that some Taylor Rule-type-estimates say that the federal funds rate should be negative. These models use GDP relative to potential, unemployment relative to the natural rate and a target inflation rate, to estimate the correct target for short-term interest rates. But because rates can’t go below zero, the Fed wants to do more quantitative easing.
 
This raises an important dilemma for anyone who does not view the world through models alone. If the necessary interest rate really is negative, but rates cannot go below zero, then how is the economy growing? The Fed says it is growing because of QE1 and QE2. We seriously doubt this proposition because there has been no QE3 and the economy and stock market are both doing better. Moreover, even though the Fed’s balance sheet has grown, M2 has not accelerated. See charts below. The monetary base has exploded, but M2 has not, and if M2 is not rapidly expanding, then QE has not boosted the money supply.
 
The bottom line is that even though Bernanke wants to make the case for QE3, he can’t. In fact, better news on the economy has cut the Fed off from doing more massive easing projects. In the end, we believe the Fed has finally run out of justification for its excessively easy monetary policy. As the quarters ahead unfold, the prospects of more ease will continue to wane. This is good news for stocks – which do not do well with accelerating inflation – but, it is bad news for gold. Gold is done….and so is the Fed.

[Crafty_Dog]

BEIJING—Fresh data suggest China is moderating its appetite for investing in U.S. securities, a trend that could mean lower flows of cheap capital from Beijing and a possible rise in borrowing costs across the American economy.

An analysis of U.S. Treasury data suggests China, with $3.2 trillion in foreign-exchange reserves, has begun to rapidly diversify its currencies portfolio.

"It clearly indicates China's intention not to put all its eggs in one basket," said Lu Feng, director of Peking University's China Macroeconomic Research Center.

China still remains a strong buyer of U.S. debt. China's holdings of U.S. securities rose 7% to $1.73 trillion as of June 30, an increase of $115 billion from 12 months earlier, Treasury data show, but the percentage of dollar holdings in China's foreign-exchange reserves fell to a decade low of 54% in the year that ended June 30, from 65% in 2010. The Treasury data provided the most comprehensive read on China's holdings of U.S. securities available.

A comparison with China's own foreign-exchange reserve data suggests a marked reduction in the share of reserves parked in dollars. But difficulties in measuring China's holdings, exacerbated by what some analysts call an attempt by Beijing to hide the allocation of its reserves, mean that it is possible the data overstate the trend.

The purchase of U.S. securities amounted to just 15% of the increase in China's foreign-exchange reserves in the 12 months ended June 30, down from 45% in 2010 and an average of 63% over the past five years, according to calculations based on information published by the U.S. Treasury and the Chinese government.

Economists have long warned that if China starts to cut back its purchases of U.S. securities, U.S. interest rates could climb, damaging the American economy and ratcheting up the government's borrowing costs.

"We've been worried about China refraining from buying U.S. debt for three years now, and it really has not occurred," said David Ader, head of government bond strategy at CRT Capital in Stamford, Conn.

China's foreign-exchange reserves have ballooned over the past two years, and the country has plenty of money to support the U.S. and other debt issuers. "China has been diversifying for several years," Mr. Ader said. "It's been incremental and they've told us that much. Simply diversifying into another currency certainly made sense."

Some economists said China's move was well-timed. "It would be optimal for China to adopt a contrarian strategy and pick times when the dollar is strong to aggressively diversify the currency composition of its reserve portfolio away from the dollar," said Eswar Prasad, a China scholar at the Brookings Institution.

China won't say how it invests its foreign-exchange reserves, which have grown rapidly over the past decade. Beijing has used its control over the exchange rate as a key plank of its economic-development strategy and has racked up immense trade surpluses. That requires China's State Administration of Foreign Exchange to invest the proceeds overseas. In the past, SAFE has hinted that about two-thirds of its stash is held in U.S. securities, a percentage that generally has been in line with annual data collected by the U.S. Treasury. Officials at China's foreign-exchange agency didn't respond to questions faxed to them on Thursday.

China's leaders have made increasingly strong statements that they would like to help the 17-nation euro zone deal with its troubles. In February, Premier Wen Jiabao, speaking at the EU-China summit, said "Europe is a main investment destination for China to diversify its foreign-exchange reserves."

Klaus Regling, the chief executive of the European Financial Stability Facility—the euro-zone's rescue fund for Greece and other financially troubled nations—was in Beijing in October for talks with SAFE. Regular talks have continued since then and EFSF documents show that Asia, apart from Japan—essentially China—accounted for between 14% and 24% of purchases for three EFSF bond sales worth €13 billion in the first half of 2011. That was before Mr. Regling's Beijing trip.

China has many reasons to try to reduce its exposure to the dollar. They include very low yields paid by Treasurys and a vulnerability to U.S. decisions on managing its debt, which could lead to inflation that would erode the value of those holdings. Last summer's political debate over raising the U.S. debt ceiling sparked worries that the U.S. could default on obligations.

China also would have good reason for deepening its ties to other currencies. Buying some undervalued European assets during the debt crisis over the past year might have been a smart move. And China has an interest in supporting its exports by helping bolster the currencies of its biggest customers.

Meantime, overall global demand for U.S. securities has remained strong as investors seek a haven during troubled times. Foreign holdings of U.S. securities increased $1.8 trillion, or about 17%, to $12.52 trillion over 12 months to June, according to the Treasury data.

To arrive at the percentage of dollar holdings in China's reserves, U.S. Treasury data on Chinese purchases of U.S. securities must be compared with Beijing data on its foreign-exchange holdings. That calculation is complicated by the impact of currency movements on the value of China's reserves. Even so, it is clear that China is purchasing fewer dollar-based securities than it had in the past.

 
Reuters
 .While China's holdings of U.S. securities rose 7% in the year that ended in June, China's total foreign-exchange holdings increased by 30% to $3.2 trillion, an increase of $743 billion. Essentially, the pace of China's purchases of U.S. securities didn't come close to matching the pace of expansion of its foreign-reserve pile, reducing the percentage of dollar holdings.

Monthly figures on China's holdings of U.S. Treasurys have been seen as less reliable than the annual survey.

But the Treasury has now introduced a new survey technique intended to improve the accuracy of the data.

The latest monthly numbers show China's holdings of U.S. Treasurys dropped to $1.15 trillion in December, falling $156 billion since the period covered by the annual survey. That suggests China's diversification away from dollars may have continued in the second half of 2011.

It is also unclear how much of Chinese dollar holdings are reflected in the latest data. China could have dollar-based assets outside the U.S., held by fund managers in other countries or on deposit in the international banking system.

Where China has pulled back on U.S. securities purchases, others have stepped up. Japan has more than compensated for the difference and other investors in the U.S. and abroad have done the same. That has supported Treasury prices and largely kept the 10-year yield below 2%—lower than it was last summer before any pullback from China.

[Crafty_Dog]

One business story these days is how companies are crashing the debt markets to raise money at today's bargain rates. The same goes for the world's biggest borrower, Uncle Sam, which is also quietly benefitting from historically low interest rates that cannot last. The latter deserves more attention because the next President and Congress are likely to be stuck paying the bill when rates inevitably rise.

***
First, a couple facts: the U.S. Treasury currently has $10.7 trillion in outstanding publicly-held debt, and more than $8 trillion of it must be repaid within the next seven years. More than $5 trillion falls due within the next 36 months.

This relatively short-term debt sheet is no accident. Like a subprime borrower opting for a low teaser rate, the government has structured its debt to keep current interest payments low. This is a political temptation for every Administration because it means lower budget deficits on its watch.

The Obama Administration has added close to $5 trillion to the U.S. debt. So it much prefers to finance all of this at a rate, say, of 0.3% in two-year notes than at 2% in 10-year notes. The nearby charts show how federal debt has soared during the Obama years, yet net federal interest payments are lower than they were in 2007 and lower than they were in nominal dollars even in 1997 when public debt was a mere $3.8 trillion. This year the debt is expected to reach $11.58 trillion.

The problem is that this disguises the magnitude of the debt threat and stores up trouble for future Presidents and taxpayers. And maybe not far in the future.

The Congressional Budget Office (CBO), for example, forecasts that in the period 2014-2017 the average rates on three-month Treasury bills will rise to 2% from less than 0.1% today. CBO expects average rates on 10-year Treasury notes to climb to 3.8%, from 2.03% now. CBO adds that every 100 basis-point rise in government borrowing costs over the next decade will trigger almost $1 trillion in new federal debt.

Enlarge Image

Close...As of January 2012, taking into account all the various notes and bonds issued by the federal government to the public, Uncle Sam is paying an average interest rate of 2.24%. The government expects to spend in the neighborhood of $225 billion this year making interest payments.

That may seem like a large sum, and it is, but consider what happens if rates quickly rise back toward their historical norms. As recently as early 2007 the government was paying 5% on its debt, which is the average of the last two decades, though of course rates could always go higher. During the 1990s, the average was well above 6%.

If the government had to pay the 5% rate that it was offering before the financial crisis on today's debt, the annual interest payments would be $535 billion, twice CBO's projection for total federal spending on Medicaid this year. If Uncle Sam had to pay 6% on its debt, the annual interest payments of $642 billion would surpass total federal spending on Medicare, currently $484 billion. Such a radical change in budget math could trigger a political panic and intense pressure for tax increases, perhaps even for a European-style value-added tax.

Should Treasury be much more aggressive now in seeking to borrow for the long term at today's low rates? This would seem to be a sensible call, especially given that everyone except perhaps the Federal Reserve Board of Governors expects rates to rise.

Treasury says it is aware of the dangers and is acting on it. In a September 2010 letter to the Journal, Mary J. Miller, Treasury's assistant secretary for financial markets, reported that 55% of Treasury debt was maturing within three years and that this figure was declining. She added that Treasury planned to continue lengthening the average maturity of its debt.

Ms. Miller and her Treasury colleagues have been true to her word. Today, 52% of the debt is due within three years.

The problem is that, amid the astounding Obama-era increase in federal debt, Ms. Miller's letter arrived almost $2 trillion ago. So while short-term debt may be declining modestly as a percentage of Treasury paper, it's part of a much bigger debt pie.

Of course, Treasury can't decide entirely on its own to rely on longer-term financing. Investors watching the mounting Obama debt pile probably wouldn't agree to finance most of it for 30 years at a low rate. The risk of future rate increases or inflation are too great.

Not that we can tell how much private market demand exists for 30-year bonds anyway. The Federal Reserve is now among the largest buyers as it implements "Operation Twist" and other monetary adventures.

This is a useful reminder that fiscal authorities aren't the only ones who will have trouble exiting from this era of profligate government. Sooner or later the Fed has to manage the withdrawal from its historically accommodative monetary policy. Even now many investors suspect that the Fed is keeping rates so low for so long in part to finance federal debt on easier terms.

If the economy gains steam—say, in a new Administration that reforms the tax code, cuts spending and reduces regulation—the Fed may have to raise rates to forestall inflation. But if it raises rates, interest payments on the debt will soar, the deficit may not fall from its Obama trillion-dollar levels, and pressure could build for a tax increase.

***
President Obama may not mind this outcome but Mitt Romney and Rick Santorum should, which is why they need to talk about this fiscal nitroglycerin that Mr. Obama and Fed Chairman Ben Bernanke have created. The two Republicans might also take a moment to wonder how much they really want this job. The next Presidential term may be spent trying to defuse the Obama debt bomb.

[DougMacG]

IIRC, the precedent for this was Sec Rubin under Bill Clinton.  He made a very large and irreponsible gamble of putting long term debt out at short term rates to save money in the shart term that panned out quite well where they were able through other actions (capital gains tax cuts, welfare reform, spending restraints, internet buildout, etc.) balance the budget for a short time (in a bubble economy).

Now that kind of irresponsibility is the norm even though now we KNOW interest rates must go up and that we will be fiscally punished for doing this.  This is not in the context of throwing a Hail Mary to balance the budget.  This is in the context of multi-year, trillion dollar deficits, spending at nearly 1.5 times revenues, immeasurable entitlement liabilities accelerating and releasing yet another budget that reaches balance at date certain: NEVER.

[Crafty_Dog]

No Sign of QE3 To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 3/13/2012
Absolutely no sign of a third round of quantitative easing. That was the big news from today’s statement from the Federal Reserve. The stance of monetary policy remains unchanged.
The only alterations to the Fed’s statement, compared to what it released after the last meeting on January 25, indicated somewhat faster economic growth and higher inflation.
 
The Fed said unemployment “has declined notably,” growth in coming quarters should be “moderate” (last time it said “modest”), and that strains in global financial markets have eased. On inflation, the Fed acknowledged that crude oil and gas prices have risen lately, but says these increases will only keep inflation up “temporarily.”
 
Otherwise, the Fed made no changes to interest rates, the size of its balance sheet, or its policy of paying interest on excess reserves. In other words, no third round of quantitative easing. Given the re-acceleration in the economy we continue to think QE3 is a ship that will never sail.
 
Once again, the only dissent came from Richmond Bank President Jeffrey Lacker, who believes economic conditions will warrant raising rates before late 2014.

[G M]

http://www.cnbc.com/id/46721564

The Federal Reserve "is playing a game with us to some extent" by maintaining low interest rates, Pimco founder Bill Gross told CNBC, who also expects another round of quantitative easing.

 
"I think the Fed will continue to do this for a long time and subordinate investors in the bond market," said Gross, who runs the world's largest bond fund.

Gross spoke Tuesday after the Fed left its policy unchanged. While acknowledging signs of strength in the U.S. economy, it reiterated that unemployment  is too high and interest rates would remain near zero until late 2014. The Fed did not say whether there would be another round of quantitative easing  .

Gross said there has to be a QE3.

"Whenever the Fed and other central banks have paused with their quantitative easing programs since 2009, stock prices have fallen and economies have slowed. To my mind there’s little hope for the private markets substituting for central banks anytime soon," he said.

[Crafty_Dog]

Bill Gross is a very, very smart guy and he is a subject matter expert for this issue.  That said, he most recent big prediction and attendant decision to get out of treasuries completely was a whiff-- interest rates went down even further after he exited.  Of course that doesn't mean he's wrong now , , ,

[G M]

Bill Gross is a very, very smart guy and he is a subject matter expert for this issue.  That said, he most recent big prediction and attendant decision to get out of treasuries completely was a whiff-- interest rates went down even further after he exited.  Of course that doesn't mean he's wrong now , , ,

I'd be curious to see who has the better track record, Gross or Krug-bury.

If interest rates go up, what happens to our massive debt?

[G M]

http://www.thestreet.com/story/11449757/1/federal-reserves-sterilized-qe3-may-get-messy.html

NEW YORK (TheStreet) -- Reports that the Federal Reserve is toying with the idea of a "sterilized" U.S. Treasury bond trade as a way to push liquidity into the markets without igniting inflation sounds like a great deal.
 
Which, as it turns out, is exactly the point: Flood the economy with money without sounding inflationary alarm and causing equity investors to flee the U.S. markets in droves.
 
Under the proposed third quantitative easing plan (QE3), first reported by The Wall Street Journal, the Fed will buy mortgage-backed securities (MBS) and longer-dated U.S. Treasury bonds. That would give big investors already loaded up with Treasuries additional buying power, pushing down long-term yields and freeing up capital.
 
The Federal Reserve will pay for the program by doing what central banks do best -- printing money. But turning up the Fed printing presses is the first signal to the equity markets that asset-destroying inflation can't be far behind.
 
Any stimulus would be canceled out by a stock market swoon.

In order to dance around the specter of inflation, the Fed would then "sterilize" the trade by locking up the bonds with the buyers for a short period of a month or less. That would, in theory, damn up the liquidity at the source and keep from it flooding into the broader economy where it would push up prices.
 
The sterilization part of the Fed's trade idea is known as a reverse repurchase agreement, or reverse repo, and its entire purpose is to convince the stock market that inflation is off the table, said Arvind Krishnamurthy, professor of finance at the Kellogg School of Management at Northwestern University.
 

[DougMacG]

CPI is calculated by removing those volatile items that go up the most.  Some argue the real inflation rate is higher:

http://www.nypost.com/p/news/national/price_clubbed_in_jRGGyS9wKfAKjxAs0bkVnO

America’s real inflation rate has moved above 8%

Read it at the link, click on the ads.

[G M]

http://www.bloomberg.com/news/2012-03-14/watch-bernanke-s-little-inflation-capsize-u-s-amity-shlaes.html

A little is all right. That’s the message Federal Reserve Chairman Ben S. Bernanke has been giving out recently when asked about the evidence of inflation in the U.S. recovery.

Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”



About Amity Shlaes
 
Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations and the author of the best-sellers "The Forgotten Man: A New History of the Great Depression" and "The Greedy Hand: Why Taxes Drive Americans Crazy."

 “Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

**Read it all.

[DougMacG]

I don't favor a return to the gold standard for reasons different from the Fed Chair.

http://www.reuters.com/article/2012/03/20/us-usa-fed-gold-idUSBRE82J17A20120320

Bernanke says gold standard wouldn't solve problems

WASHINGTON | Tue Mar 20, 2012 4:55pm EDT

(Reuters) - Federal Reserve Chairman Ben Bernanke on Tuesday took aim at proponents of the gold standard, saying that such a system handicaps the government's ability to address economic conditions.

Bernanke spoke in the first of a series of four public lectures at George Washington University that is the central bank's latest effort to counter a raft of negative public sentiment that has arisen from its handling of the financial crisis. The former Princeton economics professor delivers a second lecture on Thursday and two more next week.

"Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy," Bernanke said. "Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity - so that's the reverse of what a central bank would normally do today." (more at the link)

[G M]

http://www.bloomberg.com/news/2012-03-14/watch-bernanke-s-little-inflation-capsize-u-s-amity-shlaes.html

A little is all right. That’s the message Federal Reserve Chairman Ben S. Bernanke has been giving out recently when asked about the evidence of inflation in the U.S. recovery.

Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”



About Amity Shlaes
 
Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations and the author of the best-sellers "The Forgotten Man: A New History of the Great Depression" and "The Greedy Hand: Why Taxes Drive Americans Crazy."

 “Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

**Read it all.

http://www.cnbc.com/id/46923999

'Massive Wealth Destruction' Is About to Hit Investors: Faber
Published: Monday, 2 Apr 2012 | 8:12 AM ET Text Size By: Jeff Cox
CNBC.com Senior Writer
   

Runaway government debts have triggered uncontrolled money printing that in turn will lead to inflation that will decimate portfolios, according to the latest forecast from "Dr. Doom" Marc Faber.

Investors, particularly those in the "well-to-do" category, could lose about half their total wealth in the next few years as the consequences pile up from global government debt problems, Faber, the author of the Gloom Boom & Doom Report, said on CNBC.

Efforts to stem the debt problems have seen the Federal Reserve  expand its balance sheet to nearly $3 trillion and other central banks implement aggressive liquidity programs as well, which Faber sees producing devastating inflation  as well as other consequences.

"Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse," he said. "Maybe all of it will happen, but at different times."

Noted for his pessimistic forecasts and gold advocacy, Faber nonetheless lately has been telling investors that stocks are a good choice as central bank policies pump up asset prices.

He reiterated both his commitment to stocks and gold, but said investors also can find value in other hard assets, particularly in distressed properties in the U.S. South.



"In Georgia, in Arizona, in Florida their property values will not collapse much more and will stabilize, so I think to own some land and some property, not necessarily in the financial centers but in the secondary cities, these are desirable investments relatively speaking," Faber said.

[DougMacG]

... The Sound Dollar Act of 2012, a subject of hearings at the Joint Economic Committee this week, has a number of useful provisions. It removes the confusing dual mandate of "maximum employment" and "stable prices," which was put into the Federal Reserve Act during the interventionist wave of the 1970s. Instead it gives the Federal Reserve a single goal of "long-run price stability."  - John Taylor, professor of economics at Stanford

http://online.wsj.com/article/SB10001424052702303816504577307403971824094.html?mod=googlenews_wsj

    OPINION
    Updated March 28, 2012

The Dangers of an Interventionist Fed
A century of experience shows that rules lead to prosperity and discretion leads to trouble.

By JOHN B. TAYLOR

America has now had nearly a century of decision-making experience under the Federal Reserve Act, first passed in 1913. Thanks to careful empirical research by Milton Friedman, Anna Schwartz and Allan Meltzer, we have plenty of evidence that rules-based monetary policies work and unpredictable discretionary policies don't. Now is the time to act on that evidence.

The Fed's mistake of slowing money growth at the onset of the Great Depression is well-known. And from the mid-1960s through the '70s, the Fed intervened with discretionary go-stop changes in money growth that led to frequent recessions, high unemployment, low economic growth, and high inflation.

In contrast, through much of the 1980s and '90s and into the past decade the Fed ran a more predictable, rules-based policy with a clear price-stability goal. This eventually led to lower unemployment, lower interest rates, longer expansions, and stronger economic growth.

Unfortunately the Fed has returned to its discretionary, unpredictable ways, and the results are not good. Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom. It then overshot the needed increase in interest rates, which worsened the bust. Now, with inflation and the economy picking up, the Fed is again veering into "too low for too long" territory. Policy indicators suggest the need for higher interest rates, while the Fed signals a zero rate through 2014.

It is difficult to overstate the extraordinary nature of the recent interventions, even if you ignore actions during the 2008 panic, including the Bear Stearns and AIG bailouts, and consider only the subsequent two rounds of "quantitative easing" (QE1 and QE2)—the large-scale purchases of mortgage-backed securities and longer-term Treasurys.

The Fed's discretion is now virtually unlimited. To pay for mortgages and other large-scale securities purchases, all it has to do is credit banks with electronic deposits—called reserve balances or bank money. The result is the explosion of bank money (as shown in the nearby chart), which now dwarfs the Fed's emergency response to the 9/11 attacks.

Before the 2008 panic, reserve balances were about $10 billion. By the end of 2011 they were about $1,600 billion. If the Fed had stopped with the emergency responses of the 2008 panic, instead of embarking on QE1 and QE2, reserve balances would now be normal.

This large expansion of bank money creates risks. If it is not undone, then the bank money will eventually pour out into the economy, causing inflation. If it is undone too quickly, banks may find it hard to adjust and pull back on loans.

The very existence of quantitative easing as a policy tool creates unpredictability, as traders speculate whether and when the Fed will intervene again. That the Fed can, if it chooses, intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans—creates more uncertainty and raises questions about why an independent agency of government should have such power.

The combination of the prolonged zero interest rate and the bloated supply of bank money is potentially lethal. The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself—i.e., the Fed determines the interest rate by declaring what it will pay on bank deposits at the Fed without regard for the supply and demand for money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended consequences throughout the economy.

For all these reasons, the Federal Reserve should move to a less interventionist and more rules-based policy of the kind that has worked in the past. With due deliberation, it should make plans to raise the interest rate and develop a credible strategy to reduce its outsized portfolio of Treasurys and mortgage-backed securities.

History shows that reform of the Federal Reserve Act is also needed to incentivize rules-based policy and prevent a return to excessive discretion. The Sound Dollar Act of 2012, a subject of hearings at the Joint Economic Committee this week, has a number of useful provisions. It removes the confusing dual mandate of "maximum employment" and "stable prices," which was put into the Federal Reserve Act during the interventionist wave of the 1970s. Instead it gives the Federal Reserve a single goal of "long-run price stability."

The term "long-run" clarifies that the goal does not require the Fed to overreact to the short-run ups and downs in inflation. The single goal wouldn't stop the Fed from providing liquidity when money markets freeze up, or serving as lender of last resort to banks during a panic, or reducing the interest rate in a recession.

Some worry that a focus on the goal of price stability would lead to more unemployment. History shows the opposite.

One reason the Fed kept its interest rate too low for too long in 2003-05 was concern that raising the interest rate would increase unemployment in the short run. However, an unintended effect was the great recession and very high unemployment. A single mandate would help the Fed avoid such mistakes. Since 2008, the Fed has explicitly cited the dual mandate to justify its extraordinary interventions, including quantitative easing. Removing the dual mandate will remove that excuse.

A single goal of long-run price stability should be supplemented with a requirement that the Fed establish and report its strategy for setting the interest rate or the money supply to achieve that goal. If the Fed deviates from its strategy, it should provide a written explanation and testify in Congress. To further limit discretion, restraints on the composition of the Federal Reserve's portfolio are also appropriate, as called for in the Sound Dollar Act.

Giving all Federal Reserve district bank presidents—not only the New York Fed president—voting rights at every Federal Open Market Committee meeting, as does the Sound Dollar Act, would ensure that the entire Federal Reserve system is involved in designing and implementing the strategy. It would offset any tendency for decisions to favor certain sectors or groups in the economy.

Such reforms would lead to a more predictable policy centered on maintaining the purchasing power of the dollar. They would provide an appropriate degree of oversight by the political authorities without interfering in the Fed's day-to-day operations.

Mr. Taylor is a professor of economics at Stanford and a senior fellow at the Hoover Institution. This op-ed is adapted from his testimony this week before the Joint Economic Committee, which drew on his book "First Principles: Five Keys to Restoring America's Prosperity." (W.W. Norton, 2012).

[G M]

What’s Your Plan?


By Mark Steyn

April 14, 2012 4:00 A.M.

 
In the end, free societies get the governments they deserve. So, if the American people wish to choose their chief executive on the basis of the “war on women,” the Republican theocrats’ confiscation of your contraceptives, or whatever other mangy and emaciated rabbit the Great Magician produces from his threadbare topper, they are free to do so, and they will live with the consequences. This week’s bit of ham-handed misdirection was “the Buffett Rule,” a not-so-disguised capital-gains-tax hike designed to ensure that Warren Buffett pays as much tax as his secretary. If the alleged Sage of Omaha is as exercised about this as his public effusions would suggest, I’d be in favor of repealing the prohibition on Bills of Attainder, and the old boy could sleep easy at night. But instead every other American “millionaire” will be subject to the new rule — because, as President Obama said this week, it “will help us close our deficit.”
 
Wow! Who knew it was that easy?
 
A-hem. According to the Congressional Budget Office (the same nonpartisan bean-counters who project that on Obama’s current spending proposals the entire U.S. economy will cease to exist in 2027) Obama’s Buffett Rule will raise — stand well back — $3.2 billion per year. Or what the United States government currently borrows every 17 hours. So in 514 years it will have raised enough additional revenue to pay off the 2011 federal budget deficit. If you want to mark it on your calendar, 514 years is the year 2526. There’s a sporting chance Joe Biden will have retired from public life by then, but other than that I’m not making any bets.
 
Let’s go back to that presidential sound bite:
 
“It will help us close our deficit.”
 
I’m beginning to suspect that the Oval Office teleprompter may be malfunctioning, or that perhaps that NBC News producer who “accidentally” edited George Zimmerman into sounding like a racist has now edited the smartest president of all time into sounding like an idiot. Either way, it appears the last seven words fell off the end of the sentence. What the president meant to say was:
 
“It will help us close our deficit . . . for 2011 . . . within a mere half millennium!” [Pause for deafening cheers and standing ovation.]
 
Sometimes societies become too stupid to survive. A nation that takes Barack Obama’s current rhetorical flourishes seriously is certainly well advanced along that dismal path. The current federal debt burden works out at about $140,000 per federal taxpayer, and President Obama is proposing to increase both debt and taxes. Are you one of those taxpayers? How much more do you want added to your $140,000 debt burden? As the Great Magician would say, pick a number, any number. Sorry, you’re wrong. Whatever you’re willing to bear, he’s got more lined up for you.
 
Even if you’re absolved from federal income tax, you too require enough people willing to keep the racket going, and America is already pushing forward into territory the rest of the developed world is steering well clear of. On April Fools’ Day, Japan and the United Kingdom both cut their corporate-tax rates, leaving the United States even more of an outlier, with the highest corporate-tax rate in the developed world: The top rate of federal corporate tax in the U.S. is 35 percent. It’s 15 percent in Canada. Which is next door.
 
Well, who cares about corporations? Only out of touch dilettante playboys like Mitt Romney who — hmm, let’s see what I can produce from the bottom of the top hat — put his dog on the roof of his car as recently as 1984! That’s where your gran’ma will be under the Republicans’ plan, while your contraceptiveless teenage daughter is giving birth on the hood. “Corporations are people, my friend,” said Mitt, in what’s generally regarded as a damaging sound bite by all the smart people who think Obama’s plan to use the Buffett Rule to “close the deficit” this side of the fourth millennium is a stroke of genius.
 
But Mitt’s not wrong. In the end, a corporation doesn’t pay tax. The marble atrium of Global MegaCorp’s corporate HQ is indifferent to the tax rate; the Articles of Incorporation in the bottom drawer of the chairman’s desk couldn’t care less. Every dollar of “corporate” tax has to be fished out the pocket of a real flesh-and-blood human being, whether shareholder, employee, or customer.
 
And that’s the problem. For what Obama’s spending, there aren’t enough of them, or us, or “the rich” — and there never will be. There is only one Warren Buffett. He is the third-wealthiest person on the planet. The first is a Mexican, and beyond the reach of the U.S. Treasury. Mr. Buffett is worth $44 billion. If he donated the entire lot to the government of the United States, they would blow through it within four and a half days. Okay, so who’s the fourth-richest guy? He’s French. And the fifth guy’s a Spaniard. Number six is Larry Ellison. He’s American, but that loser is only worth $36 billion. So he and Buffett between them could keep the United States government going for a week. The next-richest American is Christy Walton of Walmart, and she’s barely a semi-Buffett. So her $25 billion will see you through a couple of days of the second week. There aren’t a lot of other semi-Buffetts, but, if you scrounge around, you can rustle up some hemi-demi-semi-Buffetts: If you confiscate the total wealth of the Forbes 400 richest Americans it comes to $1.5 trillion, which is just a little less than the Obama budget deficit for a year.
 
But there are a lot of “millionaires,” depending on how you define it. Jerry Brown, California’s reborn Governor Moonbeam, defines his “millionaire’s tax” as applying to anybody who earns more than $250,000 a year. “Anybody who makes $250,000 becomes a millionaire very quickly,” he explained. “You just need four years.” This may be the simplest wealth-creation advice since Bob Hope was asked to respond back in 1967 to reports that he was worth half a billion dollars. “Anyone can do it,” said Hope. “All you have to do is save a million dollars a year for 500 years.”
 
It’s that easy, folks! Like President Obama says, all you have to do to pay off his 2011 deficit is save $3.2 billion a year for 500 years.
 
He thinks you’re stupid. Warren Buffett thinks you’re stupid. Maybe you are. But not everyone is. And America’s foreign debtors understand that “the Buffett Rule” is just another pathetic sleight of hand en route to the collapse of the U.S. dollar, and of American society shortly thereafter.
 
When he’s not talking up his buddy Warren, the Half-Millennium Man has been staggering around demonizing Paul Ryan’s plan, which would lead, he says, to the end of the weather service, air-traffic control, national parks, law enforcement, and drinkable water. Given what’s at stake, you might think then that the president would have an alternative plan. But he has none, save for his proposal to pay off the 2011 federal deficit by the year 2526. The Obama No-Plan plan means the end of everything. That really ought to be the only slogan the Republicans need this fall:
 
What’s your plan?
 
And all you hear are crickets chirping.
 
But don’t worry, they’re federally funded crickets, chirping at a research facility in North Carolina investigating whether there’s any correlation between chirping crickets and the inability of America’s political institutions to effect meaningful course correction.
 
Hey, relax. The Buffett Rule will pick up the tab.

[DougMacG]

Thank you to bigdog for posting the text of the oath of office taken by Supreme Court Justices over on the the constitutional issues thread including the history of the oath: http://dogbrothers.com/phpBB2/index.php?topic=1850.msg61804#msg61804

I would also would like to know the actual text of the oath of office for Federal Reserve Governors, and begin to hold them to it.

As I understand it, each member of the Board of Governors of the Federal Reserve Bank of the United States shall "within fifteen days after notice of appointment make and subscribe to the oath of office."
http://www.law.cornell.edu/uscode/text/12/242

There is a press release for every time a new Governor takes the oath, but I have not seen exactly what is that oath. The closest I could find is this oath for directors of individual Federal Reserve Banks swearing their allegiance - to the bank!

[JDN]

I,the undersigned,having been duly elected a Class A director of the Federal Reserve Bank of______________________ do solemnly swear (or affirm) that I will, so far as the duty devolves on me, diligently and honestly administer the affairs of said Bank fairly and impartially and without discrimination in favor of or against any member bank or banks; and that I will not knowingly violate, or willingly permit to be violated, any of the provisions of the statutes of the United States applicable to this Bank.

http://www.kc.frb.org/publicat/aboutus/director-oaths-of-office.pdf

[DougMacG]

Yes that is the wrong answer I already found.  Can someone post the oath that Bernancke took?  He is not 'elected', a 'Director', or a 'Class A' Director: "Class A and class B directors are elected by member banks in the District" http://www.federalreserve.gov/pubs/frseries/frseri4.htm

[Crafty_Dog]

Doug:

It was a well-intentioned effort.

GM: 

Great article by Steyn. In that is about a possible tax, it belongs on the Tax thread 

Doug: 

Former Fed president (Kansas?  Texas?) Herman Cain was making this very, very important point during his campaign.   I wonder what the prospects are for this bill to gather some serious attention?

[G M]

How US debt risks dollar doomsday
 
By SCOTT S. POWELL
 
Last Updated: 12:27 AM, May 1, 2012
 
Posted: 10:23 PM, April 30, 2012



The US dollar is getting perilously close to losing its status as the world’s reserve currency. Should it cross the line, the 2008 financial crisis could look like a summer storm.
 
Yes, worries about insolvency in Europe dominate the headlines. Last week, Standard & Poor’s cut Spain’s bond rating to BBB+ — a clear sign that Europe’s financial crisis is far from over.

But America’s escalating debt problem is far more likely to precipitate a truly global crisis, because the dollar has for decades played such a central role in the world economy.
 
How bad is the US problem? Former Treasury official Lawrence Goodman recently pointed out that investors are shunning US bonds and notes; the lack of other buyers forced the Federal Reserve to buy “a stunning . . . 61 percent of the total net issuance of US government debt” last year. Like many others, he warns that ballooning debt puts the US economy at risk for a sharp correction.
 


Reuters
 
The greenback’s losing to the yuan.
 



But the even larger risk is the potential loss of the dollar’s “reserve currency” status — a key support of the world economy for the last four decades.
 
It started with the 1973 Saudi commitment to accept only US dollars as payment for oil, followed by OPEC’s 1975 agreement to trade only in dollars. Trading of other commodities came to be priced in dollars, reinforcing the dollar’s “reserve” status.
 
As a result, central banks worldwide have held onto large reserves of dollars to facilitate trade. That, in turn, has enabled the US to print much larger amounts of its currency, with seemingly little inflationary consequences. It’s also made it easier for Americans to import more than they export, to consume more than they produce, and to spend more than they earn.

But all that is changing rapidly.

A number of countries are abandoning the dollar for the Chinese yuan. Last December, Japan and China agreed to trade in yen and yuan. In January, the 10 nations of the Association of Southeast Asian Nations finalized a non-dollar credit agreement equivalent to $240 billion, strengthening their economies’ links with China, Japan and South Korea.

That same month, Chinese Premier Wen Jiabao signed a currency-swap agreement with the United Arab Emirates, which holds 7 percent of the world’s oil reserves. Iran has agreed to accept rubles and yuan in trade with Russia and China, and now is trading oil with India in rupees and gold.
 
In late March, the China Development Bank agreed with its counterparts in Brazil, Russia, India and South Africa to eschew dollar lending and extend credit to each other in their own respective currencies.

With global demand for dollars falling, central banks around the world will inevitably reduce their dollar reserves. That selloff further weakens the dollar against other currencies and in turn drives up inflation.

All this comes as US federal debt is soaring, adding to concerns about the future value of that debt and of the dollar. It’s suddenly much easier to imagine a dollar collapse — which would be a highly unexpected occurrence, known as a “black swan” event. This would precipitate unprecedented disruption, because the dollar remains the world’s most important currency.
 
Let’s hope we can avert a global crisis triggered by reckless US government spending. What’s needed is new leadership in Washington with the courage to get our fiscal house in order and to defend the dollar against attack in a competitive global market.

Scott S. Powell is a Discovery Institute senior fellow.
 
scottp@discovery.org


Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/how_us_debt_risks_dollar_doomsday_j8dxHSYWUa22QpSN7ttOIL

[DougMacG]

http://www.realclearpolitics.com/video/2012/04/30/ron_paul_vs_paul_krugman_on_economics.html

Two thought leaders, from both extremes. 

Ron Paul is right about inflation being theft but a little off and confusing to me on monetary and Fed issues.  He says in his book 'End the Fed' if you read it closely he does not say end the Fed but end the monopoly of the Fed.  Okay, but IMHO:  We just need a better managed, sole function Fed, manage our currency to protect its value; our currency value should not be manipulated to compensate for policy errors elsewhere in government.  We don't need a full return to gold convertibility, but to track a 'basket of goods and commodities' that includes gold.  We already track it we just don't act on the information.

Krugman doesn't say we are in a recession, he says we are in a depression.  We should expand the monetary base and deficit spending far far more than we are right now in his view.

Interesting disagreement over their citing of Milton Friedman on the Fed's role in the (other) Great Depression.

[Crafty_Dog]

Data Watch
________________________________________
Producer Price Index (PPI) declined 0.2% in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 5/11/2012
The Producer Price Index (PPI) declined 0.2% in April, versus the consensus expectation of no change. Producer prices are up 1.9% versus a year ago.
Energy prices fell 1.4%, while food prices rose 0.2%. The “core” PPI, which excludes food and energy, increased 0.2%.

Consumer goods prices were down 0.3% in April, but are up 1.9% versus last year. Capital equipment prices rose 0.2% in April and are up 2.0% in the past year.

Core intermediate goods prices rose 0.2% in April and are up 1.4% versus a year ago. Core crude prices were down 1.8% in April, and are down 3.6% versus a year ago.

Implications: Due to falling energy prices, overall producer prices were down 0.2% in April, coming in lower than the consensus expected. That’s good news for companies making purchases, but no justification for another round of quantitative easing. “Core” prices, which exclude food and energy, and which the Federal Reserve claims are more important than the overall number, were up 0.2% in April. The increase in core prices was led by pharmaceutical drugs which accounted for about a quarter of the “core” PPI increase. Core prices are now up 2.7% from last year, which is faster than the overall PPI. In the past three months, the core PPI is up at a 2.5% annual rate while overall prices are up at a 0.6% rate. We don’t expect that to last. Due to loose monetary policy, these inflation measures will head higher later this year. Taking a look further down the producer pipeline, core intermediate goods prices are accelerating, up at a 7.5% annual rate in the past three months, although core crude prices are down at a 3.7% annual rate in the same timeframe. Be careful of the stories you may read in the coming weeks about how the Federal Reserve was right all along and that inflation is not a problem. By later this year, the conventional wisdom will realize this was temporary.

[Crafty_Dog]

http://online.wsj.com/article/SB10001424052702303360504577408320289444822.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Fed Flags Fiscal Risks
By KRISTINA PETERSON And JEFFREY SPARSHOTT

Federal Reserve officials in April flagged concerns over U.S. fiscal policy and its impact on the economy, according to minutes of their last policy meeting released Wednesday.

Central bank officials overall thought the economic outlook was still on a path of "moderate" economic growth that would gradually pick up, according to minutes of the Federal Open Market Committee's April 24-25 meeting, released after the customary three-week lag.

While Fed officials have indicated they aren't planning to take any immediate new actions to spur economic growth, "several" officials "indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough," the minutes said.

Among the concerns that Fed officials noted last month was the U.S. fiscal situation. Federal Reserve Chairman Ben Bernanke has warned lawmakers about the potential effect of the "fiscal cliff," which includes the Bush-era tax cuts and a payroll-tax break expiring at the end of this year, as well as more than $1 trillion in spending cuts scheduled to kick in at the beginning of 2013.

Fed officials expected that the government sector would be a "drag on economic growth over coming quarters" and saw the U.S. fiscal situation as a "sizable risk." If lawmakers don't reach agreement on a plan for the federal budget, "a sharp fiscal tightening could occur at the start of 2013," the minutes noted. That uncertainty "could lead businesses to defer hiring and investment," officials worried at the meeting. Agreement on a long-term plan could alleviate some of that uncertainty.

Fed officials also debated how much of the weakness in the job market would ease when the economic recovery accelerates.

"Participants expressed a range of views on the extent to which the unemployment rate was being boosted by structural factors such as mismatches between the skills of unemployed workers and those being demanded by hiring firms," the minutes stated.

The officials also explored making changes to the Fed's new communications strategy and agreed to discuss further the advantages and drawbacks of using "simple monetary rules" as "guides for monetary policy decision making" and for external communications about their policy.

In April, the Fed's policy-making body reaffirmed its plan to keep short-term interest rates near zero through late 2014. However, projections released on the same day showed some Fed officials expected the central bank to start raising interest rates earlier than they had in January.

For instance, only four Fed officials now expect the Fed to wait until 2015 for its first-interest rate increase, down from six in January. The minutes noted that views ranged in part because officials had different projections for how the economic recovery would proceed and the pace of the decline in unemployment. Some officials also thought it was appropriate to keep short-term interest rates lower for "a longer period" when the federal-funds rate had been near zero.

All 17 Fed officials make quarterly projections, but only the central bank's board of governors and five regional bank presidents vote on the path of monetary policy at FOMC meetings.

The Fed also decided to change the schedule for the meetings of its policy-making body. The FOMC will now meet over two days, instead of alternating one- and two-day meetings. Quarterly economic projections will be released and Mr. Bernanke will conduct a press conference after the meetings in the third month of each quarter: March, June, September and December.

Some Fed officials had "expressed a preference for the two-day format over the one-day format" and Mr. Bernanke raised the possibility of changing the meeting schedule "to incorporate more two-day meetings to allow additional time for discussion," the minutes noted.

In their assessment of the economy at the April meeting, Fed officials viewed the economy as continuing to "expand moderately." Strains in global financial markets continued to pose a risk. Labor-market conditions showed improvement, although Fed officials noted that unusually warm weather may have inflated employment figures earlier in the year. Most officials thought the inflation outlook was balanced, though "some" officials worried that "maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation."

[Crafty_Dog]

I note that gold has been dropping rather sharply and it was reported this afternoon that it has broken its four year trend line.

This would seem to be rather contrary to some of the prevailing wisdom around here , , , though I might add that I have cautioned on gold more than once , , ,

====================

http://scottgrannis.blogspot.com/

[Crafty_Dog]

http://www.youngresearch.com/authors/jeremyjones/greenspan-we-dont-have-a-plan-b/?awt_l=PWy8k&awt_m=3au.bOMII0zlu1V

[Crafty_Dog]

Data Watch
________________________________________
The Producer Price Index (PPI) declined 1.0% in May To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 6/13/2012
The Producer Price Index (PPI) declined 1.0% in May, coming in below the consensus expected drop of 0.6%. Producer prices are up 0.7% versus a year ago.
Energy prices fell 4.3% and food prices declined 0.6%. The “core” PPI, which excludes food and energy, increased 0.2%.
Consumer goods prices were down 1.5% in May, but are up 0.3% versus last year. Capital equipment prices rose 0.1% in May and are up 2.1% in the past year.
Core intermediate goods prices fell 0.2% in May but are up 0.5% versus a year ago. Core crude prices were down 1.3% in May, and are down 3.9% versus a year ago.
Implications: Energy prices plummeted in May, dropping by the most in any month in more than three years. Almost completely as a result of this drop, overall producer prices were down 1% in May, coming in below the consensus expected decline of 0.6%. That’s good news for companies making purchases, but no justification for another round of quantitative easing. “Core” prices, which exclude food and energy, and which the Federal Reserve claims are more important than the overall number, were up 0.2% again in May. Core prices are now up 2.7% from last year, which is much faster than the overall PPI. In the past three months, the core PPI is up at a 2.5% annual rate while overall prices are down at a 4.9% rate. In other recent inflation news, trade prices declined in May, with overall import prices down 1% and overall export prices down 0.4%. “Core” prices were also down in the trade sector in May, with imports ex-petroleum ticking down 0.1% and exports ex-agriculture declining 0.5%. Import prices are down 0.3% from a year ago, although up 0.3% excluding oil. Export prices are down 0.1% from a year ago, and up only 0.1% excluding agriculture. We do not expect the lull in inflation to last. With short-term rates being held near zero while nominal GDP is growing at about a 4% annual rate, monetary policy is loose. As a result, all these measures of inflation are very likely to move higher later this year. Be careful of all the stories you’ll read in the near future about how the Federal Reserve was right all along and that inflation is not a problem. By later this year, the conventional wisdom will realize this was temporary.

[Crafty_Dog]

The Consumer Price Index (CPI) fell 0.3% in May
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 6/14/2012

The Consumer Price Index (CPI) fell 0.3% in May, coming in below the consensus expected drop of 0.2%. The CPI is up 1.7% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was down 0.4% in May, but is up 1.6% in the past year.  The drop in CPI in May was lead by a 4.3% drop in energy, which more than offset widespread gains in most other major categories. The “core” CPI, which excludes food and energy, was up 0.2%, matching consensus expectations, and is up 2.3% versus last year.

Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were up 0.3% in May but are down 0.1% in the past year. Real weekly earnings are flat the past year.

Implications: Gas prices plummeted in May. As a result, consumer prices fell 0.3% in May, coming in slightly below consensus expectations. Excluding energy, consumer prices were up across the board. “Core” inflation, which excludes food and energy, was up 0.2% again in May and is up 2.3% from a year ago, hovering near the largest 12-month gain since September 2008. In the past three months, core prices are up at a 2.7% annual rate. These figures are already above the Federal Reserve’s supposed target of 2%. Meanwhile, monetary policy is very loose and housing costs (which are measured by rents, not asset values) are rising. Owners’ equivalent rent was up 0.1% in May and is up 2.1% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. With loose monetary policy and housing costs accelerating, it’s hard to see core inflation getting back down to the Fed’s 2% target anytime soon. On the earnings front, “real” (inflation-adjusted) wages per hour were up 0.3% in May. Although these earnings are down 0.1% from a year ago, the number of hours worked is up 1.8%, giving consumers more purchasing power. In other news this morning, new claims for jobless benefits increased 6,000 last week to 386,000. Continuing claims for regular state benefits declined 33,000 to 3.28 million. Recent data on claims suggest weak payroll growth in June, roughly 50,000 non-farm and 60,000 private, although data over the next two weeks may revise this forecast. Regardless, June payroll growth has been relatively weak the past few years, so don’t read too much into those figures. Job growth should accelerate again in the second half of the year.

[Crafty_Dog]

News From the Swamp: Federal Reserve Debt Holdings Skyrocket
Newly released numbers show that the Federal Reserve under Obama has become the largest shareholder in U.S. government debt. The Fed owned $302 billion in U.S. Treasury securities in January 2009. That portion rose an incredible 452 percent by April 2012, with the Fed now holding $1.67 trillion. In roughly the same time frame, China's share of U.S. government debt rose from $740 billion to $1.17 trillion, and Japan's share shot from $635 billion to just over $1 trillion. Together, these three entities possess 49 percent of all the new debt generated during Obama's term, in which total debt rose 50 percent from $10 trillion to $15 trillion.

[Crafty_Dog]

By PAUL HANNON LONDON—The euro-zone's bailout funds are now insufficient to aid a large member of the currency area, the world's biggest private financial institutions said Sunday.

In its monthly report, the Institute of International Finance Inc. said that following the euro-zone's decision to provide Spain with up to €100 billion ($126.3 billion) with which to support its stricken banks, the currency area's bailout funds have resources of just €251 billion.

"This means that...the Eurogroup's rescue funds, as currently authorized and structured, will have sufficient funds to help a small economy like Cyprus, but hardly enough to deal with any large country," the IIF said.

The banking group said rescue funds will increase in November as euro-zone members make additional contributions to the European Stability Mechanism, the currency area's permanent bailout fund.

The IIF represents more than 450 of the world's largest private financial firms.

The banking group repeated its view that the euro zone needs to move towards a "banking union," or a shared way to support troubled banks.

It said the euro-zone's decision to direct the €100 billion earmarked for Spanish banks through the government rather than directly to the institutions in need "validates investor concern about the vicious linkage between weak sovereign and bank balance sheets."

 Mean Street host Francesco Guerrera calls on WSJ's Charles Forelle to discuss why the European crisis is so important to the U.S. economy.
.The IIF said that the amounts involved in the bailout should be "more than adequate" to recapitalize troubled Spanish banks and provide them with a "decent" buffer against future losses.

But it said the Spanish and euro-zone authorities had been partly responsible for the "lukewarm" response of investors to the bailout, which was agreed on June 9.

"Investors have been disheartened by inconsistent public statements from Spanish and European officials as to the nature and degree of conditionality and monitoring attached to the loan." the IIF said.

The banking group said investors were also worried by the possibility that existing and future bonds issued by the Spanish government would be "subordinated" to the ESM if it were to provide the bailout. That would mean that in the event Spain's government had problems paying its creditors, the ESM would be taken care of first, and bondholders would get what was left.

The IIF said the ESM's status as senior creditor could therefore push up already high borrowing costs for Spain and any other government that looked to it for help.

"The ESM...claim of seniority would increase the credit risk premium on outstanding and future sovereign debt of countries receiving...assistance," the banking group said. "The whole issue of credit seniority and subordination needs to he clarified quickly."

[Crafty_Dog]

http://pjmedia.com/blog/the-libor-scandal-historys-largest-market-fraud/?singlepage=true

While the Supreme Court’s health care decision and the 2012 election season have been dominating news in the U.S., in London a banking scandal is unfolding which threatens to engulf much of the British financial and political establishments. The story has barely registered in the U.S. outside of the financial press, but the scandal is set to spread across the Atlantic, and is being discussed as potentially the biggest market manipulation fraud in history.

Barclays bank has been fined $453 million by U.S. and UK regulators, and its American chief executive, Bob Diamond, has resigned after admitting its staff rigged the inter-bank “Libor” rate — a daily measure of the interest rates at which banks lend to one another — over a period of several years. The Libor rate affects interest rates paid to investors and by borrowers on mortgages and other loans. According to the Wall Street Journal, more than $800 trillion in securities and loans are linked to Libor.

This rigging was divided into two phases. Starting in 2005, Barclays traders conspired to manipulate Libor up or down for personal gain. This is bad enough, but it’s the second phase of the scandal that’s likely to have the greater ramifications. Around 2008, with the financial crisis in full swing, senior figures at Barclays ordered staff to distort Libor downward to create the impression that the bank’s finances were more sound than was the case. And Barclays bosses have claimed this manipulation had the tacit approval of the Bank of England — the UK central bank — and ministers in the then-Labour government, who wanted to shore up confidence in the economy. The current Conservative-led coalition government has gleefully launched a parliamentary inquiry into the affair.

Barclays’ involvement in the scandal emerged because they reached an agreement with regulators, admitting their guilt in return for reduced fines. Several banks are still under investigation, including UBS and Citigroup in the U.S. Lawsuits that could run into tens of billions of dollars are being prepared on behalf of individuals, companies, and institutions who have suffered losses.
At best, the scandal has revealed an appalling lack of bank regulation. At worst it suggests collusion at the highest levels between commercial banks, central bankers, and governments to manipulate interest rates for mutual benefit. It’s been suggested that the U.S. Federal Reserve could be dragged into the scandal.

This affair is set to run and run, and is likely to take all manner of twists in the coming months. But whatever the outcome, it’s clear there remain serious problems with the way big banks and financial institutions operate and are regulated. And conservatives shouldn’t be afraid to say so, because to acknowledge the problem is not remotely a concession that capitalism and free markets have failed.

The left-leaning are claiming just that — note this piece by Seumas Milne of Britain’s left-wing Guardian. Milne rightly points the finger at financial elites and their political enablers, but then writes:

It could of course have happened only in a private-dominated financial sector, and makes a nonsense of the bankrupt free-market ideology that still holds sway in public life.

This is nonsense, but sounds plausible to the casual observer and so needs to be debunked. Banks may have a passing acquaintance with capitalism to the extent that for a price they facilitate it, but today’s banking and financial behemoths do not operate in a free market. While genuine capitalists risk borrowed money or their own savings, banks gamble with other people’s money, and in recent years when things have gone wrong banks have been bailed out by governments with taxpayer cash.
The growth of too-big-to-fail banks has coincided with the growth of massive, statist government. And while nominally conservative politicians have certainly been guilty of indulging the bankers in the past, Labour in the UK and the U.S. Democrats are the primary culprits harnessing big finance to big government.

Tony Blair’s Labour government famously favored “light-touch” regulation, with one minister from that once proudly socialist party remarking that New Labour was “seriously relaxed about people getting filthy rich”. The reason Labour took such a lax attitude to bankers lining their pockets was that the City of London was providing billions of pounds in tax revenues for the government to pump into the black hole of public services, while at the same time ensuring a plentiful supply of cheap money to create a credit-fueled boom.

In the U.S., similar easy money policies enabled George W. Bush to oversee a decidedly un-conservative expansion of government and helped to fuel the housing bubble that ultimately led to the financial crisis. Many Republicans voted for the bailouts that followed, but it was Democrats, having won power thanks in no small measure to sticking the Republicans with the blame for the crisis, who fully enlisted big finance in their statist, crony capitalist project.

The banks and other financial institutions that helped bankroll Obama’s 2008 election campaign didn’t do so because they expected him to be a swashbuckling free-marketeer. They were rewarded with the Dodd-Frank bill, which effectively enshrined the notion of too big to fail and created a centrally planned banking system that discourages competition and innovation.

The American Enterprise Institute’s Peter Wallison wrote of the bill:

Crony capitalists and their government mentors will be the biggest winners. Concentrated and heavily regulated markets are fine with supporters of the Dodd-Frank Act. They are comfortable with a financial industry made up of a few large firms responsive to government direction.

Now the Libor scandal is shining a light on the cozy relationship between bankers and governments, and it could present an opportunity for real reform of the banking system. There are calls for tighter regulation — not least from the regulators and politicians who’ve brought us to this pass — but banks will always find new ways to game the system as long as the rewards are great, failure is rewarded with bailouts, and the punishment for wrongdoing amounts to a slap on the wrist. Parliamentary inquiries and Congressional hearings are not the answer. What’s required are regulators willing to enforce — and who are capable of enforcing – the existing rules, and punishments sufficient to deter wrongdoing.

With election season in full swing there’s little interest in banking reform in the U.S. now, although if the Libor scandal catches fire it could quickly become a campaign issue. However, the ideas of conservative economists such as Luigi Zingales, author of A Capitalism for the People: Recapturing the Lost Genius of American Prosperity and (profiled  by the Boston Globe) are starting to attract attention.

In Britain, Conservative MPs such as Steve Baker are taking the lead with initiatives for real reform. Baker has introduced a bill that would force bank directors to take personal liability for any losses suffered under their leadership; would treat bankers’ bonus pools as capital that would be used to make good losses; and would create a mechanism to allow banks to fail in an orderly fashion without taxpayer bailouts.

Some — most prominently, Rep. Ron Paul — now argue for an end to the current system of fiat money (that is, money created out of thin air by central and commercial banks) and its replacement with a market-based system underpinned by gold and silver, or by digital systems such as Bitcoin. (See this article by economist Detlev Schlichter.)

Conservatives are acutely aware of the need to dismantle big government, but if they want to succeed they’re going to have to take apart big finance as well.

Mike McNally is a journalist based in Bath, England. He posts at PJ Tatler and at his own blog Monkey Tennis, and tweets at @notoserfdom. When he's not writing about politics he writes about Photoshop.

[Crafty_Dog]

Deep questions and implications for free market theory here.  What do we make of this gents?

==========================

http://londonbanker.blogspot.co.uk/2012/07/lies-damn-lies-and-libor.html

 
Lies, Damn Lies and LIBOR

I've been hesitant to write about the LIBOR scandal because what I want to say goes so much further. We now know that Barclays and other major global banks have been manipulating the calculation of LIBOR through the quotation data they provided to the British Bankers Association. What I suspect is that this is not a flaw but a feature of modern financial markets. And if it was happening in LIBOR for between 5 and 15 years, then the business model has been profitably replicated to many other quotation-based reference prices.
 
Price discovery is not a sexy function of markets, but it is critical to the efficient allocation of scarce capital and resources, and to the preservation of the long term wealth of investors and the economy as a whole. If price discovery is compromised by manipulation, then we will all be gradually impoverished and the economy will be imbalanced and unstable.
 
Over the past 25 years the forces of regulatory liberalisation and demutualisation of markets have allowed the largest global banks to set the rules, processes and infrastructure of global markets to their own self-interested requirements. Regulatory complexity and harmonisation benefit the biggest banks disproportionately, eroding the competitive stance of smaller, local banks and market participants. This has led to a very high degree of concentration in a very few banks in most markets that determine global reference rates for interest rates, currencies, commodities and investments. If those few collude with each other - as Adam Smith warned was always the result - then they impoverish us all.
 
We have allowed markets to evolve in ways that make supervision of markets almost impossible. Many instruments trade off-exchange or in multiple venues, making it nearly impossible for any single investor or regulator to supervise trading to prevent or detect manipulation or abuse. Many financial instruments are now synthetic compilations of underlying assets and derivatives, with multiple pricing components determined by reference to other prices or rates. Demutualisation and regualtory reforms stripped exchanges of the self-regulating interest in preventing manipulation and abuse by their members as mergers, profits and market share came to dominate governance objectives.
 
Off-exchange trading has been allowed to proliferate, creating massive ill-transparent and largely illiquid markets in almost every sector of finance. Pricing in these markets is based around calculated reference rates which, like LIBOR, are open to abusive quotation and data input practices. Many OTC derivatives are priced and margined using reference rates calculated against quotations unrelated to actual reported transactions. Synthetic securities such as ETFs are another example of an instrument that prices off a reference rate rather than the actual contents of an underlying asset portfolio. These instruments are open to consistent abusive pricing as a means of incrementally impoverishing those market participants who are the krill on which the global banks thrive.
 
How has it been possible for banks to grow from less than 4 per cent of the global economy to more than 12 per cent of the global economy without impoverishing others? How has it been possible for profits in the financial sector to be consistently higher than profits from other human endeavors with more tangible products or impacts on our daily lives - such as agriculture, transport, health care or utilities? How has it been possible that banks derive their profits not from the protected and regulated activities of deposit-taking and lending, but from the unsupervised and often unknowable escalation of off-balance sheet assets and liabilities? How has it been possible that pension savings have increased while pension returns have declined to the point where only bankers can expect a comfortable old age? Global banks have built the casinos and tilted the odds in the house's favour by rigging the data that determines the outcomes of most of the bets on the table. Every one of us that sits at the table long enough - whether saver, investor, borrower, taxpayer or pensioner - will be a loser. It is not a flaw; it is feature.
 
There is a reason that financial infrastructure used to be dominated by mutuals. Mutual gain and mutual liability created a natural discipline on excess and on rogue elements that would impoverish their peers.
 
There is a reason why trading was restricted to exchanges, and exchanges and clearing houses used to be self-regulating, and even had responsibility for resolution and liquidation of their members. Direct responsibility, authority and financial control meant that they could exert very powerful and immediate consequences on those members identified as abusing the market or investors.
 
The investigations into market rigging are just beginning. Paul Tucker opened the box yesterday when he admitted that he could not know whether the abuses discovered in setting LIBOR had spread to other synthetically calculated reference rates. As events unfold, it may be that we begin to appreciate just how deeply vulnerable we have become to predation by bankers with no stake in a local economy or in the local quality of life of the people they impoverish. A reckoning is needed, and then a rebalancing toward more local and mutual provision of essential services and market infrastructure that servers markets rather than those few bankers on the board.
 
As a start, regulators should consider punitive restrictions on the sale of instruments which price on reference rates unrelated to reported market transactions or underlying asset portfolios. Pricing should reflect real market transactions rather than guesstimates talking the banker's book.
 
We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. If banks, markets and clearing are protected because they have a social function, we should make certain that social function is adding value. If it isn't, then we need some new models and some new rules.

[objectivist1]

Placing a large portion of your liquid assets into physical gold and silver has never been more advisable.  Time is growing short.  The writing is on the wall in giant red letters:

Analysis: Euro zone fragmenting faster than EU can act

Mon, Jul 9 2012

By Paul Taylor

PARIS (Reuters) - Signs are growing that Europe's economic and monetary union may be fragmenting faster than policymakers can repair it.
Euro zone leaders agreed in principle on June 29 to establish a joint banking supervisor for the 17-nation single currency area, based on the European Central Bank, although most of the crucial details remain to be worked out.
The proposal was a tentative first step towards a European banking union that could eventually feature a joint deposit guarantee and a bank resolution fund, to prevent bank runs or collapses sending shock waves around the continent.
The leaders agreed that the euro zone's permanent bailout fund, the 500 billion euro ($620 billion) European Stability Mechanism, would be able to inject capital directly into banks on strict conditions once the joint supervisor is established.
But the rush to put first elements of such a system in place by next year may come too late.
Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.
Many banks are reorganizing, or being forced to reorganize, along national lines, accentuating a deepening north-south divide within the currency bloc.
An invisible financial wall, potentially as dangerous as the Iron Curtain that once divided eastern and western Europe, is slowly going up inside the euro area.
The interest rate gap between north European creditor countries such as Germany and the Netherlands, whose borrowing costs are at an all-time low, and southern debtor countries like Spain and Italy, where bond yields have risen to near pre-euro levels, threatens to entrench a lasting divergence.
Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers.
POLITICAL BACKLASH
The longer that situation goes on, the less chance there is of a recovery in southern Europe and the bigger will grow the wealth gap between north and south.
With ever-higher unemployment and poverty levels in southern countries, a political backlash, already fierce in Greece and seething in Spain and Italy, seems inexorable.
European Central Bank President Mario Draghi acknowledged as he cut interest rates last week that the north-south disconnect was making it more difficult to run a single monetary policy.
Two huge injections of cheap three-year loans into the euro zone banking system this year, amounting to 1 trillion euros, bought only a few months' respite.
"It is not clear that there are measures that can be effective in a highly fragmented area," Draghi told journalists.
Conservative German economists led by Hans-Werner Sinn, head of the Ifo institute, are warning of dire consequences for Germany from ballooning claims via the ECB's system for settling payments among national central banks, known as TARGET2.
If a southern country were to default or leave the euro, they contend, Germany would be left with an astronomical bill, far beyond its theoretical limit of 211 billion euros liability for euro zone bailout funds.
As long as European monetary union is permanent and irreversible, such cross-border claims and capital flows within the currency area should not matter any more than money moving between Texas and California does.
But even the faintest prospect of a Day of Reckoning changes that calculus radically.
In that case, money would flood into German assets considered "safe" and out of securities and deposits in countries seen as at risk of leaving the monetary union. Some pessimists reckon we are already witnessing the early signs of such a process.
OVERWHELMING?
Any event that makes a euro exit by Greece - the most heavily indebted member state, which is off track on its second bailout program and in the fifth year of a recession - look more likely seems bound to accelerate those flows, despite repeated statements by EU leaders that Greece is a unique case.
"If it does occur, a crisis will propagate itself through the TARGET payments system of the European System of Central Banks," U.S. economist Peter Garber, now a global strategist with Deutsche Bank, wrote in a prophetic 1999 research paper.
Either member governments would always be willing to let their national central banks give unlimited credit to each other, in which case a collapse would be impossible, or they might be unwilling to provide boundless credit, "and this will set the parameters for the dynamics of collapse", Garber warned.
"The problem is that at the time of a sovereign debt crisis, large portions of a national balance sheet may suddenly flee to the ECB's books, possibly overwhelming the capacity of a bailout fund to absorb the entire hit," he wrote in 2010, after the start of the Greek crisis, in a report for Deutsche Bank.
European officials tend to roll their eyes at such theories, insisting the euro is forever, so the issue does not arise.
In practice, national regulators in some EU countries are moving quietly to try to reduce their home banks' exposure to such an eventuality. The ECB itself last week set a limit on the amount of state-backed bank bonds that banks could use as collateral in its lending operations.
In one high-profile case, Germany's financial regulator Bafin ordered HypoVereinsbank (HVB), the German subsidiary of UniCredit (CRDI.MI: Quote, Profile, Research, Stock Buzz), to curb transfers to its parent bank in Italy last year, people familiar with the case said.
Such restrictions are legal, since bank supervision is at national level, but they run counter to the principle of the free movement of capital in the European Union's single market and to an integrated currency union.
Whether a single euro zone banking supervisor would be able to overrule those curbs is one of the many uncertainties left by the summit deal. In any case, common supervision without joint deposit insurance may be insufficient to reverse capital flight.
German Chancellor Angela Merkel, keen to shield her grumpy taxpayers, has so far rejected any sharing of liability for guaranteeing bank deposits or winding up failed banks.
Veteran EU watchers say political determination to make the single currency irreversible will drive euro zone leaders to give birth to a full banking union, and the decision to create a joint supervisor effectively got them pregnant.
But for now, Europe's financial disintegration seems to be moving faster than the forces of financial integration.
(Editing by David Holmes)
© Thomson Reuters 2011. All rights reserved.

[DougMacG]

July 5, 2012 | Wall Street Journal
news » hoover daily report  Hoover Institution Stanford University
. . . ideas defining a free society
http://www.hoover.org/news/daily-report/121856

Monetary Policy and the Next Crisis
by John B. Taylor (George P. Shultz Senior Fellow in Economics; Chair, Working Group on Economic Policy; and member of the Task Force on Energy Policy)

At its annual meeting of the world's central bankers in Switzerland last week, the Bank for International Settlements—the central bank of central banks—warned about the harmful "side effects" of current monetary policies "in the major advanced economies" where "policy rates remain very low and central bank balance sheets continue to expand." These policies "have been fueling credit and asset price booms in some emerging economies," the BIS reported, noting the "significant negative repercussions" unwinding these booms will have on advanced economies.

The BIS emphasizes the view that international capital flows stirred up by monetary policy were a primary factor leading to the preceding crisis and that these flows would lead to the next one. This is in stark contrast to the "global saving glut" hypothesis—which says that the funds pouring into the U.S. in the previous decade originated largely from the surplus of exports over imports in emerging market economies.

The BIS should be taken seriously. It warned long in advance about the monetary excesses that led to the financial crisis of 2008.

The capital-flow story starts during extended periods of low interest rates, as in the U.S. Federal Reserve's low rates from 2003 to 2005 and its current near-zero interest rate policy, which began in 2008 and is expected to last to 2014. These low interest rates cause investors to search elsewhere for yield, and they buy foreign securities—corporate as well as sovereign—for that reason. Global bond funds in the U.S. thus shift their portfolios to these higher-yielding foreign securities and investors move to funds that specialize in such securities.

Low U.S. interest rates also encourage foreign firms to borrow in dollars rather than in local currency. U.S. branch offices of foreign banks play a key part in this process: As of 2009, U.S. branches of over 150 foreign banks had raised $645 billion to make loans in their home countries, making special use of U.S. money-market funds, where about one half of these funds' assets are liabilities of foreign banks.

This increased flow of funds abroad—whether through direct securities purchases or through bank lending—puts upward pressure on the exchange rate in these countries, as the foreign firms sell their borrowed dollars and buy local currency to expand their operations and pay workers. That's when foreign central banks enter the story. Concerned about the negative impact of the appreciating currency on their country's exports or with the risky dollar borrowing of their firms, they respond in several ways.

First, they impose restrictions on their firms' overseas borrowing or on foreigners investing in their country. But the differences in yield provide strong incentives for market participants to circumvent the restrictions.

Second, central banks buy dollar assets, including mortgage-backed securities and U.S. Treasurys, to keep the value of their local currency from rising too much as against the dollar. One consequence of these purchases is a foreign government-induced bubble in U.S. securities markets, as we saw in mortgage markets leading up to the recent crisis, and as we may now be seeing in U.S. Treasurys.

The flow of loans from the U.S. to foreign borrowers is effectively matched by a flow of funds by central banks back into the U.S. There is no change in the current account, and no role for the so-called savings glut.

Third, in order to discourage the inflow of funds seeking higher yields—which would drive up the exchange rate of their own currency—foreign central banks hold their interest rates lower than would be appropriate for domestic economic stability. There is much statistical evidence for this policy response, and, when you roam the halls of the BIS and talk to central bankers, as I did last week, you get even more convincing anecdotal evidence. Call it the lemming effect: Central banks tend to follow each other's interest rates down.

This is what happened in the lead up to the 2008 financial crisis, and it has helped fuel Europe's current debt crisis. In the 2003-2005 period, low interest rates led to a flow of funds into U.S. mortgage markets as foreign central banks bought dollars, aggravating the housing boom and the subsequent bust.

Moreover, the European Central Bank's interest rate moves during 2003-2005 were influenced by the Fed's low rates. By my estimates, the interest rate set by the ECB was as much as two percentage points too low, which also had the effect of spurring housing booms in Greece, Ireland and Spain. Ironically, the European debt crisis, which originated in the booms and busts in Greece, Ireland and Spain, now has come around to threaten the U.S. economy.

The Fed's current near-zero interest rate policy, designed to stimulate the U.S. economy, has made it harder for other central banks to combat credit and asset price booms. A group of 18 emerging market central banks—including Brazil, China, India, Mexico and Turkey—held their interest rates on average as much as five percentage points below widely used policy benchmarks—and global commodity prices doubled from 2009 to 2011, a boom rivaling the excesses leading up to the 2008 financial crisis. This global, loose monetary policy was likely a big factor pushing up commodity prices. The current sharp slowdown in most emerging markets coincides with an inevitable bust of this easy-money induced boom, and the decline of foreign demand for American goods is now feeding back to the U.S. economy.

The Fed needs to pay closer attention to global capital flows and the reactions of other central banks to its decision to set interest rates very low for long periods of time. This does not mean taking one's eye off the U.S. economy, but rather preventing booms and busts abroad from slowing growth at home precisely when we need it most.

Mr. Taylor, a professor of economics at Stanford University and a senior fellow at the Hoover Institution, is the author of "First Principles: Five Keys to Restoring America's Prosperity (Norton, 2012).

[Crafty_Dog]

The Consumer Price Index (CPI) was Unchanged in June To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 7/17/2012
The Consumer Price Index (CPI) was unchanged in June, matching consensus expectations. The CPI is up 1.7% versus a year ago.
“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was also unchanged in June, but is up 1.6% in the past year.
The CPI was flat in June due to a 1.4% drop in energy, which offset widespread gains in most other major categories. The “core” CPI, which excludes food and energy, was up 0.2%, matching consensus expectations, and is up 2.2% versus last year.
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were up 0.2% in June and are up 0.3% in the past year. Real weekly earnings are up 0.6% in the past year.
Implications: Energy prices fell again in June. As a result, consumer prices were flat, matching consensus expectations. Excluding energy, consumer prices were up across the board. “Core” inflation, which excludes food and energy, was up 0.2% again in June and is up 2.2% from a year ago, hovering near the largest 12-month gain since September 2008. In the past three months, core prices are up at a 2.6% annual rate. These figures are already above the Federal Reserve’s supposed target of 2%. Meanwhile, monetary policy is very loose and housing costs (which are measured by rents, not asset values) are rising. Owners’ equivalent rent was up 0.1% in June and is up 2.0% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. With loose monetary policy and housing costs accelerating, it’s hard to see core inflation getting back down to the Fed’s 2% target anytime soon. On the earnings front, “real” (inflation-adjusted) wages per hour were up 0.2% in June. These earnings are up 0.3% from a year ago. Worker hours are up 2.1% in the past year. Combining these two factors means workers' purchasing power is up about 2.5 % from a year ago, suggesting that the weakness in retail sales is temporary.

[Crafty_Dog]

Bringing Doug's post here, the banking thread:
================================

Hardly a buffoon?  Watch the video and try to help me with a better description. Maybe he is diabolically clever and just plays a buffoon on television, and on policy matters.

Quite a career (usually one will credit source when cutting and pasting into your own text), Geithner is illustrative of the Peter Principle where people rise to their own level of incompetence.  Head of the NY Fed, at a time when monetary policy was out of control and a major factor pulling us into collapse and scandal.  He is the epitome of the botched policies/regulation/oversight that brought us the collapse and Great Recession.  His face with a red circle and a line through it should be on every Occupy Wall Street sign.
---------------------

Geithner has more recent scandals brewing:

http://www.nypost.com/p/news/opinion/opedcolumnists/what_did_tim_know_NQ113lKVCrJPZHUhVCVVfM

What did Tim know?
Geithner’s Libor labors

Last Updated: July 11, 2012

The latest development in the Libor-manipulation scandal is that the banks weren’t really fixing the price of the key interest rate in total secret — US regulators were aware of the sleazy activities at the time, and seemed to have done nothing.

Which should surprise no one.

I can’t tell you how much federal officials knew about the activities of Barclay’s, JPMorgan, Citigroup and the other big banks at the center of the maelstrom. In coming weeks, both Federal Reserve chief Ben Bernanke and Treasury Secretary Tim Geithner will inevitably discuss the mess when they appear before Congress.

Geithner: Boss of New York Fed during alleged fixing of the key Libor financial benchmark.

Bernanke testifies before the Senate Banking Committee next week, but the more important hearing by far will come a week later — when the House Financial Services Committee questions Geithner, who headed the New York Fed when the sleaze was going down.

If the right questions get asked, the American people will get a firsthand account not just about how much our government knew about the Libor mess, but also of the cozy, corrosive relationship between the nation’s big banks and the bureaucrats who are supposed to regulate them.

Long before President Obama tapped him for Treasury, Geithner was one of those bureaucrats. He worked at the Clinton Treasury, the IMF and then as president of the New York Federal Reserve Bank for five years — where he played a key role in the bailouts and the rest of the government’s response to the financial crisis.

The New York Fed has two main functions: It handles the transactions whereby the overall Federal Reserve controls the nation’s money supply, and it’s supposed to be the chief regulator of the big banks in its region.

When Obama named him for Treasury, the banking industry hailed Geithner as a godsend. Shares shot up on his announcement, and CEOs called it a wise choice for a key job at a time of crisis.

But the dirty little secret on Wall Street is that the New York Fed is a horrible regulator: It sees its chief job as keeping the banking system intact. Since it needs its member banks to buy US government debt and to control the money supply, the last thing it wants to do is shed light on the banks’ shady practices.

Which is why the Wall Street power brokers loved Geithner so much: On his New York Fed watch, he basically let them get away with the financial equivalent of murder, letting them take on the astronomical amounts of risk that ultimately blew up the system in 2008.

And then, when they needed a bailout, he was there with a plan that made sure their banks and jobs were safe.

That’s why I’m saying Geithner is such an important witness as the Libor investigation expands to include the possibility that banking-industry cops like himself looked the other way.

The London Interbank Offered Rate, keep in mind, is one of the world’s most important financial benchmarks. Both Wall Street financiers and average consumers are charged interest based on Libor, which is set by a banking trade group that calculates an average of the big banks’ borrowing rates.

So the last thing you want is for the rate to be manipulated in any way. Yet that’s what the banks are accused of doing, as their borrowing rates started rising in the runup to the crisis.

The incentive for banks like Barclays to rig Libor by reporting falsely low borrowing costs is obvious: They could make money and disguise the extent of their distress.

We know that Barclays — so far the only firm charged in the matter — met with officials at the New York Fed to discuss the Libor mess back in 2007 and 2008, when it complained that banks might be manipulating the benchmark.

And we know that now-deposed Barclays CEO Bob Diamond met with Geithner during this time. Maybe they were only talking about the broader market upheaval; maybe they discussed the Libor rate-fixing, too.

Geithner has declined repeated requests for comment. The New York Fed stated that it “received occasional anecdotal reports from Barclays of problems with Libor . . . and we subsequently shared analysis and suggestions for reform” with regulators in the UK, where Libor is set.

Translation: We chose to do nothing.

But Congress has a duty to find out why — and what Tim Geithner knew about the banks’ dirty dealings.
--------------------------------------------
http://www.nypost.com/p/news/opinion/opedcolumnists/geithner_yawned_at_epic_fraud_ixr2rjBL9s16VKG673U4GO

Geithner yawned at epic fraud

July 15, 2012

Tim Geithner had evidence of a financial crime of epic proportion — so he wrote a memo.

That’s about the only way you can sum up the then-New York Fed boss’ actions several years ago, when he was confronted with fairly compelling evidence that banks under his direct supervision were manipulating Libor — a key benchmark of global finance.

The Libor scandal has become pretty big news, with Barclays ousting its CEO and agreeing to pay a large fine even as it cooperates with civil and criminal law-enforcement authorities now investigating other big banks.
What, me worry? Geithner only wrote a memo.
AP
What, me worry? Geithner only wrote a memo.

But it doesn’t end there: There’s also evidence that top regulators, including Geithner, now Treasury secretary, knew about and largely ignored the mess.

On Friday, the New York Fed released documents that supposedly exonerate Geithner. Selective leaks to friendly news outlets ensured kind first-day coverage, with one headline reading “Geithner tried to curb bank’s rate rigging in 2008.”

But that’s a bizarrely generous read of Geithner’s action (or inaction) on learning that Barclays actually admitted to one of his investigators that it had submitted false data for the computation of Libor, and that other banks were doing the same.

As I wrote last week, the New York Fed has long enjoyed a cozy relationship with the banks under its regulatory umbrella — ignoring even the stuff that brought down the financial system in 2008.

A close associate of former Clinton Treasury Secretary and top Citigroup exec Robert Rubin, Geithner has spent most of his professional life as a federal financial bureaucrat — a member of a community that keeps close ties with the heads of the major banks. Yet even by that standard, his behavior in the Libor scandal is incredible.

Libor, the London Interbank Offered Rate, is set by a UK banking trade group, which uses the big banks’ borrowing costs to compute a single benchmark rate that’s widely used on complex financial products as well as consumer loans.

In other words, rigging Libor is a pretty big deal. Yet Geithner treated it like a parking violation.

In 2007 and 2008, as the banking crisis began to heat up and big investors started demanding higher interest rates when lending to the banks, evidence began to build that banks were submitting falsely low borrowing costs to mask their financial distress.

Barclays was one such bank. Indeed, the New York Fed learned as early as December 2007 that Barclays may have been manipulating Libor — but Geithner’s crew waited until April 2008 to make its initial inquiry, documents show.

That’s when a New York Fed official contacted a trading executive at Barclays — who admitted the dirty deed with very little pressure: “We know that we’re not posting, um, an honest Libor.”

The trader’s rationale: If the bank posted its real borrowing costs, then spiking in the runup to the banking crisis, “It draws, um, unwanted attention on ourselves.”

The trader indicated that other banks were submitting fake info, too. The New York Fed regulator conducting the interview didn’t seem particularly outraged, answering with a simple “OK.”

Maybe the Fed official didn’t want to show her cards, but you’d think that a competent regulator hearing a concession like would get the wheels of justice moving pretty quickly. But not at Tim Geithner’s New York Fed.

Geithner was brought in right after the call — and his response was more of the same. He sent a single e-mail to his counterpart at the Bank of England recommending a handful of ways to address Libor rigging, including how UK regulators “should eliminate incentive to misreport.”

So here you have it: In Geithner’s world, rate-rigging fraud is “misreporting.”

His UK counterpart, Bank of England Governor Mervyn King, didn’t do much better. He e-mailed Geithner that he’d ask the trade group “to include in their consultation document the ideas contained in your note.”

Other than a few followup calls from his staff to traders, that’s about the end of Geithner’s real interest in the matter — until it came to light that the practices were much worse and more pervasive than even the Barclays trader had suggested, and that other big banks directly under the New York Fed’s jurisdiction were manipulating one of the world’s most important financial barometers.

Or, as Geithner put it, “misreporting.”
---------------------------
http://www.latimes.com/business/la-fi-house-libor-20120717,0,1890104.story

House panel probes banks' alleged role in LIBOR-fixing scandal
It plans to question Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner about allegations that banks rigged the key interest rate.

[Crafty_Dog]

 

Sunday, July 22, 2012 12:36 AM


Monetary Insanity: ECB Considers Negative Interest Rates, Looking for Clues From Denmark

The ECB is now pondering monetary insanity: ECB's Coeure says negative bank deposit rate an option
 Cutting the deposit rate the European Central Bank offers lenders in the euro zone below zero is an option, ECB Executive Board Member Benoit Coeure said on Friday.

Speaking in Mexico, Coeure said the bank needed to take the rate down 25 basis points to zero to match its cut in the reference rate.

He said policymakers would need to consider whether it could take the deposit rate below zero, which would mean the central bank would start charging banks for the privilege of parking spare cash in the ECB.

"It's still possible," Coeure told students at an event in Mexico City. "It's true that we are hitting a psychological limit at zero. And it's unclear whether markets can function at negative interest rates. Some of them can."

"Some of them apparently can't. So before making the next step, which would be moving the deposit facility to a negative yield, we'll reflect about it," he added.

Denmark introduced a negative interest rate this month and the ECB is watching closely how the move plays out.
Negative Rates in Denmark, Switzerland

The Wall Street Journal discusses Negative Rates in Denmark, Switzerland.

 July 6, 2012

For the first time ever, the Danes cut one of their official interest rates to below zero on Thursday.

Struggling against a tide of foreign capital seeking a safe haven, the Danes are trying to keep their exchange rate from rising to the point of throttling domestic industry. Unfortunately, one way or another, the struggle to retain competitiveness is likely to be a forlorn hope.

Denmark’s certificate of deposit rate was chopped by a quarter point to where CDs now yield minus 0.2%. Which is to say holders of these certificates willingly pay the Danish government a fifth of a percentage point for Denmark to hold their money.

Like Denmark, Switzerland is once again struggling against these capital flows, albeit nowadays they’re coming from closer to home.

Market rates on various short-dated Swiss, German and Danish government paper have been negative during the past year. Indeed, what started off as negative rates on the most short-dated bills has been creeping along the yield curve. On Friday morning, yields on the German two-year note, known as the Schatz, dropped to minus 0.01%.

So far, Switzerland and Denmark have managed to limit their currency appreciation. Switzerland has heroically been defending the 1.20 Swiss francs to the euro floor by buying euros frenetically.
Anteaters and Hurricanes

Denmark and Switzerland want to stop capital inflows and currency appreciation.

In contrast, the ECB does not want to stop currency appreciation nor does it want acceleration of bets against the euro. Rather, the ECB wants to stop capital flight specifically from Greece, Spain, Italy, and Portugal. 

Moreover, and also in contrast to the problems in Denmark and Switzerland, the ECB is struggling with dramatically different sovereign bond rates in the Southern Europe (notably Greece, Spain, Italy, and Portugal), than the rest of Europe.

Such conditions only apply to monetary unions, not individual sovereign countries.

The only thing the ECB is likely to achieve if it goes ahead with this ridiculous idea is cause a massive cash withdrawal from money markets in general, not halt capital flight in Southern Europe.

Negative rates sure will not spur lending, another possible goal of the ECB.

Yet, Benoit Coeure wants to study results in Denmark. Good luck with that.

All things considered, studying negative rates in Denmark for application across the entire ECB is like studying anteaters when the problem is hurricanes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read more at http://globaleconomicanalysis.blogspot.com/#cL0EmrwPpHEGUalW.99

[DougMacG]

Unbelievable.  Like treating a failed car ignition system by continuously overflowing the gas tank.

No more than one in three adults in Europe have a full time job in the private sector in Europe.  They aren't starting new businesses and there's no incentive to expand an existing one.  You are taxed heavily if you earn, taxed heavily if you spend, taxed if you save and regulated to death.  Economic growth is done and instead of fix any of all of what is broken, they increase the money supply.

We not only copy their insanity, we back it.

http://www.bloomberg.com/news/2011-09-15/ecb-coordinates-with-federal-reserve-in-lending-dollars-to-euro-area-banks.html
ECB Coordinates With Federal Reserve to Provide Dollars to Euro-Area Banks
Sep 15, 2011 Bloomberg

The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year (2011).
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This is not a crisis.  It is a you-reap-what-you sew economy.  Decline by design.

[Crafty_Dog]

By JON HILSENRATH
Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring.

 Federal Reserve officials, impatient with the economy's disappointing performance, are moving closer to taking new actions to spur growth and employment if they don't see evidence soon that activity is picking up on its own. Jon Hilsenrath has details on The News Hub.
.Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own.

Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move. Central-bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act.

Stocks Pare Losses on News
Stocks are bouncing off session lows in the final trading hour on the news that Fed officials are moving closer to taking new actions if the labor market and economic growth don't pick up soon.
.Fed officials could take some actions in combination or one after another. Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including a new program of buying mortgage-backed or Treasury securities, new commitments to keep short-term interest rates near zero beyond 2014 or an effort to push already-low benchmark short-term interest rates even lower.

Determined to keep trying to get the economy going without causing inflation, the Fed is exploring other novel measures. One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment.

Mr. Bernanke told Congress he wants to see more progress in reducing unemployment and he expressed frustration the economy appears to be "stuck in the mud." The Fed chairman has spoken in the past about the importance of the economy achieving what he calls "escape velocity"—growth that is fast enough to give the economy forward, self-reinforcing momentum.

New worries are emerging at the Fed that the economy is falling short of that speed. The Commerce Department is expected to report this week that the economy grew at a rate substantially below 2% in the second quarter after expanding just 1.9% in the first quarter. The unemployment rate, at 8.2% in June, has moved little since January. Retail sales have been soft in recent months and financial markets, particularly in Europe, have become strained in past weeks. Some officials believe the outlook for growth has worsened a bit since the Fed's June meeting, when the central bank marked down its economic projections.

Several officials have expressed both frustration with the disappointing recovery and a willingness to act if growth and employment don't pick up. Sandra Pianalto, president of the Cleveland Fed, said in public comments earlier this month she would be prepared to act if weak economic data persisted. Dennis Lockhart, the Atlanta Fed president, said more action could be needed barring a "step-up of output and employment growth."

Fed "hawks"—who tend to worry more about inflation and have opposed more action to stimulate the economy—have softened their tone and acknowledged the frustration. "I know people feel like we haven't made enough progress," James Bullard, St. Louis Fed president, said in an interview this month. He said he would be prepared to act if inflation falls too low or if a new shock hits the economy.

There are several reasons why Fed officials might wait for their September meeting to decide whether to proceed. By then they will have seen two more monthly unemployment reports and two more months of data on output, spending and investment. Fed officials update their economic projections at the September meeting and Mr. Bernanke holds his a quarterly news conference after, which would give him an opportunity to publicly explain the Fed's thinking.

Moreover, some officials believe the Fed's June decision to continue a program known as "Operation Twist" through year-end could help the economy and want to give it time to work. Under that program, the Fed is buying $267 billion worth of long-term Treasury securities and selling an equal amount of short-term securities in an attempt to push down long-term interest rates to spur spending and investment.

The most controversial option on the Fed's list is a large bond-buying program in which the Fed would acquire long-term securities with newly created money—a step known to many as "quantitative easing," or QE.

In the Fed's first round of QE in 2009 and early 2010, it bought $1.25 trillion worth of mortgage-backed securities and $300 billion of Treasury securities and debt issued by Fannie Mae and Freddie Mac. In its second round in 2010 and 2011, the Fed bought $600 billion of Treasury securities. A third round could involve similarly substantial sums. Many officials have signaled a preference for buying mortgage securities. One reason: They fear that if they buy many more Treasury securities, the Fed could become too large a presence in that market and disrupt trading.

For years, critics have warned that such programs would spur inflation, a collapse in the value of the dollar or a new financial bubble. Most measures of consumer price inflation, however, are close to the Fed's 2% goal, and broad measures of the dollar exchange rate have strengthened in the past twelve months, which has dampened the power of these warnings.

Mr. Bernanke, meanwhile, has argued that the programs are helpful, while acknowledging their effects can be limited under certain conditions, such as when interest rates are already very low and demand for credit remains weak.

A new round of bond-buying would be politically controversial so close to the November presidential election. During Mr. Bernanke's testimony last week, Democrats made clear they wanted the Fed to act and Republicans said it should proceed cautiously. The Fed chief has said repeatedly that the central bank will seek to do what is best for the economy, regardless of political pressure.

Another option is a change in the Fed's public communication about its plans. Since January the Fed has been saying it doesn't expect to raise short-term interest rates until late 2014. The Fed could change its policy statement in September to move that date into 2015. Such pronouncements about the expected path of short-term rates tend to reduce long- and medium-term interest rates. The Fed thinks this supports near-term spending and investment.

Officials also are looking at changing the interest rate paid on money banks deposit at the Fed. This interest on reserves is now 0.25%. Some critics say the Fed shouldn't be paying banks even this small amount for money that they choose not to lend.

Fed officials haven't been very enthusiastic about this idea. Some officials think the benefits of reducing the rate would be small, and some worry cutting the rate could disrupt short-term money markets. Still, officials might choose to reduce the rate in combination with other moves in an effort to give the economy a little extra lift. The European Central Bank cut its bank deposit rate to zero earlier this month.

The Fed could also try to push its benchmark interest rate, the federal funds rate, a little lower. Since late 2008, it has targeted a range for the rate between zero and 0.25%. It could narrow that range closer to zero.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

[Crafty_Dog]

Just saw a report that the House has passed the Audit the Fed bill!!!

[Crafty_Dog]

http://www.ftportfolios.com/Commentary/EconomicResearch/2012/7/26/justice-roberts-lesson-for-ben-bernanke