Everything is under control.
Posted on 09/03/2009 6:25:32 PM PDT by SeekAndFind
Conventional wisdom is that the Fed’s printing presses are running overtime and the economy is awash with liquidity. Earlier this week the National Association for Business Economics reported that almost half the economists they surveyed believed that Federal Reserve Policy is inflationary. Too bad the NABE-surveyed economists and conventional wisdom are wrong.
Economists, pundits and journalists who climb the soap box to lecture Bernanke & Company about the evils of printing too much money need to take a second look at Federal Reserve policy.
If the Fed critics were correct, then overly aggressive monetary policy would be increasing the amount of money supply and hyper-inflation would be right around the corner. But, inflation is in check and if the Fed keeps on its current monetary trajectory high inflation isn’t in the cards for the U.S.
As it turns out, every week the Federal Reserve publishes statistics on money supply and since December 15, 2008, money supply has increased only marginally. M1 and M2 are up by about 4% and 2.5%, respectively. Such small increases hardly signal an out of control Federal Reserve led by “helicopter Ben” dropping money on the economy.
Fed watchers are correct, however, since the Lehman collapse the size of the Federal Reserve’s balance sheet has more than doubled. However, this growth of Fed size isn’t a warning of impending monetary or economic Armageddon.
While in the last year the size of the Federal Reserve’s balance sheet has grown from a little less than $1 trillion to around $2 trillion, what the Fed detractors neglect to mention is that the Federal Reserve didn’t print money to pay for the purchase of its new assets but rather sucked money out of the banking system that was being hoarded by banks, corporations and individuals. As a result, there was only a tiny net increase in money supply from Federal Reserve intervention. And, with only a small increase in money supply, inflation fears are being blown out of proportion.
Instead of printing “new money” and increasing money supply, Bernanke got banks to deposit their “old money” with the Federal Reserve, which meant that money supply didn’t increase. The Federal Reserve used that old money on deposit to purchase its new assets and grow its balance sheet.
Bernanke encouraged banks to deposit their excess funds at the Federal Reserve by persuading Congress to pass a law that allows the Federal Reserve to pay interest on cash deposits at the Federal Reserve. Prior to the change in law, the Federal Reserve couldn’t pay interest on money deposited, and as a result banks didn’t leave their excess funds at the Federal Reserve Bank. This very technical change in Federal Reserve authority provided Bernanke the magic wand to pull the banking system out of its death spiral without sparking hyper-inflation or running the printing presses overtime. Excess reserves on deposit at the Fed (which are essentially deposits of excess cash by banks at the various Federal Reserve banks around the country) total approximately $800 million and by sucking up excess reserves the Federal Reserve financed about 80% of its policy initiatives.
By recycling existing excess cash, the Federal Reserve stopped the negative effects of cash hoarding and pulled the U.S. out of a full scale depression. Bank cash hoarding at the end of 2008 depressed the velocity of money (i.e., the number of times it turns over each year) which almost caused an economic calamity for the U.S.
In a simple closed economy, annual GDP must equal (a) the amount of money multiplied by (b) the number of times money turns over in a year. If the velocity of money slows down, i.e., the number of times it turns over goes down, then GDP must fall. When the economy was in big trouble, in late 2008, banks, consumers and businesses were hoarding cash, which meant money wasn’t turning over. As a result, velocity dropped like a stone and GDP began to crash.
Bernanke and his staff were brilliant when they figured out how to stabilize GDP by forcing the velocity of money to stabilize and start to rise. Since Bernanke & Co. couldn’t rely upon the banks to recycle excess cash, they used their new authority to vacuum up the hoarded money and had the Federal Reserve Bank assume the role of private banks as an intermediary for money.
Prior to the beginning of 2009, the only successful policy that stabilized velocity of money and stopped panic hoarding was large-scale deficit spending by the central government which ultimately results in wealth redistribution and other social problems. Bernanke didn’t accept the standard prescription of aggressive fiscal intervention and instead invented as new paradigm of monetary policy.
As Bernanke’s policies started to work and panic hoarding lessened, the Federal Reserve began quietly reversing course and pulled back from some of its most aggressive measures. Pundits who question whether or not the Fed has the courage to reverse course and pull out monetary stimulus as the economy recovers need to look at actual data. They will see that there is no shortage of courage at the Fed.
Quietly and without fanfare, the Fed has gotten out of the business of being the lender of last resort for most of the securities market and broker dealers. As of the date of the last Fed report, the Fed had essentially $0 outstanding in its primary dealer, securities repurchase and commercial paper purchase facilities. And, the overall size of the Fed’s balance sheet was down between $100 million and $200 million from its peak level. Even the amount of credit that the Fed is providing to AIG is lower than it was at the height of the crisis. Plus, last week Fed governors started discussing whether or not all of the open market purchases of mortgage that have been authorized will in fact take place.
Every two weeks the Federal Reserve publishes a report that details the composition of its assets and liabilities. It should be required reading for pundits, economists and journalists before they talk or write anything about the Federal Reserve, Bernanke or his staff.
While I don’t agree with everything that Bernanke has done (particularly in the area of regulation), Bernanke and his staff are perhaps the most skilled monetary economists ever.
Of course we don’t have inflation now...after all, people are still lending to us big-time.
Cut off that lending and guess what the government is forced to do:
1) Cut spending (fat chance)
2) Increase taxes (obviously, but there is a limit, and it’s not nearly enough)
3) Print money to cover the shortfall.
Wouldn’t it be nice if this was right?
Talk to me in a year when milk is back to 4.00 a gallon.
I’d like to answer this, but time will do so better.
Don’t you remember the Wall St garage sale?
I got a great deal on some of Paulsons expired dated caviar.
I trust the government’s index for money supply as much as I trust the CPI and the unemployment rate. Pure political tools.
Calling Winston Smith, I know you’re out there.
We will be damn lucky if that is all it is 12 months from now.
Everything is under control.
I’m stocking up on boxes of powdered milk. It’s great in cooking and only 11.00 a box right now.
My kids won’t drink it but will drink this
Hot cocoa Mix
* 4 cups instant nonfat dry milk powder
* 1-1/2 to 2 cups sugar
* 1 cup powdered non-dairy creamer (coffee lightener like Creamora)
* 2/3 cup unsweetened cocoa
* 1 package of instant store-bought chocolate OR vanilla pudding mix (optional, but very good)
Measure all of the ingredients into a dry clean bowl. Use a whisk to sort of stir everything together. If the cocoa clumps up, smash the little balls with a fork. When everything is evenly distributed, transfer the Hot Cocoa Mix to a clean coffee can, or a sealed canister. Use 2 cups of sugar if you are making this for kids. The extra sweetness makes it especially kid-friendly. For grown-ups you could add 1/4 cup of instant coffee for a nice mocha flavor.
To Prepare: Spoon 1/3 cup of the hot cocoa mix into a cup or mug. Add boiling water to the top, stir and serve.
(we use Splenda and I can drink it)
Mark Sunshine (gumdrops, rainbows, unicorns, and lollipops too).
Mark Sunshine is the President and CEO of MA Sunshine Capital, a financial advisory firm that specializes in financial institutions and fixed income advisory services.
Prior to founding MA sunshine Capital, Mr. Sunshine was the President of of First Capital (http://www.firstcapital.com/) and the president and CEO of Siemens First Capital (http://www.siemensfirstcapital.com/). Both companies are global commercial lenders.
Mr. Sunshine had overall responsibility for the management and financial and corporate planning for the companies.
...
Mr. Sunshine is a regular guest commentator on FOX Business Network and has also appeared on CNBC. He is widely recognized in the media and has been quoted in The Wall Street Journal, The New York Times, Los Angeles Times, FORTUNE, CFO and many others.
Mr. Sunshine taught accounting at the University of Michigan and received his B.A. and B.S. from the Wharton School of the University of Pennsylvania and his J.D. from the University of Michigan.
....
from his profile at the URL
interesting and hard to believe....one tiny little change in Fed policy...interest in excess funds accounts....stopped the bleeding.
will be reading the comments with interest
M1 is up over %20 in the last year.
What about the trillions in USG debt they have been buying with money created out of thin air? Where’s that money going to be spent. And the Fed stopped publishing M3? Why?
Uncle Sam can sell assets, print our money until it is worthless, and raise taxes until we work for the government full time.
It will not fix the problem. The entitlements will crush the system. The numbers are so ridiculous we cannot even comprehend the disaster that is rapidly approaching.
The only solution is to kill the programs and cut spending. I don’t see anyone advocating that do you?
Does anyone seriously believe that simply moving cash from one set of hoarders to another actually saved us from Great Depression II? If it did, does it make you feel secure that it won’t happen later, especially under Teleprompter-man? Gives us time to prep.
The Fed’s asset sheet is high mostly because of LOANS - money owed to them by banks. The Fed refuses to report what the collateral is on those loans. So, most likely it’s their toxic assets. When the great majority of those go bad, it will come out of the Treasury. Because the other side of the Fed’s ledger is hundreds of billions owed to the Treasury (us).
Of course, all they need to do is let the banks release all that money, and the debts will go away, the toxic assets are valuable again, and bread costs $200 a loaf.
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