The Fed should raise short-term interest rates soon and by quite a bit. Why, you might ask should they do this? Because rates at zero have done their job and because once the real crisis passed this spring the need for zero interest rates was over. Would it make any difference to anyone in the real economy if short-term rates were 1.5% instead of zero? We doubt it. Would the financial markets scream and yell? Sure. But, the financial markets aren’t the real economy and we shouldn’t let the tail wag the dog. The financial markets would get over modestly higher interest rates a lot quicker than the real economy would, so let’s do it. Read more
Author: Karl Schroeder
Rock Bottom – Looking Back
Rock Bottom
It was 27 years ago last week that the market hit its bottom in the 1981-1982 bear market. That market had seen stock prices fall to rock bottom valuations and yet, no one wanted to own stocks that summer. To think, Philip Morris at 6 times earnings and yielding 8%. The environment then was horrendous. Interest rates on long-term Treasury bonds were still at 12%, down from 15% in late 1981. The prime rate had fallen to 17% from over 20%. If you wanted a mortgage loan, you had to pay 18% or better. Unemployment was over 10.5% and still rising. Business Week magazine argued that stocks were dead. That was the bottom of a life time, unless you managed to live long enough to see the low earlier this year. Read more
Ready For Good Times?
Ready For Good Times?
Our great nation is on the verge of another great wave of growth. It may not come rapidly or at the exact time we may expect it, but it is coming. Why? Because we have all the ingredients we need to get lots of economic growth. Interest rates are low. There is lots of money flowing around. We have lots of unused capacity in labor and capital markets. Many cyclical industries are operating at minimal operating levels (so any increase in demand translates into marked growth). We have a consumer who has dramatically reduced consumption. Inflation is virtually non-existent, outside periodic bouts of commodity-driven price increases. And, the government has a program to pump money into the economy and create make-work jobs. There should be no question we are going to have a recovery. The only question is how powerful it is likely to be. Read more
A Requiem for Supply-Side Economics
It was Nixon who remarked after taking the US off the gold standard that “we are all Keynesians now.” That was the high water mark for Keynesian economic theory. Keynes’ proposal that government ought to step up during times of economic contraction and be the consumer of last resort was the lasting idea of his teachings. His ideas have been adopted by virtually every democratic government in the world since 1936 when he published his “General Theory of Employment, Interest and Money”. The principal contribution of the ‘General Theory’ was the idea that the government had an obligation to do something during times of economic contraction to maintain aggregate demand by being the aforementioned consumer of last resort. This demand management seemed to strike a chord with politicians who could promise more, actually deliver some small fraction of that and none the less slop around in the economy a lot more than they were accustomed to. Read more
The Pendletones
The Pendletones
We’re back on our inflation kick this week after complaining about the analyst community last week.
Dr. Bernanke was out trying to rebuild the credibility of the Fed as an inflation fighter last week in speeches, a Wall Street Journal op-ed and Congressional testimony. The Fed has a dual mandate (which is sort of rare among central banks) to maintain stable prices and foster economic growth (actually full employment). To do both at the same time requires the balancing skills of a world-class acrobat. We have had few of those folks work at the Fed over the years. Read more
More on Inflation
As promised, there will be more on inflation this week and maybe even next week.
For those of you who either flunked Money and Banking or never took economics in the first place, we live in a fractional reserve world, where banks are required to maintain a fraction of their liabilities in actual reserves to meet the demands of their customers. The rest of the money is available to be lent-out. So, if you’re a banker with $1,000,000,000 in deposits, you’d have to retain $100,000,000 in reserves if we had a 10% reserve requirement. Looked at another way, if the bank as $100,000,000 in capital, it can create $1,000,000,000 in assets. The bank can take the $100,000,000 of high-powered money and multiply it. This is the guts of the money creation machinery. But today, banks aren’t taking their high-powered money and creating even more money. If they did, the economy would be screaming, assuming the monetarist economists are right. Read more