Recent Fiscal and Monetary Policies: Vas ist Das?

Transcription

1 Recent Fiscal and Monetary Policies: Vas ist Das?

2 My Original Motivation: Ease My Brother s Listeners Befuddlement -- My Brother and His Advisor Team -- Has a 2 hour, Sunday radio call-in program in Phoenix Some callers obsessed with government fiscal/monetary policy So I sometimes help answer them by phone-patch.

3 I ll Do My Best to Use Plain English Invesco surveyed 800 investors knowledge of terms For example, Invesco asked how they interpret the phrase Institutional-Quality Money Management One focus-group member wondered why prison inmates were handling money.

4 The Macro Effect of Employment Stimulus Keynesian Concept: Spend Like Drunken Sailor Stimulus Spending Doesn't Work Harvard Prof. Robert Barro: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. GDP +0.8% in 2009 ; +1.2% in 2010 But, this is more than wiped out by effects of future taxes and/or inflation needed to pay for it. Wisc. Congressman Obey, Previous House Appropriations Chair

5 An Anecdote About Uncle Milton Nobel Laureate Milton Friedman: Another short, feisty guy who pissed off a Dean or two. Friedman went to Asia, and was shown a canal being dug. He noticed it was being dug by thousands of guys with shovels. When he asked why they weren t using earth-moving equipment, the officials told him that they wanted to employ more workers. Prof. Friedman replied: So, why don t you give them spoons?

6 Will Monetary Policy Will Save Us?

7 Current Monetary Policy is Not More Complex Than Obamacare From the Fed publication: Understanding Open Market Operations

8 In Plain English, What Does the Fed Do? When the Fed Buys Securities from Dealers Increases Dealers Banks excess reserves, until the the banks lend or invest the excess. The extra loanable funds prevent the Fed Funds rate (i.e. the interbank loan rate) from drifting upward. When the excess reserves eventually get lent out, the money supply is increased by a multiple of the amount lent. When the Fed Sells Securities to Dealers Accomplishes the Opposite

9 Since the Financial Crisis: Bought Tons of Securities Not In Prior Ones The NY Fed Trading Desk Bank Excess Reserves Created By Fed Drove Fed Funds Rate to (near) Zero Fed Started Paying Interest On these Reserves

10 Prof. Milton Friedman, in WSJ, 1989: Said Don t Extrapolate Inflation Trend Instead: Show Me the Money Supply

11 Future Inflation Prediction = Money Growth Rate 3% Outside of Recessions, Predicted Well Recently Friedman Rule Inflation Prediction 8.0% % Growth 6.0% 4.0% 2.0% Recession Years M2 Growth Rate-3% Inflation,2 yrs. later 0.0% Year

12 So What s Going On? Excess reserves are high because banks could, but have not, lent them out. But as bank lending accelerates: More loans multiplying deposits induced by them Much more deposits much more money supply Much more money supply more inflation later Yup, He is Right About That

13 Let s See If the Inflationary Process Is Starting Commercial Lending Bottomed Out A Year Ago

14 Here Comes Friedman s Money Supply: Money Supply Growth Rate has accelerated

15 Whither Inflation? As more excess reserves get lent out, money supply will grow more rapidly, raising fears of inflation. Fed s exit strategy is two-fold: 1. Sell a whole bunch of that paper it bought back to dealers, thus draining reserves and putting upward pressure on the Fed Funds rate. 2. As the Fed Fund rate rises, raise the interest rate paid on reserves to prevent excessive lending, and subsequent excessive money supply growth. Because this will need to be done before recovery is complete, this will be UNPOPULAR -- perhaps INFEASIBLE.

16 Will the Fed Keep Rates Low Too Long? Some Say It Did, After the 2001 Recession

17 Taylor Rule vs. Actual FED Policy: The FED Was Too Easy Over Taylor Rule vs. Actual Fed Funds Rate Federal Funds Rate 8.0% 6.0% 4.0% 2.0% 0.0% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Date Jan-07 Jan-08 Jan-09 Taylor Rule Actual Rate But Now OK, Based on CBO Estimate Of Output Gap

18 If the CBO Estimate of Output Gap is too Pessimistic, Taylor Rule Would Call for a Higher Rate NOW

19 I Am Not The Sole Worrywart

20 So Consider This On Behalf Of Your Clients: Even Jeremy Stocks for the Long Run Siegel Likes TIPS

21 TIPS Returns: Cumulative 6.5% with Low Volatility TIPS Index

22 Gold Prices Vs. Inflation: Vas ist Das?? In fla tio n R a te

23 Caveat Emptor: China is a very big player in Gold. If it drove it up, it can break it down! #1 According to the World Gold Council, China consumed tons of gold during The United States only consumed tons. #2 China has been importing gold at a feverish pace. In fact, China imported five times as much gold in 2010 as it did during #3 The Chinese appetite for gold only seems to be accelerating in #4 Chinese demand for gold has now risen to approximately 25% of total global production.

24 Conclusion: No Savior in More Fiscal and Monetary Stimulus. What Else Could We Do? Convince Obama to stop trying to be more like Europe! Government Wants to Help? Try these: Lower the Corporate Tax Rate Now: Talk to Blaine Rollins! 42% of Federal workers are retiring within 10 years. Reduce costs by rolling some savings into block grants for states to achieve similar objectives. Move Social Security away from adjusting wage histories upward by the national growth rate in wages, to adjusting by the national inflation rate. Lessen regulatory and costly employment mandates for smaller companies, while forcing the relative handful of megabanks to divest some units -- credibly preventing Too Big to Fail. YOUR THOUGHTS: I Will Now Take Proposals From the Floor