Video: On the third round of quantitative easing and the US economy
The video below is from On the Edge with Max Keiser. I speak to Max during this show from 31 March about the US economy, Federal Reserve policy, financial repression and more.
On the issue of financial repression, I think my view is pretty clear from this video. However, I should note that analysts like Marshall Auerback take issue with the whole notion. He wrote me just yesterday on the topic:
[Pensioners] see it as repression because that’s how it’s portrayed in the mainstream press and economics profession, as well as by market professionals. It goes back to a point that George Lakoff has made many times: the guardians of the status quo use language in a very clever way to support their arguments. Who can be in favour of something as awful as "repression"? Of course we find that objectionable. And if that was what the Fed was actually doing then it would be abhorrent to all of us. But constitutionally, the government (and I include the Fed in this – let’s leave aside the Jekyll Island stuff for now), is the monopoly supplier of the currency. So if one wants to use repression in that way, I guess you could say that conferring that monopoly on the government is ‘repressive’.
Marshall’s argument is that to give retirees an adequate social safety net, clearly social security is there. He is in effect asking why we should subsidize so-called rentiers. I do think Marshall makes valid points and would appreciate his fleshing them out as a riposte. Nevertheless, I still see the Fed’s policy as both ‘repressive’ and ‘misallocating’. The Fed has inserted itself in a way which distorts market signals in favour of debtors. There is no free lunch here as this distortion has had consequences in the accumulation of private debt. As we speak US households are releveraging despite the lack of real income growth. That releveraging will end badly for the debtors and the economy as a whole.
As for QE, the Fed is more concerned with getting rates down and has probably already realised QE doesn’t do a good job of that. They are already using other means to ease.
Video below
P.S. – QE expands the Fed’s balance sheet but the Fed is not literally printing money (although I kind of like to think of it that way). The Fed is increasing the monetary base in a financial asset swap by buying treasury bonds. See my post on “How Quantitative Easing Really Works“.
One thing that I did not think you mentioned was the possible fall out from all these investors who are driven in to riskier investments just to get sensible returns. Now in the case of your mother who was used to 5% returns on her CD’s could aim to only get 5% from some other investment, that could turn out to be a lot riskier. Should that investment fail then not only would your mother be out of pocket but so would many others and that would mean that these people would be cutting spending even more to rebuild a nest egg or pension pot, and they are not really trying to take any risks. Marc Faber makes just that point on Capital Account with Lauren Lyster last night.
Agree. That’s what I mean whenever I say reaching for yield. Taking on risk means greater volatility of return i.e. large losses in the down cycle. People like my mother are not suitable investors for risk assets that could lose them a sizable portion of their wealth. When these people get creamed in the next downturn, the fallout will be nasty on the asset price side and on the AD side.
The same applies to pension funds. They are not looking for risk. When they are building the pot they need steady growth not volatility. Then when they are paying out pensions they definitely do not want risk. So pension savers who had expected to be able to retire with their pension pot repaying 6% are now finding that their income will be closer to 0.5% so they are either unable to retire or have to save much more. This in the longer term will impact the ability of pension funds to attract savers and will deter many from even bothering to save for a pension. This is effectively transferring all the risk back to the state, as the state pension will be the fall back option for more and more, even those who have previously paid for a pension. Why save for a pension when it will not allow you to retire?
Ed,
Going to disagree a little on the financial repression part. What the FED is doing is trying to accomplish its dual mandate. Nobody “deserves” a 5-6% yield. However, I do see super low yields as a problem to many Americans. I just don’t see the Fed at fault.
Who’s really at fault is Congress. The financial repression comes from a depressed economy which comes from failed policies. What I would like to have seen from the Congress is bigger tax breaks (especially for the middle class, something like a payroll tax holiday for 2 years) and some infrastructure spending (to go along with the original pre-revised stimulus plan at 1.5Trillion).
This would’ve boosted the economy and had it growing around 4-5%, unemployment would’ve probably been at 6%, and the Fed wouldve been forced to raise rates by now which wouldve put yields closer to historical norms.
So technically agree with you, there is financial repression, but the one doing it is on the fiscal side (Congress) and not monetary (Fed).
[Btw, if you take a look at yields,inflation, and GDP, you see there is a strong/decent correlation b/w them)
Well, I could not disagree more. What we have now is a dysfunctional economy. Policy is to bail out the banks, in the hope that they lend more into the economy to restart the bubble. That is Fed policy. So the financial repression is coming only from the Fed. The lack of action from Congress is actually benefitting the economy rather than slamming on the brakes that you propose.
Congress are unable to do anything other than think of tax cuts. It was Bush’s tax cuts that eliminated the surplus and put the US economy into its cycle of ever increasing deficits. This was only compounded when the crisis hit by wiping out the profits and tax revenue from the banks. Now you want to compound that mistake. Also the payroll tax cut will have to be made up somehow in the future. Also the growth claims of 4-5% are laughable. That might have been possible in a normal recession, but this is one with massive over-leverage and excessive debt. So even 3% is remarkable, and only happening because of the inability of Congress to make cuts. Once that axe falls then growth will plummet and the US economy will possibly fall back into recession.
The tax breaks are foolish at best and criminal at worst. The idea of infrastructure spending would benefit the economy but that is unlikely to happen with the Congress that you have now.
As for nobody deserving a 5-6% yield, that was the norm for decades from ordinary savings. Governments could borrow at much less than that and companies could borrow for slightly more. We have had financial repression of normal rates for years because of the Fed policy to lower the cost of funds to banks. What you also fail to appreciate that ultra low rates destroy the pensions of private companies. Long term Interest rates set the returns available from annuities. So low returns mean that either retirement is abandoned and longer term if individuals feel that pensions are a waste of time, that pension contributions fall, and the pensions industry collapses. This effectively passes the burden of what to do back to the tax payer.
Just saw this.
Most of everything you said is of faulty knowledge.
Deficits are needed if there is a trade deficit, because the public sector deficit is, by definition, private sector savings. This is an Accounting identity. If the private sector wishes to save more than it consumes (that is, the private sector has more net financial assets (NFA) at the end of the day), then the public secot MUST have a deficit.
In fact, the fact that the US ran a surplus in Clinton’s years was horrible policy, which lead the private sector levering up thus causing a massive (priv sec) bubble fueled by debt (because they were sucked of their savings) . That is why this recession was so bad and thats why we remain in a balance-sheet recession.
I couldn;’t disagree more with what your wrote. The lack of action from the congress is KILLING the recovery/private sector. The private sector needs NFA, and they are not getting them. This would be done either via stimulus spending or tax cuts.
While I would agree the bush tax cuts were not that helpful (b/c most of it went to the top), without it, this economy would have been in worse shape b/c the deficit would have been smaller.
Also, I agree, that pensions are getting killed, but thats not the Fed’s fault! Thats congress. The Fed CANNOT raise rates until inflation picks up which would come from growth.
All of this is explained by Modern Monetary Theory (MMT).
I also talked about this subject in more detail here:
https://jerrykhachoyan.com/the-stunning-collapse-in-interest-income/
I am not disagreeing about the need for the deficit. Just the scale. Governments should be running with small 1 or 2% deficits. Not 10% deficits. As I said the fact that Congress is unable to agree on anything means that it is adding to the funds available for the private sector, so balancing the accounting function. The problem is where that deficit is going. It is not going to the average person to help them rebuild their financial assets. They have little bargaining power and so all the benefits are going to corporations who are investing those surpluses outside the US economy. That is why the recovery is so weak, especially when you consider most people are burdened with huge debts that they need to pay off somehow.
As for Clintons surplus sucking up all the financial assets and forcing the private sector to lever up is wrong. That process started in the 80’s well before Clinton, when wages stagnated and the only way to cope was to borrow.
So the lack of action from Congress is killing the private sector, when by your now words the private sector needs a government deficit for them to increase net financial assets. My concerns are where that deficit is going. If it ends up in corporations it does not help the economy because they do not need to invest or spend it, or can send it overseas. If it end up in the hands of average individuals it will be saved or spent but it will boost the economy. This is a failure of Congress.
The Bush tax cuts are not helpful. What would be better is to reverse those tax cuts and spend all the extra proceeds on services that cannot be imported. This would raise working incomes and be by its nature be revenue neutral. As more people work the tax revenues would reduce the deficit without the need for tax cuts which are poor means to stimulate the economy. Most of the stimulus tax cuts went into savings so were useless. So any mention of tax cuts is idiocy trying to expect a different outcome from the same action. Also the payroll tax cut will have to be reversed if it is not going to destroy social security in the process.
Here in the UK the bank of England has the same proviso that the Fed does to maintain employment and control inflation. Yet we have had inflation of 5% and yet the BoE have not increased interest rates to control inflation. In fact as inflation has eroded wages and spending power it has caused further cut backs in spending. It is maintaining low interest rates to bail out over banks who have over lent to a weak housing market over 30 years. In a vain attempt to maintain housing prices just like the Fed has done. This is failing as house prices outside London are still falling.
As for Congress killing pensions from not creating growth, and all from a captured Congress who will do anything that business wants. I cannot see that. Congress do need to provide ways to boost growth but the problem is that the policies that Congress would approve are very ineffective at boosting growth or employment. Or all they do is end up in the pockets of business. All it does in response is define the natural rate of unemployment ever higher. In the 50’s unemployment was far lower. Though if is what MMT predicts then it is clearly a failure along with neoclassical economics.
I totally agree with you that the deficits should be targeted towards the “99%”. I’m with you that if the deficits just end up in the pockets of those not willing to spend/invest (in America), then there is no benefit in running that deficit.
However, I disagree that congress should be running 1-2% deficits. If they do that, we will easily fall in another recession tomorrow, even if it isn’t done in 1 year. Why? Because people (private sector) want to SAVE right now (and pay down debt).If nobody is spending, then the economy contracts. The deficit should probably be 10% for the next two years until we see some strong growth.
A decrease in NFA has been bad everytime for the private sector. It has always led to a recession as shown by this chart https://twitter.com/#!/TheArmoTrader/status/183020364618670082/photo/1
Some of your comments are erroneous. Taxes do not fund anything (like payroll funding social security). Thus having a payroll holiday wont kill SS. Its fnny how people dont talk about medicare “running out of $”. Yes they mention it as an unfunded liability (whatever that means, as a currency issuer we cannot run out of money), but they never talk about the “medicare fund running out of money”. So that argument is false, that a payroll holiday would kill SS.
As for your congress point, I think we are talking two different arguments.
I’m arguing what the congress CAN do, your arguing what the congress WONT do. I agree, there are some stuff which is politically unfeasible, however, that does not mean I shouldnt support the correct policies. I/You should, that’s what would make it politically feasible, once everyone joins in. Yes, I know its not going to be easy, but it can be done.
To conclude: Yes, we need big deficits to pull us out of the balance sheet recession. Yes, I agree, those deficits should be targeted much better, like hiring workers for infrasturcture spending and giving payroll tax holidays along with income tax breaks to the 99%. The 1% + corporations are doing fine, we don’t need to touch their rate.
Lastly, What Congress CAN do is different from what they will do. I think we can agree on that.
I was definitely not expecting a return to 1-2% deficits over night. With the severity of the financial crisis it could be a decade or more before the deficit can be tackled. I think that he deficit should stay as high as it is until unemployment is significantly lower. So we are agreed on that point.
As for Congress that could be a lost cause since Citizens United. The USA needs root and branch reform of political funding to actually get them to support voters rather than the paymasters.
My proposals would be end caps to any tax so the rich keep paying it at what ever income they earn. Scrap carried interest and deem it to be income. No need to even raise rates. Make fines for tax evasion so penal that bankruptcy is possible. If a business is fined so heavily that it is technically bankrupt the IRS could then break up the company and sell its component parts, without a loss of jobs. Only victims would be the board and shareholders, who could sue the board and the accountants.
My concerns about the payroll tax is that if it is deliberately underfunded for a long time it will be used as an excuse to scrap social security.
Like you I do think better targeting of spending would be far better. Economists already know what will have the most effect stimulating the economy. Defence spending has a negative impact overall, as it only increases GDP 40% for every dollar spent on it. So better to slash that and extend unemployment benefits (140% for every dollar spent) indefinitely.
A national infrastructure program would be beneficial, as would an energy efficiency program as that would lower house hold expenses and allow higher spending or saving. Then fiscal transfers to states to maintain employment of services like education and police.
I am not so sure about lowering taxes for the 90%, the top 10% should have higher taxes as should larger corporations. Small businesses that create the majority of reporting employment and who reinvest should be entitled to lower tax rates.
What is needed long term is a clamp down on excessive credit growth to stop bubbles and eliminate crises like the one we are in now.
Re: Last comment.
I’m with you on citizens united/reforming the process. I’m the biggest advocate on getting money out of politics. So totally agree with you there.
But mos of the stuff your talking about, like ‘deficit reduction’, or ‘SS being underfunded’, this is all wrong. The US as a currency issuer can NEVER run out of money. So nothing can ever run out of money. We can always issue more. The only constraint here is inflation. So we can’t just have everyone collecting “living wages” if there is nobody producing enough goods/services to meet the demand in the economy. That’s he real worry when it comes to issuing currency.
I don’t think anybody’s taxes should go up. We have a slack in our economy. And until we get <5% unemployment and GDP growing at 4-5%, there probably would be no reason to raise anybody's taxes b/c inflation wouldn't be that high until we get to that point.
MMT explains this all. Don't want to expand too much on this b/c of the narrowing room in the comments, ha.
My concern about “underfunding” social security is that the right will use that excuse as a way to abolish it, even if the claims are false. Never stopped them scrapping Glass-Steagall when all the evidence has been for a coming train wreck, which we have had since 2007. I am trying to stop them having any leeway to scrap it or privatise it.
I still think that 5% unemployment is too high. My parents lived through an era when unemployment was so low that you could walk out of a job in the morning and find another one by the afternoon. That is full employment not 5%. Also the US has inflation way higher than can be explained by neoclassical economics. Interest rates need to be higher to kill off speculative housing and asset bubbles and create incentives for saving and proper investment, yet Fed policy is for more of the same.
That’s a legit issue. Totally agree there, that the possibility of scraping it/privatizing it could arise from it being “Broke”. But thats a political issue (a legit one I will admit it), not an operational issue.
Yes, I agree, UE should be under 3% but realistically speaking thats not likely. Just take a look at the UE rate chart since 1980. Wev’e only had a few years where the rate was under 5%, and both those years came at the height of both bubbles (dot com and housing). So to just get down below 5% would be a win in my book and a return to normal UE rates. But ya, in this digital age where jobs are being killed by tech, where assembly jobs are being shipped overseas, under 5% would be a good goal.
As for “killing off bubbles/speculation”, right now, thats our least of our worries since nobody is borrowing because of the fact that we are in a balance sheet recession. So until we emerge from the BSR, there is no need to raise rates. Once loan demand picks up and the enviroment is normalized (only fiscal policy or time can solve that), then the Fed should raise rates b/c inflation will pick up b/c of the growing economy.
(BTW, are you LA times’ David Lazarus?)
I can tolerate 5% as an intermediate goal, though I think that monetary policy is lousy at reducing unemployment as it is too blunt a policy weapon. What is needed is a combination of fiscal policy as well. Though with the Tea Party holding the nation to ransom I doubt that the US will see full employment ever again. Fiscal policy is dead in the water while there are either enough Blue Dog Democrats, Tea Party or Republicans in either the Senate, Congress or the White House. Until the US clears them out of politics I expect that the US to be in a decade or more of decline. In twenty years even 8% could look good. Structural changes are needed and they are simply not being done.
I am in favour of higher interest rates but with caps and collars to restrict Fed meddling. The long term aim should be stability of savings, so that needs higher interest rates. If rates had been held higher then the bubbles would never have inflated and the level of savings would be better. What you have now is the paradox of thrift, and one of the best ways of avoiding that is to make sure that savings do not fall like they did in the recent past. That should be a Fed target, not unemployment which really is the responsibility of Congress.
I have looked at how the Depression was dealt with and I would do exactly what they did then. Liquidate the bad investments, which means debts being wiped out and people starting again. It will lead to better pricing of real estate and capital investment by companies.
While you might not think that bubbles are a problem right now the stock markets are clearly in bubble mode and more investors are talking of big falls. Edward Harrison has criticised my negative comment about the state of the economy and putting a downer on it. I have no stake either way in the US economy so do not feel compelled to talk the market up like a Bloomberg desk jockey. Though without debts being cleared and stable markets the economy is basically waiting for the next shock.
Oh and no I am not the journalist in LA. I am actually an Irish/UK citizen in the UK.