Saturday, January 18, 2020

Stunning: Minneapolis Fed President Put Out Tweet Indicating He Doesn't Know How the Fed Creates Money

Neel Kashkari
This is simply astounding.

Minneapolis Fed President Neel Kashkari put out the below tweet:


Be sure to read the tweet carefully. It clearly shows that Kashkari has no idea why the Fed is doing repo operations and why banks would want to swap T-bills for Fed reserves.

Here is the New York Fed explaining why they do repo transactions (my bold):
In a repo transaction, the [New York Fed's Open Market Trading] Desk purchases Treasury, agency debt, or agency mortgage-backed securities (MBS) from a counterparty subject to an agreement to resell the securities at a later date. It is economically similar to a loan collateralized by securities having a value higher than the loan to protect the Desk against market and credit risk. Repo transactions temporarily increase the quantity of reserve balances in the banking system.
So why would the Fed want to increase the reserve balances in the banking system?

Because it increases the money supply and generally puts short-term downward pressure on interest rates.

This is pretty basic stuff that Kashkari appears to be clueless about.

Even Paul Krugman, with Robin Wells, in their college text,  Microeconomics, explain the process:
The monetary base is the sum of currency in circulation and bank reserves...Each dollar of bank reserves backs several dollars of bank deposits, making the money supply larger than the monetary base. 
That is the monetary base acts as a multiplier of the money supply.

Treasury bills don't have the multiplier effect that bank reserves do. That's why a bank may need additional Fed reserves to support its loan portfolio.

The full discussion about Fed reserves could go on for hours. There are, for example, excess reserves that are not in the system acting as a direct money supply multiplier. Only required reserves do but the key is that banks seek these reserves because T-bills and other assets don't act as multipliers. This is very important to understand. Because of the way the fractional reserve system is structured, Federal reserve balances support the entire bank credit system

This is the primary function of the Federal Reserve, through various methods to manipulate the money supply generally via different types of reserve operations.



Since the financial crisis of September 2008, the Federal Reserve has been pumping massive amounts of reserves into the system, some ended up for technical reasons as excess reserves that don't have an impact on the money supply, but nearly 100 billion dollars has ended up as required reserves---thus supporting the spectacular growth in the money supply. This expanded money supply is what is causing the climb in equity prices.

The tweet from Kashkari indicates he doesn't understand any of this.

He was torched on Twitter:
 and this tweet said it all:
And get this, Federal Reserve regional bank presidents rotate as voting members of the Federal Open Market Committee, the monetary policy setting committee of the Federal Reserve, which includes setting reserve policy, and clueless Kashkari is actually a voting member this year.

-RW

Friday, January 17, 2020

Three Cheers for Vanguard: It Has Refused to Sign Up to the "Climate Crisis Commitment”

George Reisman tweets:



It also should be kept in mind that climate science is hardly "settled" science. And that the millions chanting that something must be done about CO2 emissions have no idea what the scientific arguments are that are made by those that argue that current CO2 levels are not a threat. Nor do they understand the economics of how a free market would deal with a crisis if there actually was one.

The concern about climate change is mass hysteria. It really is not that different from the Salem witch hunt trials.

-RW

The Very Odd Trade Deal Between the U.S. and China; What Do the Chinese Really Think About It?


President Trump's trade deal with China is not a typical U.S-style trade deal. Most trade deals are crony deals that to a degree benefit particular operators but it is in the framework, as far as the U.S. has been concerned, of free-market trade.

The just-announced deal between the U.S. and China is a statist managed trade animal that could only be designed by people who do not understand free trade or who are willing to bow to any Trump plan no matter how illogical it is. This just signed deal is only a notch above the type of deal that the old Nikita Khrushchev's Soviet Union would make with, say, Castro's Cuba.

The Chinese have to think this deal is nuts and are probably confident there are backdoor loopholes that Trump is not aware of and is unlikely to spot.

At Cato, Simon Lester and Huan Zhu explain the oddity of the deal:
[On Wednesday], President Trump and Chinese Vice Premier Liu He signed a "phase one" U.S.-China trade deal. A "phase two" deal may be coming, although the timing is unclear, and many people (including us) are skeptical that it will happen any time soon. There are some technical and complicated parts of the phase one deal, and it will take some time to digest it all and come up with an overall evaluation. But it's worth exploring some specific aspects right away. One of the most talked about parts of the phase one deal is the commitments by China to purchase large amounts of U.S. products, including agricultural products. Article 6.2, paragraph 1 of the deal has broad details of these purchases:

During the two-year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.

Given that U.S. exports to China in 2017 were about $180 billion, an additional $200 billion over two years would be a massive increase. The deal further divides up these purchases into manufactured goods, agricultural goods, energy, and services, with specified amounts for each. It then provides sub-categories, but it does not publicly break down the purchase amounts by sub-category (apparently it does so in a confidential version of the text).

This is not a typical trade deal. A normal trade deal would focus on liberalizing trade in both directions (although modern trade deals have gone beyond that and do a lot of regulating). By contrast, this trade deal is an extreme version of managed trade, with China agreeing to buy designated amounts of U.S. products (supposedly "based on market conditions").

Beyond the problematic policy goals, it remains to be seen what all of this means in practice. Here are a few questions that arise: How exactly will China quickly ramp up its purchases? What is the role of the government in this shopping spree? What domestic process will the Chinese government use to induce companies to make these purchases? Are there accounting tricks they can rely on (e.g. reclassifying current Hong Kong imports as Chinese imports)? Will these companies shift current purchases of these products away from other countries' producers and over to U.S. producers (and will those other countries be annoyed)? Can U.S. producers scale up production to meet these targets?
In short, this is a typical Trump kind of program. It is not thought out in detail. It appears very unlikely to work. And it does not appear to be based on any foundational principles,  free-market or otherwise, other than discredited mercantilist thinking.

-RW

Thursday, January 16, 2020

The First Great Wrongheaded Economics Book of the 21st Century

The Modern Monetary Theory economist Stephanie Kelton, Professor of Economics and Public Policy at Stony Brook University, who was formerly Chief Economist on the U.S. Senate Budget Committee and an economic advisor to the Bernie Sanders' 2016 presidential campaign, will be out with a new book in June: The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy.

She really believes that deficits don't matter and that you can finance them by just printing money out of thin air. Remarkably, she has a following. All the mad spenders are likely to use this book as the support and justification for their mad spending ways.

From the book's blurb:
The leading thinker and most visible public advocate of modern monetary theory - the freshest and most important idea about economics in decades - delivers a radically different, bold, new understanding for how to build a just and prosperous society.

Any ambitious proposal - ranging from fixing crumbling infrastructure to Medicare for all or preventing the coming climate apocalypse - inevitably sparks questions: how can we afford it? How can we pay for it? Stephanie Kelton points out how misguided those questions really are by using the bold ideas of modern monetary theory (MMT), a fundamentally different approach to using our resources to maximize our potential as a society.

We've been thinking about government spending in the wrong ways, Kelton argues, on both sides of the political aisle. Everything that both liberal/progressives and conservatives believe about deficits and the role of money and government spending in the economy is wrong, especially the fear that deficits will endanger long-term prosperity.

Through illuminating insights about government debt, deficits, inflation, taxes, the financial system, and financial constraints on the federal budget, Kelton dramatically changes our understanding of how to best deal with important issues ranging from poverty and inequality to creating jobs and building infrastructure. Rather than asking the self-defeating question of how to pay for the crucial improvements our society needs, Kelton guides us to ask: which deficits actually matter? What is the best way to balance the risk of inflation against the benefits of a society that is more broadly prosperous, safer, cleaner, and secure?

With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT busts myths that prevent us from taking action because we can't get beyond the question of how to pay for it.
-RW

Peter Navarro’s Unintentionally Hilarious Apologies for Protectionism

Peter Navarro
Here’s a Don Boudreaux letter to the Wall Street Journal:
Editor:
By my count, Peter Navarro’s op-ed in today’s pages – “Give Trump’s Tariffs a Fair Test” – is the seventh such piece that you’ve published by him since he became Donald Trump’s trade shaman. Each of these essays is a cascade of contradictions and confusions so immense that even listing them would require an unusually long op-ed. But two examples will suffice.
First, in a March 6th, 2017, piece Mr. Navarro argued that U.S. trade deficits inflict such harm on the American economy that U.S. trade restrictions are justified as a means of trying to reduce these deficits. Yet in today’s op-ed he boasts that the “threat of auto tariffs has likewise drawn billions of dollars of new foreign direct investment from the likes of Toyota, Volkswagen and Mercedes-Benz.” Mr. Navarro apparently doesn’t understand the elementary fact that, because every dollar invested in the U.S. by foreigners is a dollar not spent on U.S. exports, the investments about which Mr. Navarro today boasts promote the very trade deficits that, in other contexts, he bemoans.
Second, Mr. Navarro commits the sophomoric error of confusing correlation with causation. Yes, today’s U.S. economy is booming. But economics tells us that, contrary to Mr. Navarro’s claim, this good performance is fueled, not by tariffs, but by the tax cuts and deregulation for which the Trump administration can take credit.
Researchers who’ve focused in on the actual effects of the tariffs find that, without them, today’s economy would be even more buoyant and healthy. To cite just one example: Federal Reserve economists Aaron Flaaen and Justin Pierce find “that  the  2018  tariffs  are  associated  with  relative  reductions  in  manufacturing employment  and  relative increases  in  producer  prices. For  manufacturing  employment,  a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs.”
I understand the importance of giving some of your valuable ink to prominent officials. But you insult your readers by repeatedly publishing arguments that are so comically self-contradictory and intellectually insupportable that the author, were he to submit them as answers to a high-school economics quiz, would receive an F-.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030
The above originally appeared at Cafe Hayek

Wednesday, January 15, 2020

What's With This Consumption Thing?



C98 emails with regard to the post, Trump's Shady Trade "Deal" With China Exposed:
Hello Robert!
I appreciate EPJ and all your hard work that goes into educating the economically challenged masses! Would you please help me understand the quote from Rothbard below in the context of my vocation?
 "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.… But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce."
As a farmer (producer) I grow high quality organic food for discerning and selective consumers who pay me a premium for it. I then take that "bullion", save as much as possible for the inevitable "rainy day" and invest the rest of it back into my farming operation with the overall goal to be as self-sufficient as possible in the essentials of life; food, shelter, energy and health. This serves to greatly insulate me from the vagaries of the markets, weather and AGWs. My consumer sales (consumption) are an outgrowth of my "industry" and hard work (production) but not the impetus or even the sole end, if I understand these concepts properly. Thank you!!
RW response:

Consumption is always the end goal of work, of production, unless you are doing something just for the pleasure of it which makes it a hobby.

But note what you say you do with the proceeds of your own product sales. You "save as much as possible for the inevitable 'rainy day.'"

This is nothing but building up reserves for later consumption.

And as far as "invest[ing] the rest of it back into my farming operation with the overall goal to be as self-sufficient as possible in the essentials of life."

It sounds to me like you are doing two things here, investing money back into the business to grow it (so you have more incoming funds) and you are consuming some funds in terms of goods that will make you self-sufficient.

It is misleading to think of consumption as spending only on clothes, vacations or wild parties. In whatever manner you spend money that is not a direct investment in your business or is not an investment where you are expecting a monetary return, you are most likely making some type of consumption-related spending, even if it is only for power generators, blankets, candles and dried food.

As to your point:
My consumer sales (consumption) are an outgrowth of my "industry" and hard work (production) but not the impetus or even the sole end, if I understand these concepts properly. 
Your sales of product you produced is not consumption from your perspective, they are the sale of goods for cash. And, again, unless it is a hobby, you are producing the product for cash. Presumably, so that your revenue is greater than your expenses so that you have money to spend.

San Francisco Hotel Charges an Extra $30 per Hour If You Spend Too Much Time Eating Breakfast



The 38th Annual J.P. Morgan Healthcare Conference is being held this week in San Francisco.

With the Federal Reserve pumping money into the system through money spigots located on Wall Street and Silicon Valley, the money men have plenty of cash to spend and prices at the high price hotels in San Francisco are reflecting that.

Breakfast at the Fairmont Hotel, on top of Nob Hill, isn't cheap to begin with: Eggs Benedict with home fries will set you back $26, and sourdough French toast is $24. But if you're visiting the hotel's Laurel Court Restaurant and Bar this week, you'll have to spend a $50-per-person minimum on breakfast in addition to an 18 percent “service charge” — and if you stay longer than 90 minutes, you'll be charged an extra $30 per hour, according to the San Francisco Chronicle.

Over at the Sir Francis Drake Hotel, the San Francisco Business Times reports space in the lobby is going for $300 for a three-hour time slot.

Notes the Business Times:
It wasn't always this way. During the Great Recession, when Wall Street sought refuge away from high-risk life sciences investments, there were no charges for sitting in a hotel lobby. But when venture capital money returned and companies delivered $100 million initial public offerings, rents started increasing for labs and offices as well as hotel rooms and meeting spaces during JPM Week.
Thank you, Federal Reserve.

-RW

The Shallow Economic Understanding of Roger Scruton

Roger Scruton (1944-2020)
On the news of the recent passing of the conservative British philosopher Sir Roger Scruton, I see the below quote from his writing being passed around in the Twittersphere:



And in an ironic manner, the quote reflects what I have generally thought of the writing of Scruton, broad-based but as shallow as a street puddle after a summer shower.

Scruton has created, via his observation above, two trains crashing into each other head-on. It has his turgid writing style smacking into incorrect economics.

No one, for a moment, who truly understands economics would hold the view that free-market exchange reflects only exchanges that take place in the street bazaar and that education, love and art are outside the circle of exchange.

Indeed, the term free market is slang for free exchange between individuals and also the ranking by individuals of choices.

Education must be ranked all the time, within the circle of education itself and outside it. I have to choose between reading book one or book two. And outside the circle, I often have to choose between continuing to read or, alternatively, say, answering a phone call from a friend who might want to discuss a topic that Scruton would surely rank as non-educational.

As far as love goes, if I have about seven women chasing me but I really don't have time for them all, I certainly would have to choose based on what I most value.

And for those who have broken a heart or had one broken, you know that potential interpersonal exchanges may not work because of different ranking systems between different individuals.

And art is certainly about the subjective. Not everyone appreciates the same kind of art. We sometimes see art being sold for exorbitant amounts that most of us wouldn't pay a devalued dollar for.

And so, there are exchanges and valuations everywhere.

Buying and selling may not always be in terms of the coin of the realm but there is always trading, even if sometimes it is only the trading in time to do one thing rather than another.

Scruton appears to have wanted to devalue trading when it is for common material goods as if other types of goods, spiritual and high-brow are not part of the same valuation and trading scheme. But they are all served in the cafeteria of life with the cashier demanding that you make choices always and everywhere.

This shallowness of thought by Scruton has, of course, stopped now that he is in a deep grave.

-RW

Tuesday, January 14, 2020

Trump's Shady Trade "Deal" With China Exposed



It is obvious that President Trump has a very weak understanding of trade that pushes him into thinking that discredited mercantilism is sound policy.

As Murray Rothbard put it decades ago:
Mercantilism has had a "good press" in recent decades, in contrast to 19th-century opinion. In the days of Adam Smith and the classical economists, mercantilism was properly regarded as a blend of economic fallacy and state creation of special privilege...

Mercantilism, which reached its height in the Europe of the 17th and 18th centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held that exports should be encouraged by the government and imports discouraged. Economically, this seems to be a tissue of fallacy; for what is the point of exports if not to purchase imports, and what is the point of piling up monetary bullion if the bullion is not used to purchase goods?...

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.… But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.
So Trump has recently been put in a box. He wants the benefits of free trade going into the election, e.g. a stronger stock market and a better overall standard of living, but he doesn't really want free trade. Thus, he has been negotiating a "Phase 1" trade deal with China--when he really doesn't want a deal.

Hence, it should not come as a surprise that the street hustling Trump, and his sycophant advisers, have come up with a trade deal that isn't much of a deal at all.

Bloomberg News is reporting today, on the heels of the signing of Phase 1 tomorrow, that:
Existing tariffs on billions of dollars of Chinese goods coming into the U.S. are likely to stay in place until after the American presidential election, and any move to reduce them will hinge on Beijing’s compliance with the terms of a phase-one trade accord, people familiar with the matter said.
The two sides have an understanding that no sooner than 10 months after the signing of the agreement at the White House Wednesday, the U.S. will review progress and potentially trim tariffs now in place on $360 billion of imports from China, the people said, declining to be identified because the matter is private.
So who really knows how Trump will grade the Chinese trade report card in 10 months given his erratic positions on just about everything else and the fact that in 10 months he will not have election pressures.

The Trump street hustle is on.

-RW

This is Who Is Going to Join President Trump in Davos, Switzerland at the World Economic Forum


The annual World Economic Forum gathering in Davos, Switzerland will run from January 21 until January 24. This year's theme will be the economically ignorant but politically correct, "Stakeholders for a Cohesive and Sustainable World.”

The trade-hating President Trump is scheduled to attend.

Here are some others that are expected to join him:

Greta Thunberg,  child abuse sufferer
Angela Merkel, Federal Chancellor of Germany
Christine Lagarde, President, European Central Bank
Marc Benioff, founder, chairman and co-CEO of Salesforce and confused lefty
Al Gore, opportunist and climate fearmonger
David Rubenstein,  Co-Founder and Co-Executive Chairman of The Carlyle Group, low key arms dealer
Fareed Zakaria, CNN host, possibly CIA-connected

-RW

Federal Reserve Warns That a Cyberattack on a Top Five Bank Could Cause Major Disruptions



The Federal Reserve Bank of New York has just released a new paper warning about the disruptions that could occur in the financial system as a result of a cyberattack.

The paper, titled Cyber Risk and the U.S. Financial System: A Pre-Mortem Analysis, considered what could occur if one of the five biggest banks involved in the payments system was successfully attacked.

From the paper:
We estimate that the impairment of any of the five most active U.S. banks will result in significant spillovers to other banks, with 38 percent of the network affected on average.
The impact varies and can be larger on particular days and in geographies with concentrated banking markets. 
The focus was on the wholesale payments network but the paper stated there would be similarities to old fashioned bank runs:
We begin by integrating cyber risk into the theoretical literature on bank runs, highlighting similarities and differences between cyber and traditional shocks. In some ways, losses related to cyber attacks are similar to other operational loss events that can trigger liquidity runs and lead to solvency issues. Such runs can be panic based or fundamentals based. As in a standard run, a cyber related run would likely result in direct costs to the affected bank and spillovers to counterparties within the financial sector and to the real economy.
Here is a conclusion from the paper as to which counties in the United States would be most and least impacted by a successful cyberattack at the wholesale payment system level on a major bank:

Click for larger view.
The paper didn't specifically address what could occur at the ATM/cash machine level but obviously, major disruption could occur. It might result in the inability to withdraw cash from some ATMs and severe limitations as to how much can be withdrawn from ATMs that are still active.

I warned just last week that an Iranian cyberattack might have the potential to knock out the banking system. I stated then:
I am not predicting this will be the type of attack that will occur but it is a prudent time to make sure you have one to three months of living expenses in cash under your bed.
You should have that already but if you don't, what are you waiting for?
During a crisis with ATMs down, a cash hoard will have tremendous buying power.
I am still not predicting that a major cyberattack will occur, but this Fed paper should be a wake-up call to protect against such a possibility.

It's time to stuff the mattress.

-RW