I'm starting to wonder if the Federal Reserve is no longer an effective tool for job creation.
After years of propping up the economy and expanding the supply of money, we have very little to show for it on "main street." We have booming real-estate prices in some cities, a growing stock market, and lots of cheap money flowing into the hands of the wealthy -- but most regular folks have been completely shut out of this recovery.
Imagine if in 2009, instead of using the traditional means to expand monetary supply, we just started sending checks to all citizens. It seems we're still waiting for the trickle down effect to kick in from the Fed's stimulus. Why are we waiting for banks to lend and businesses to hire? If the goal is to prime the economic pump with an influx of new money, put that money in the hands of people who will actually go out and buy something.
> If the goal is to prime the economic pump with an influx of new money, put that money in the hands of people who will actually go out and buy something. ... [from nostromo's grandchild comment] My question is simply: why use asset buying as a vehicle for injecting money into the economy and not cash to citizens?
Because when the Fed buys bonds, it temporarily puts cash into the economy, but sending people checks would permanently increase the money supply.
If inflation gets too high, the Fed can sell off its bonds, destroying the money it created to buy them. And even if it doesn't sell its bonds before they mature, the income on those bonds—the payments of interest and principal—is a cash flow that represents a slow, steady destruction of the money the Fed created to buy them. In this passive way, the Fed is already gradually undoing its quantitative easing, and has been doing since it scaled back its bond purchases.
(The Fed's profits—i.e., money beyond what it created to buy the bonds—go to shareholders and the federal treasury, so exactly as much money is destroyed as is created by the time the bond reaches maturity, by the way.)
A permanent increase in the money supply, on the other hand, would almost certainly show up as inflation at some point.
The US has huge structural problems and the Fed is just a useful band-aid. It's value is stabilizing the banking system not the economy.
Systemic Corruption, Terrible primary education system, Ridiculous Military Spending, Unsustainable Debt Levels, Minimal Infrastructure Spending, Huge undocumented Immigrant population, Ridicules Sentencing Laws, Anti Middle Class / Start-up Tax Code, Legislation Requiring Middle Men (Cars, Healthcare, etc), Pro Lawyer legal system, etc. We even get basic things wrong like promoting home ownership and heavily subsidizing farming.
What people forget is the US's primary advantage was simply abundant natural resources and getting though WWII without loss of infrastructure.
The Fed is a tool for managing inflation and monetary supply and it does its best with that tool to sustain job creation and the economy in general.
The real problem is the US's structural problems have become a systemic cancer that is choking off growth:
1) We have a tax code that incentives capital when capital isn't an economic constraint. We are demand constrained as far as I can tell, which means more people need to have an income to spend it.
2) We have a fundamentally broken political system that incentives things like invading other countries, the war on drugs, and a bunch of destructive spending over constructive spending on things like infrastructure that would act as an economic multiplier.
The net result is we basically need to equalize taxes on Labor v. Capital and shift the income into reducing taxes on the poorest people in the country who also pay taxes + infrastructure spending. It really is the only solution I can see that is truly going to fix anything.
Tbh, I'd settle for the taxation equalization with all of the gain on the Capital side going to the poorest income earners. That might be politically viable without the Republicans fighting it [after all, they are reducing taxes for everyone and only raising them on capital]. [e.g. Raise capital gains, raise the standard deduction for everyone]
I don't really see this happening while the US still frequently has good years. It is going to happen when we get hit with another great recession or other calamity.
Just sending checks to all citizens is politically difficult, because it starts conversations about “class warfare” and “socialism”, and implies that the federal government should have a policy of explicit wealth redistribution, rather than the current hodge-podge of means tested welfare programs and monetary policy tools.
But to answer your question: yes, we’d increase liquidity, reduce unemployment and dramatically improve the lives of basically everyone in the society if we taxed capital gains as income, restored inheritance taxes to historical levels, raised the top marginal income tax rates, and closed various corporate tax loopholes, and then just took the resulting pool of cash and distributed it equally among citizens.
In the long term, the great-great grandchildren of today’s billionaires would probably end up richer, too, since the whole society would be richer.
> I'm starting to wonder if the Federal Reserve is no longer an effective tool for job creation.
The principle purpose of independent central banking is to put government debt on a secure footing by minimizing the risk of the government acting to monetize the debt by separating direct, day-to-day control of the money supply from the government organs responsible for borrowing and repaying debt, setting spending, etc.; it also seeks to avoid harming the economy through policies that inhibit economic activity, but actually actively promoting job growth is more about fiscal (and specific program) policy of government than monetary policy of the central bank.
Well they might be effective if not for an over sized Federal Government which is consuming so much of the economy through taxation and borrowing. The US has one of the least business friendly tax systems in the world, so blind Washington is to their own actions they want to fine companies for leaving instead of getting the hint.
The Fed is too prop up people who support Washington, K-Street, and Wall Street, not Main Street.
The chart in the articles below paints the picture. I've never really been overly involved in economics up until last year. When I started reading and exploring I was shocked at what I found. I kept struggling, because I knew something wasn't right, I just couldn't put my finger on it. I still can't.
All indicators that I can find show the economy slipping into another recession (or simply continuing the previously interrupted "Great Recession")
I sincerely hope Zerohedge isn't your source for economics information, they are desperately alarmist and wrong nearly constantly. The source of your unease might just be your source of news. The world isn't falling apart, there is no 'great lie', poor homebuyers in Topeka aren't to blame for the GFC, and you shouldn't be stockpiling bullets and gold.
The world entered a debt-driven recession and we're still climbing out of the aftermath. Everyone tried to deleverage at once, which left nobody to drive the economy toward previous growth levels. Monetary policy is ineffective since the Western World is bouncing off the Zero Lower Bound, and fiscal policy is ineffective since politicians don't have the will to take on new debt to stimulate their respective economies. The historically low interest rates combined with new capital requirements are preventing financial institutions from lending money. Inflation will eventually return but not before many Western countries see several quarters of strong (4%+) growth.
Hopefully the following will help brighten your outlook;
Two of my consulting clients have seen this show up in their Q2 sales to date; one is missing their Q2 revenue goal by a whopping 50%. Admittedly, they are a small business, but they have a great B2B recurring revenue model. The goal miss is driven completely by customers who had missed their own goals in Q1, and tightened their belts as a reaction.
[+] [-] nostromo|11 years ago|reply
After years of propping up the economy and expanding the supply of money, we have very little to show for it on "main street." We have booming real-estate prices in some cities, a growing stock market, and lots of cheap money flowing into the hands of the wealthy -- but most regular folks have been completely shut out of this recovery.
Imagine if in 2009, instead of using the traditional means to expand monetary supply, we just started sending checks to all citizens. It seems we're still waiting for the trickle down effect to kick in from the Fed's stimulus. Why are we waiting for banks to lend and businesses to hire? If the goal is to prime the economic pump with an influx of new money, put that money in the hands of people who will actually go out and buy something.
[+] [-] pash|11 years ago|reply
Because when the Fed buys bonds, it temporarily puts cash into the economy, but sending people checks would permanently increase the money supply.
If inflation gets too high, the Fed can sell off its bonds, destroying the money it created to buy them. And even if it doesn't sell its bonds before they mature, the income on those bonds—the payments of interest and principal—is a cash flow that represents a slow, steady destruction of the money the Fed created to buy them. In this passive way, the Fed is already gradually undoing its quantitative easing, and has been doing since it scaled back its bond purchases.
(The Fed's profits—i.e., money beyond what it created to buy the bonds—go to shareholders and the federal treasury, so exactly as much money is destroyed as is created by the time the bond reaches maturity, by the way.)
A permanent increase in the money supply, on the other hand, would almost certainly show up as inflation at some point.
[+] [-] Retric|11 years ago|reply
Systemic Corruption, Terrible primary education system, Ridiculous Military Spending, Unsustainable Debt Levels, Minimal Infrastructure Spending, Huge undocumented Immigrant population, Ridicules Sentencing Laws, Anti Middle Class / Start-up Tax Code, Legislation Requiring Middle Men (Cars, Healthcare, etc), Pro Lawyer legal system, etc. We even get basic things wrong like promoting home ownership and heavily subsidizing farming.
What people forget is the US's primary advantage was simply abundant natural resources and getting though WWII without loss of infrastructure.
[+] [-] opendais|11 years ago|reply
The real problem is the US's structural problems have become a systemic cancer that is choking off growth:
1) We have a tax code that incentives capital when capital isn't an economic constraint. We are demand constrained as far as I can tell, which means more people need to have an income to spend it.
2) We have a fundamentally broken political system that incentives things like invading other countries, the war on drugs, and a bunch of destructive spending over constructive spending on things like infrastructure that would act as an economic multiplier.
The net result is we basically need to equalize taxes on Labor v. Capital and shift the income into reducing taxes on the poorest people in the country who also pay taxes + infrastructure spending. It really is the only solution I can see that is truly going to fix anything.
Tbh, I'd settle for the taxation equalization with all of the gain on the Capital side going to the poorest income earners. That might be politically viable without the Republicans fighting it [after all, they are reducing taxes for everyone and only raising them on capital]. [e.g. Raise capital gains, raise the standard deduction for everyone]
I don't really see this happening while the US still frequently has good years. It is going to happen when we get hit with another great recession or other calamity.
[+] [-] jacobolus|11 years ago|reply
But to answer your question: yes, we’d increase liquidity, reduce unemployment and dramatically improve the lives of basically everyone in the society if we taxed capital gains as income, restored inheritance taxes to historical levels, raised the top marginal income tax rates, and closed various corporate tax loopholes, and then just took the resulting pool of cash and distributed it equally among citizens.
In the long term, the great-great grandchildren of today’s billionaires would probably end up richer, too, since the whole society would be richer.
[+] [-] dragonwriter|11 years ago|reply
The principle purpose of independent central banking is to put government debt on a secure footing by minimizing the risk of the government acting to monetize the debt by separating direct, day-to-day control of the money supply from the government organs responsible for borrowing and repaying debt, setting spending, etc.; it also seeks to avoid harming the economy through policies that inhibit economic activity, but actually actively promoting job growth is more about fiscal (and specific program) policy of government than monetary policy of the central bank.
[+] [-] Shivetya|11 years ago|reply
The Fed is too prop up people who support Washington, K-Street, and Wall Street, not Main Street.
[+] [-] s0uthPaw88|11 years ago|reply
http://krugman.blogs.nytimes.com/2013/10/15/five-on-the-floo...
[+] [-] pbreit|11 years ago|reply
But I do dort of agree that it looks like consumption is more important than investment at this juncture (always?).
[+] [-] fidotron|11 years ago|reply
[+] [-] jgamman|11 years ago|reply
[+] [-] javert|11 years ago|reply
[+] [-] kaonashi|11 years ago|reply
[+] [-] pbreit|11 years ago|reply
[deleted]
[+] [-] javert|11 years ago|reply
[deleted]
[+] [-] Paul_Dessert|11 years ago|reply
All indicators that I can find show the economy slipping into another recession (or simply continuing the previously interrupted "Great Recession")
http://www.zerohedge.com/news/2014-06-25/unforgettable-winte...
http://www.zerohedge.com/news/2014-06-25/gdp-disaster-final-...
[+] [-] mikeyouse|11 years ago|reply
The world entered a debt-driven recession and we're still climbing out of the aftermath. Everyone tried to deleverage at once, which left nobody to drive the economy toward previous growth levels. Monetary policy is ineffective since the Western World is bouncing off the Zero Lower Bound, and fiscal policy is ineffective since politicians don't have the will to take on new debt to stimulate their respective economies. The historically low interest rates combined with new capital requirements are preventing financial institutions from lending money. Inflation will eventually return but not before many Western countries see several quarters of strong (4%+) growth.
Hopefully the following will help brighten your outlook;
* There are more Americans working today than at any point in US history: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...
* There are 9 million more Americans working today than at the bottom of the recession -- even with nearly 800k fewer government employees: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=E...
* Americans are now spending the lowest percentage of their disposable income on debt payments in the 40-year history of the data series: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=D...
* US government debt interest payments as a percentage of federal outlays are as low as they've ever been: http://www.pewresearch.org/files/2013/10/debt_interest2.png
[+] [-] karlkatzke|11 years ago|reply