QE? What is Quantitative Easing anyway?

American Life, banks, Consumers, Economy, government Comments Off
Jan 182013

There are lots of news reports and internet musings about Quantitative Easing. I’ve read many with the hope of discovering one comprehensible article that would fairly represent QE for the non-fiscal, non-monetary schooled citizen. Not to be. The explanations are either way over my head or focused on attacking or defending the policy. People seem to use many exotic terms to describe an already abstract subject.

So I’m going to take a swag at explaining what and why.

The Fed chairman, Ben Bernanke has been fearful of the country falling into another depression since the bubble burst in 2008. He’s made plain that the bogeyman we have to fear is deflation, not inflation. Simply put, inflation is too much money chasing scarce goods. Inflation causes prices to rise. Deflation on the other hand is an abundance of goods and not enough money, or at least not enough buyers. Deflation causes prices to fall.

A recession brings a lot economic distress: job losses, company failures, personal bankruptcies….its ugly. But a depression, that’s an event that changes lives, economies and even governments, sometimes permanently.

The clear similarity between 1929 and 2008/2009 is that in both cases, a massive amount of capital disappeared. Money invested in almost anything (except long term treasury bonds) just disappeared. When money in investments and the value of owned assets disappears people won’t or can’t go out and buy things. Then more jobs disappear because employers know people aren’t spending as much money so they reduce expenses by laying off workers. Fewer jobs equal fewer paychecks and there is even less available money around. As you can see this becomes a really ugly self-perpetuating down spiral.

The 1929 depression saw the collapse of the stock market erase the supply of capitol.  In 2008/2009 the wealth disappeared from home equity first and then the stock and bond market followed.  Again, as in 1929 and the 1930′s, wealth just melted away.  Homes purchased in 2000 for $300,000 escalated to $500,000 in 2005 then fell to $200,000 by 2010. This happened millions of times. Almost all the homes had mortgages, many owners had refinanced and taken money out for home improvements and vacations. By 2010 the inflated value was gone. Owners owed more than the possible selling price  of the house. A vast amount of capital was taken out of the American economy. Whatever the details, 80 years ago or today, a huge amount of wealth ceased to exist.

Bernanke is using QE to replace the private capital that had been lost  in the recession. To do this the Fed is using new money to buy mortgage backed securities (MBS) from banks so that the banks, in turn, make more loans. In other words replacing money which had disappeared and getting it back into the economy.

You might say that this is nice for the banks that are getting premium prices for otherwise unwanted securities, but has this worked to help the little guy? The answer is no, not directly. However, good things have happened  to reverse some of the losses from the recession,  For example: (1) The stock market is within hailing distance of its 2007 high, thus replacing a fair measure of the capital that was lost in the recession. (2) Unemployment has improved slightly. Not that much, but its better than it was two years ago. (3) New housing is showing some signs of life. Again its not a great recovery, but there is improvement. Along with that will come housing prices which will rise and replace a lot of lost wealth.

The arguments against QE mostly have to do with it reducing interest rates for savers and opening the door to inflation.  The inflation argument is pretty weak right now since its very unusual to see high unemployment and high inflation at the same time. Later, when employment improves we hope the Fed stays ahead of the curve. Low interest rates for savers also means low interest rates for home buyers, so that’s a mixed blessing. Savers must take on more risk since bank interest rates won’t even keep pace with low inflation numbers.

SRBAC

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Posted by srbac at 12:32 pm Tagged with: , , , , ,

The Big American Political Lies

American Life, Economy, government Comments Off
Feb 292012

Do the math. It’s a fairy tale to believe that just increasing taxes on rich people will solve our deficit problems. It’s also a fairy tale to believe that reducing taxes will solve our deficit problems.

Incredible as it sounds though, these are the two big lies American politicians want citizens to believe.  One side says that all we have to do is tax the rich, which is anyone making more than $200,000 annually, and we’ll be OK. We don’t have to cut any programs, well maybe defense, but no social programs. Basic arithmetic aside, that’s what the party with the donkeys want us to believe. The other side, the party with the elephant, want us to believe that if we reduce taxes, huge amounts of dollars will flow into government coffers because, in some mysterious way the economy will soar and there will be more tax dollars without increasing tax rates. That’s magical. The elephant guys also want us to slash government spending, but most of then are really vague about which programs should get slashed. They wouldn’t want to piss-off any voters.

There’s  a theory that government spending can’t be cut while an economy is in recovery. The theory says that reducing government spending will worsen the situation by increasing unemployment and further reducing tax revenues. Economists argue about this constantly. There is really no proof that adjusting government spending will affect the economy. What there is proof of is that government spending of funds we don’t have will increase the public debt.

There’s also a theory that says taxes can’t be increased during recovery from recession, because that will reduce growth and subsequently further reduce tax receipts. In fact, taxes have been both raised and lowered during economically tough times. There’s no proof that one works better than the other. There is plenty of evidence however that if we don’t raise enough money to meet our debts, it will have a very negative effect on the country’s future.

It’s pretty evident that people in favor of less government control are not going to vote for higher taxes and people in favor of more government subsidies and wealth transfer are not going to vote for reducing spending. Both groups can point to historical situations where implementing their program (or not implementing the opposing program) achieved desirable results.  Both sides will put their own spin on not implementing their programs: citizens starving in the dark for example , or conversely, total economic collapse and Armageddon.

Both sides seem to believe that if you talk long enough and loud enough the fairy tales will come true.

SRBAC

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Posted by srbac at 3:51 pm Tagged with: , , , ,

Unconscious Headlines #4 – What do we deserve?

American Life, government, media, Unconscious headlines Comments Off
Jan 012012

Happy New Year.

For the first post of the new year we’ll celebrate The Sunday New York Times for an unconscious headline on their editorial page. The editorial is “As Good As it Gets?” and the subheading is “Americans deserve better than an economy that merely muddles along”.

My question is: why do we deserve a better economy? What exactly have we done to deserve a better economy? The article of course blames Republican intransigence for blocking more government spending. And by doing so have prevented “more government aid to help create jobs”. Setting aside the fact that governments don’t create jobs (except more government jobs), the NYT is stuck on Americans deserving something (from the government).

I was brought up with the idea that I was deserving of anything I earned. Where is the part that says “American deserve everything they earn”. And if we go on electing the same bad actors that tell Americans they “deserve” things, then we’ll get what we deserve.

Have a healthy and happy.

SRBAC

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Posted by srbac at 2:46 pm Tagged with: , , ,

Flat Tax, Balanced Budget, Campaign Finance & Term Limits.

government, politicians, taxes 1 Response »
Nov 212011

There…I said all the things that almost all politicians hate in one headline. Okay…republicans hate taxes and democrats hate spending cuts, but they all hate stuff like campaign finance reform. And to a greater or lesser degree reforming the tax code, taking a serious swag at balancing the budget and doing away with the lifetime careers for congressmen and senators. As you might expect politicians want no part of it.

Flat Tax.  Well maybe not flat exactly but certainly different than what we struggle with today. People really can’t get a handle on equitable tax distribution if all these shelters and deductions obscure the outcome. If your income puts you in the 27% bracket or the 34% bracket then the tax you pay should be about uhmmm…27% or 34%.  I don’t think we can institute a single tax bracket for everyone, even though that is itself somewhat progressive. For example, if the single flat tax is 25% and taxpayer A makes $25,000 and taxpayer B else makes  $1,000,000, taxpayer B is going to pay a lot more than A, but  a 25% tax is going to hurt A more than the bigger tax bill will hurt B. A lot of voters are in favor of tax reform, mostly because they think their taxes will be lower (and conversely someone else will have higher taxes). Tax reform will do a lot to help Americans understand and even agree about a fair tax burden.

Term Limits. Incumbent politicians, unless they’re caught taking money or fooling around usually find it easier to get re-elected than a challenger finds it to get elected the first time. Their office is a platform on which they can reward those who support them and punish those who do not.  In Congress, powerful committee chairs are dispensed by seniority. Partisan party policies continue, not because they’re good, but because the familiar officeholders keep getting re-elected. This built in bias for the office holder is contrary to the original “rotation of office” thinking common during the nation’s founding. Politicians don’t like it for obvious reasons.

Campaign Finance. The enormous amount of money spent in election campaigns in the United States propagates the two party system. The tidal wave of money raised and spent by the two dominant parties effectively freezes out third part voices. Corporations and unions are totally connected to the dominant parties and completely focused on promoting their agendas. Spending by political action committee’s  makes a farce of the election process. Elections decided because the candidate has the most money to spend is not what the democratic process is envisioned to be. Since the vast majority of politicians holding office today belong to one of the dominant parties it is unlikely they will support real significant reform.

Substantially reducing the amount of money a candidate can spend would promote the ability of candidates representing other points of view to be heard. Corporate and Union participation must be eliminated.  The media will be absolutely against this option since it provides fewer opportunities for their profound comment.

Balanced Budget. In theory a balanced budget rule is more of a hindrance than an aid. Why should we have a rule that curtails flexibility in emergencies or limits  strategic options for government in general? The problem of course is spending, or more specifically: politicians and spending. Balancing the budget means that annually we will not spend more than we have in revenues. This won’t cure the huge deficit already created by the politicians from both sides, but it would help in making sure it doesn’t get bigger.

It’s hardly a revolutionary idea since almost all the states have some type of legal requirement for budget balancing.  A major effect of an enforceable balanced budget amendment will  be to shift the politicians focus from finding ways to raise taxes or spend money, to finding ways to live within the budget constraints. Something we haven’t done for a long time.

 

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Posted by srbac at 3:50 pm Tagged with: , , ,
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