Wintery Knight

…integrating Christian faith and knowledge in the public square

New study from the Federal Reserve finds that QE stimulus doesn’t grow the economy

Investors Business Daily reports on our incompetent government’s policies.

Excerpt:

For four years now, we’ve heard policymakers and pundits alike defend the Federal Reserve’s quantitative easing based on the idea that, without it, the nation’s economy would have imploded.

Now, a new study from the Fed itself suggests that’s not the case.

The study, by San Francisco Federal Reserve economist Vasco Curdia and New York Fed economist Andrea Ferrero, suggests that quantitative easing (QE) has done little to boost the economy’s trajectory.

“Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation,” the economists wrote in a special research note that was released last week.

In their study, Curdia and Ferrero looked specifically at the impact of the Fed’s QE2 program, which totaled $600 billion.

Assuming the $600 billion program lasts for five years — with the Fed buying bonds the first year, holding them for two, then selling them off for the remaining two — the spending turns out largely to have been a waste.

That level of QE stimulus, even when coupled with the Fed’s promise to hold interest rates at zero, likely boosted GDP by a mere 0.13 percentage point, the study found. It added just 0.03 percentage point to inflation.

Bottom line: $600 billion in QE2 spending boosted GDP by less than $200 billion.

[...]And even that minor amount of growth was due in large part to the Fed’s explicit vow to hold official interest rates at close to 0% until the unemployment rate reaches 6.5% or lower, Curdia and Ferrero said.

Take away that promise, and QE2 added just 0.04 percentage point to GDP and 0.02 percentage point to inflation.

What caused it?

With $17 trillion in total U.S. debt — an amount that’s now growing at a rate of $1 trillion a year — the authors argue that the Fed is essentially trapped into printing money through QE.

If QE — which now pushes $85 billion a month into U.S. Treasury and agency debt — stops, interest rates will soar, dragging the economy down.

Fed Chairman Ben Bernanke has been sanguine about this, suggesting this enormous pile of debt can all be sold off with little disruption.

We’re not so sure. Once the Fed begins selling off its massive $3.6 trillion in assets acquired under the QE program (see chart), it will send interest rates surging and tank the economy.

Even more troubling is what it says about current politics.

The White House and a Democrat-led Senate have boosted spending dramatically — outlays as a share of GDP rose initially by 25% under President Obama

The Fed, by buying up much of the newly issued federal debt, has become the No. 1 enabler of a spendthrift government that’s pushing us to the brink of fiscal disaster.

At $85 billion a month, QE2 spending is roughly equal to the amount of federal debt we add each month.

We elected a Keynesian who thought that government could create economic growth (jobs!) by borrowing money and printing money. The countries of the world largely cheered our decision to elect him. He failed to grow the economy and he failed to create jobs. Eventually, the money he’s been spending to keep a sinking ship afloat is going to run out.

Filed under: News, , , , , , , , , , , , , , , , , , , , ,

Conservative Party MP Pierre Poilievre explains how Canada escaped the recession

Conservative M.P. Pierre Poilevre (Nepean-Carleton), a member of the majority government in Canada, explains how Canada embraced the free entreprise system that America has rejected, and the results they got.

Here is the speech that went viral on Youtube:

And here is his article in the liberal Huffington Post.

Excerpt:

In a few days the “fiscal cliff” deadline will arrive and potentially bring massive automatic spending cuts and tax increases. Even if Congress and the President agree to avoid the cliff, the next crisis awaits. Treasury Secretary, Timothy Geithner, wrote the Senate this week to report that the “statutory debt limit will be reached on December 31, 2012,” which will require extraordinary measures to prevent a mass default. These measures will give the government 60 days before it runs out of money and Uncle Sam’s head smashes into the so-called “debt ceiling.”

It has long been said that when the U.S. sneezes, Canada catches a cold. So why have these debt-related ailments in the U.S. not afflicted the Canadian government?

The answer is that Canada has been practicing what the U.S. always preached: free markets, low taxes and minimal state interference. And it is working.

For example, Canada avoided the interventionist policies that led the U.S. to the sub-prime crisis.

In an attempt to expand home ownership, administrations from Carter to Bush Jr. forced banks to offer mortgages to people who would otherwise not qualify for them. Washington then ordered government-sponsored enterprises such as Freddie Mac and Fannie Mae to insure these “sub-prime” mortgages.

According to a 2010 Report on the U.S. Financial Crisis by the World Bank’s Development Research Group, Freddie and Fannie bought an estimated 47 per cent of these toxic mortgages. Harvard financial historian Niall Ferguson indicates that the amount of mortgage debt backed by these government-sponsored enterprises grew from $200-million in 1980 to $4-trillion in 2007.(1) The government pumped so much air into the housing bubble that it burst in 2008. The resulting financial crisis led to government bailouts of the banking sector.

Big government caused the economic crisis. So we are told the solution is more big government. Funny how the problem becomes the solution.

Because the Canadian government did not impose sub-prime mortgages on the country’s charter banks, we avoided the crisis and did not bailout a single financial institution. To keep it that way, Canada’s Finance Minister has ended all government-backed insurance of low-down payment and long-amortization mortgages. In other words, if you want to take on risky debt, taxpayers will not insure you.

Governments must lead by example when managing their own debt and spending. Low debt is the result of low spending. Federal government spending as a share of the overall economy is 15 per cent in Canada (2) and 24 per cent in the U.S. (3). The numbers are not merely the result of prodigious U.S. military spending, though that is certainly a factor. Non-military federal government spending is 14 per cent of Canada’s economy (4), and 18 per cent of America’s (5).

Take a look at some of these graphs from earlier in the year about the Canadian 2012 budget. (This is straight from their government’s web site – they have new transparency/anti=corruption measures now, so the citizens know everything that government does). When comparing the deficit and debt of Canada to the United States, always multiply the Canadian number by 10 to get a benchmark to compare. For example, Canadian GDP is 1.7 trillion, and the US GDP is 15 trillion.

Canada’s budget deficit is around 30 billion, but ours is 1.2 trillion:

Canada Federal Budget Deficit / Surplus 2012

Canada Federal Budget Deficit / Surplus 2012

If we were doing as well as Canada, our deficit would be about $300 billion. But we have run up about 6 trillion in debt over 4 years! Not only that, but Canada’s national debt is only $600 billion. If we multiple that by 10, we would expect ours about $6 trillion. And it was that – during the Bush Presidency. But then the Democrats took over the House and Senate in 2007 and everything went wrong and we packed trillions and trillions onto the debt, including about $6 trillion during Obama’s first term.

Canada’s Debt to GDP ratio is 34%:

Canada vs US Debt to GDP

Canada vs US Debt to GDP

But things are even worse for the United States, now. The current United States Debt to GDP is 105%, according to official U.S. government figures. We are due for yet another credit downgrade, and should see Greece-like levels of Debt to GDP during Obama’s second term. We are spending too much, and we aren’t going to be able to make up trillion dollar deficits even if we confiscate every penny that rich people earn. (And they won’t be daft enough to keep working as hard if we did that – they would move, and probably to Canada)

What is happening to us here in the United States is self-inflicted. We are – and have been – voting to impoverish ourselves and generations of children born and unborn, by punishing those who work hard and play by the rules, and rewarding those who don’t work and don’t play by the rules. It didn’t have to be this way. We could have elected a President who actually knew something about business and economics. Knowledge matters. We can’t just choose a President who gives us the “tingles” and then expect him to perform the actual duties of being President. Competence is more important than confidence. Substance is more important than style.

Filed under: News, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

How to easily develop your knowledge of the way the world works

If you’re not reading IBD editorials every day, you are missing out. I agree with them on practically everything they write. I try to stay in touch with what’s happening in the world, with respect to economics and foreign policy, and Investors Business Daily is indispensable. (And sometimes, they even cover social issues like school choice, affirmative action and stem cell research). It’s not just the news that I want, it’s the analysis. They fit every data point into an argument – and that makes the world a very interesting place.

Here are four sample articles.

Did the latest European bailout fix anything?

Excerpt:

Led by the Fed, top central banks added dollars to the global financial system on Wednesday as Europe’s crisis deepened. We hate to rain on anyone’s parade, but this won’t solve the EU’s problems.

The central banks’ bold action, though met with wild enthusiasm by financial markets, amounts to little more than a multibillion dollar Band-Aid on a deep, dangerous wound.

[...]But even as they juggle and sell off their portfolios of bad loans, major banks in Europe, the U.S. and Asia are being forced to raise capital to meet new international banking standards. The result: a credit crunch.

In short, the global financial system is near collapse, and the central banks are madly pumping dollars into it to keep the collapse from happening.

It’s an emergency, we get it. But while such actions might help in the short run, they won’t in the long run.

The EU faces the same problems today as it did yesterday, and no amount of central bank money-printing changes that.

Namely, its 17 members, used to an ever-expanding welfare state and leisure-class lifestyle, can’t sustain that way of life with their chronically weak economies and aging, low-productivity workforces.

Contrary to recent actions, the EU’s problems aren’t short-term and financial, but long-term and fiscal.

The same kind of problems that we are having USA, as we have moved from 160 billion dollar deficits under Bush in 2007 to approximately 1.4 trillion dollar deficits in ever year that Obama has been President. Maybe we can learn some lessons from the mistakes that others have made and are making instead of making those mistakes again ourselves?

If global warming is real, where are all the hurricanes?

Excerpt:

Sunday will be the 2,232nd consecutive day that the U.S. has gone without being hit by a major hurricane. This is a big enough deal to be covered by the mainstream media. But of course it won’t be.

On Dec. 4, a new record will be set for the number of days between landfalls of category 3 or stronger storms. The previous streak, according to Roger Pielke Jr., began on Sept. 8, 1900, and ended on Oct. 19, 1906, when the Great Galveston Hurricane hit.

The record won’t be broken by just a day or even a week. Pielke, a professor of environmental studies at University of Colorado, says it will be crushed.

“Since there won’t be any intense hurricanes before next summer, the record will be shattered, with the days between intense hurricane landfalls likely to exceed 2,500 days,” he writes in his blog.

Why is this significant? Because the global warming alarmists have been telling us that man’s carbon dioxide emissions would bring bigger storms.

[...]The mainstream media has happily trafficked this nonsense, but it’s not likely to mention Pielke’s point even though it would be appropriate in stories covering our very mild hurricane season, which ended Wednesday.

Why won’t they do it? Because it’s inconsistent with their narrative. It’s like the latest batch of Climategate emails, which show again a group of scientists manipulating the process for political gain. News that contradicts the alarmists’ tale simply isn’t news to the media.

If you think that global warming alarmism has no effect on you, then you need to realize that it is being used to justify all kinds of job-killing regulations. If you want to know why companies ship jobs overseas and expand their operations outside the United States, then look no further than the EPA.

Is existing U.S. oil drilling in the EPA’s crosshairs?

Excerpt:

The latest salvo in the administration’s war on energy may be new rules and permits to regulate a process to get oil and gas from porous rock, sacrificing jobs and economic growth while under review.

There are a few areas of the U.S. that are booming. Two of these are in North Dakota and Pennsylvania, states that sit atop two massive shale rock formations, the Bakken and the Marcellus.

Extraction of oil and natural gas from these formations have created jobs and economic growth in the midst of a stagnant and parched economy.

[...]Yet the Environmental Protection Agency, bowing to environmentalists’ pressure and faithful to the administration mantra that fossil fuels are harmful and obsolete, is preparing to nip this economic boom in the bud by regulating it to death.

[...]Pennsylvania’s Department of Labor and Industry estimates fracking in the Marcellus created 72,000 jobs between the fourth quarter of 2009 and the first quarter of 2011. Drilling in the Bakken formation along the North Dakota-Montana border helps explain North Dakota’s unemployment rate of 3.2%, the nation’s lowest.

The Gulf Coast energy industry has never fully recovered from a similar moratorium and a new glacial permitting process.

Similarly, the job-creating Keystone XL pipeline project to bring Canadian tar sands oil to American refineries is stalled on environmental grounds.

It’s not enought that Obama blocks the creation of hundreds of thousands of new energy sector jobs – and wastes money on alternative energy companies connected to his campaign fundraisers – but now he might be going after existing energy production jobs, too.

Should we continue to send our “ally” Pakistan foreign aid?

Excerpt:

In what’s become a common occurrence, the Pakistani military — in an unprovoked attack — fired on coalition troops based across the border in Afghanistan. We responded by hitting two Pakistani border posts. The airstrikes killed two dozen Pakistani soldiers, sparking anti-American riots and threats of reprisal by Islamabad.

[...]So why still coddle Pakistan, diplomatically? Several reasons, not the least of which is Pakistan’s arsenal of nuclear weapons and cold war with India. But it’s mainly because we need its permission to transport military supplies across its border into landlocked Afghanistan, the terror swamp believed most worthy of draining.

More than 40% of the fuel, food, ammunition, equipment and other supplies sent to U.S. forces in Afghanistan are shipped via Pakistani ports and roads. Islamabad also gives us access to airspace — including landing rights at three air bases, where we launch the Predator drone aircraft targeting Pakistani-based terrorist camps in lieu of U.S. boots on the ground.

Islamabad could easily deny us those landing rights and cut off supply routes at any time, hamstringing our Afghan operations. Sure enough: Islamabad did exactly that over the weekend. After the coalition air strike that killed 24 of its troops, Pakistan blocked two coalition supply routes running through Pakistan. It also gave the U.S. two weeks to vacate the Shamsi air base in Balochistan, which has been used for drone sorties.

These moves make reducing our dependence on Pakistan all the more critical.

The Pentagon should hike supplies coming into Afghanistan from the north through Central Asia. To fund the added expense, it could use the billions in aid Pakistan is secretly using against us by funding and arming Afghan insurgents. It could also use a chunk of U.S. aid dollars to build larger fuel-storage facilities on the ground in Afghanistan, so that military operations can withstand major disruptions to supplies.

So there you have it – four great articles on the European crisis, global warming science, the employment situation at home, and foreign policy. And you get this analysis for free every day with Investors Business Daily. You can check out their editorials at this link, and bookmark it. Even if you don’t read the Heritage Foundation’s blog “The Foundry” and the American Enterprise Institute blog “The American”, you can still stay well informed by reading IBD every day. If you are interested in raw news without the analysis, then read CNS News.

It’s very important for Christians to understand that we have to be seen by others as aware and informed on other topics in order to be seen as aware and informed on religious issues. Part of that involves studying apologetics and being familiar with opposing arguments and evidence. Part of it is being informed about social issues like abortion, marriage and education. But part of it is just being a well-informed person in general. When topics like politics and economics and national security come up, our goal should not be to take whatever position is popular, or whatever position will make us look “nice”. We should have our own position, and we should be informed enough about the world to participate in – and even to dominate – conversations on those topics. We have to be the people who know how the world works.

Filed under: Commentary, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Bank run in socialist Europe begins

Europe: Annual Budget Deficit as % of GDP

Europe: Annual Budget Deficit as % of GDP

From CNBC.

Excerpt:

Money-market funds in the United States have quite dramatically slammed shut their lending windows to European banks. According to the Economist, Fitch estimates U.S. money market funds have withdrawn 42 percent of their money from European banks in general.

And for France that number is even higher — 69 percent. European money-market funds are also getting in on the act.

Bond issuance by banks has seized up because buyers have gone on strike.

From the Economist’s Free Exchange Blog:

In the third quarter bonds issues by European banks only reached 15 percent of the amount they raised over the same period in the past two years, reckon analysts at Citi Group. It is unlikely that European banks have sold many more bonds since.

Corporate depositors are also pulling their cash.

Free Exchange:

“We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an analyst at Citi Group wrote in a recent report. “This is a worrying development.”

And there are troubling signs that banks are even running out of collateral to back their borrowings from the European Central Bank .

So far the liquidity of the European Central Bank (ECB) has kept the system alive. Only one large European bank, Dexia, has collapsed because of a funding shortage. Yet what happens if banks run out of collateral to borrow against?

And from the leftist New York Times.

Excerpt:

The flight from European sovereign debt and banks has spanned the globe. European institutions like the Royal Bank of Scotland and pension funds in the Netherlands have been heavy sellers in recent days. And earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt.

At the same time, American institutions are pulling back on loans to even the sturdiest banks in Europe. When a $300 million certificate of deposit held by Vanguard’s $114 billion Prime Money Market Fund from Rabobank in the Netherlands came due on Nov. 9, Vanguard decided to let the loan expire and move the money out of Europe. Rabobank enjoys a AAA-credit rating and is considered one of the strongest banks in the world.

American money market funds, long a key supplier of dollars to European banks through short-term loans, have also become nervous. Fund managers have cut their holdings of notes issued by euro zone banks by $261 billion from around its peak in May, a 54 percent drop, according to JPMorgan Chase research.

This is really disturbing. I wonder if any of my economics-minded commenters can explain to me what happens when there is a run on banks. I am guessing that there will be some rioting over benefits as austerity measures are imposed, and interest rates will go up.

Filed under: Commentary, , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

A closer look at the budget deal

Here’s a good article in the Wall Street Journal about the budget deal struck by the House, Senate and White House on the weekend.

Excerpt:

The big picture is that the deal is a victory for the cause of smaller government, arguably the biggest since welfare reform in 1996. Most bipartisan budget deals trade tax increases that are immediate for spending cuts that turn out to be fictional. This one includes no immediate tax increases, despite President Obama’s demand as recently as last Monday. The immediate spending cuts are real, if smaller than we’d prefer, and the longer-term cuts could be real if Republicans hold Congress and continue to enforce the deal’s spending caps.

The framework (we haven’t seen all the details) calls for an initial step of some $900 billion in domestic discretionary cuts over 10 years from the Congressional Budget Office (CBO) baseline puffed up by recent spending. If the cuts hold, this would go some way to erasing the fiscal damage from the Obama-Nancy Pelosi stimulus.

[...]The second phase of the deal is less clear cut, though it also could turn out to shrink Leviathan. Party leaders in both houses of Congress will each appoint three Members to a special committee that will recommend another round of deficit reduction of between $1.2 trillion and $1.5 trillion, also over 10 years. Their mandate is broad, and we’re told very little is off the table, but at least seven of the 12 Members would have to agree on a package to force an up-or-down vote in Congress.

If the committee can’t agree on enough deficit reduction, then automatic spending cuts would ensue to make up the difference to reach the $1.2 trillion minimum deficit-reduction target. One key point is that the committee’s failure to agree would not automatically “trigger” (in Beltway parlance) revenue increases, as the White House was insisting on as recently as this weekend. That would have guaranteed that Democrats would never agree to enough cuts, and Republicans were right to resist.

Instead the automatic cuts would be divided equally between defense and nondefense. So, for example, if the committee agrees to deficit reduction of only $600 billion, then another $300 billion would be cut automatically from defense and domestic accounts (excluding Medicare beneficiaries) to reach at least $1.2 trillion.

One reason to think tax increases are unlikely, however, is that the 12-Member committee will operate from CBO’s baseline that assumes that the Bush tax rates expire in 2013. CBO assumes that taxes will rise by $3.5 trillion over the next decade, including huge increases for middle-class earners. Since any elimination of those tax increases would increase the deficit under CBO’s math, the strong incentive for the Members will be to avoid the tax issue. This increases the political incentive for deficit reduction to come from spending cuts.

Mr. Obama’s biggest gain in the deal is that he gets his highest priority of not having to repeat this debt-limit fight again before the 2012 election. The deal stipulates that the debt ceiling will rise automatically by $900 billion this year, and at least $1.2 trillion next year, unless two-thirds of Congress disapproves it. Congress will not do so.

I don’t like the deal because I wanted Obama to have to face this problem with this again in May of 2012, but it may be the best deal we could get with control of only the House.

Filed under: News, , , , , , , , , , ,

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