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.

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Thomas Sowell: could a Cyprus-style confiscation of private savings happen here?

Thomas Sowell, an economist for the people

Thomas Sowell, an economist for the people

Surprise! It already is happening here. Thomas Sowell explains in the American Spectator.

Excerpt:

One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.But could similar policies be imposed in other countries, including the United States?

Does that mean that Americans’ money is safe in banks? Yes and no.

The U.S. government is very unlikely to just seize money wholesale from people’s bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe?

No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever the politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save, before you are even aware, much less alarmed.

That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about “quantitative easing,” what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do — and has been doing in recent years, to the tune of tens of billions of dollars a month.

When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.

This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?

I noticed that Brian Lilley had an article about whether Cyprus-style confiscations could happen in Canada. The short answer: yes – for amounts above $100,000 Canadian.

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Michele Bachmann questions Ben Bernancke

Awesome:

Partial transcript:

BACHMANN: So the Fed wouldn’t need to be buying all these treasuries then. We could find other buyers of our debt. Is that true?

BERNANKE: Yes.

BACHMANN: So then why are we doing it?

BERNANKE: To keep rates a little bit lower, to help support housing, automobiles, and other parts of the economy that need support.

BACHMANN: But if there are other buyers, why the FED?

BERNANKE: To get rates a little bit lower.

BACHMANN: So if my 18-year-old daughter was spending 40 percent more than what my husband and I were giving her, and she didn’t just do it this month but she did it the next month and the next month and the next month — and finally my husband and I said, ‘We’re just not going to bail you out anymore, we’re not going to continue to finance that overspending that you’re doing,’ and she said to me, ‘Mother, we need to align our solution with the problem,’ — in other words, you need to keep giving me that money because it’s really not a problem yet — I would say, I think you have a problem today.

And the reason why I would say that is because the analogy with the federal government, in January of 2007, our debt was 8.67 trillion. That debt today is closer to 16.5 trillion with the intra-government debt, according to your calculation.

Do you think that’s a problem, that in six years, we’ve gone from 8.67 trillion to 16.5 trillion?

BERNANKE: Certainly I think it’s a problem, and I think it’s important we have measures to bring down it down over time.

BACHMANN: But you said we need to align the solution with the problem. It seems to me we have a big problem. and I’ll tell you why. When I was home this last week and talking to a lot of women, they were telling me, ‘I don’t get this — gasoline at Christmastime was $2.99 a gallon, now it’s $4 a gallon.’ They say, ‘I can’t keep up with the price increases at the grocery store. And we just got our health insurance premium and its going to be $300-a-month more than what it was.’

And so all I want to say Mr. Chairman is that what I’m hearing from people is that they are having to deal with the inflationary pressure.

Inflation is nothing but a hidden tax on people who save their money so that they can be independent in their old age. It’s nice to see Michele looking out for savers like me.

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Walter Williams explains why capitalism is moral in 5 minutes

Who is Walter Williams?

Dr. Walter E. Williams holds a B.A. in economics from California State University, Los Angeles, and M.A. and Ph.D. degrees in economics from UCLA. He has served on the faculty of George Mason University in Fairfax, Virginia, as John M. Olin Distinguished Professor of Economics, since 1980.

Williams was born into an African-American family. His family during childhood consisted of himself, his mother, and his sister. His father played no role in raising either child. He grew up in Philadelphia. The family initially lived in West Philadelphia, moving to North Philadelphia and the Richard Allen housing projects when Williams was ten. In 1959 he was drafted into the military, and served as a Private in the United States Army. Following his military service, he re-entered college as a far more motivated student.

While at UCLA, Thomas Sowell arrived on campus in 1969 as a visiting professor. Though he never took a class from Dr. Sowell, the two met and began a friendship that has lasted to this day.

Watch this 5-minute video where he explains why capitalism is more moral than socialism:

And here’s another 5-minute video where he explains the profit motive:

Now let’s consider another economist, Thomas Sowell:

Thomas Sowell (born June 30, 1930) is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a conservative and libertarian perspective. He is currently the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution, Stanford University. He is considered a leading representative of the Chicago school of economics.

Sowell was born in North Carolina, but grew up in Harlem, New York. He dropped out of high school, and served in the United States Marine Corps during the Korean War. He received a bachelor’s degree from Harvard University in 1958 and a master’s degree from Columbia University in 1959. In 1968, he earned his doctorate degree in Economics from the University of Chicago.

Sowell has served on the faculties of several universities, including Cornell University and University of California, Los Angeles, and worked for think tanks such as the Urban Institute. Since 1980 he has worked at the Hoover Institution. He is the author of more than 30 books.

Here is a 33-minute interview with Thomas Sowell on basic economics:

Lately, I have been thinking a lot about Christians who focus on only one issue during elections, typically abortion. I consider this to be a weak and short-sighted approach. Even if the main goal you desire is to stop the murder of unborn babies, you would do well to consider your opponent and use every tool available to defeat them in elections. Our opponent on the abortion issue is the Democrat voter. A Democrat is a person who is liberal on social policy – who supports abortion and gay marriage. If you want to defeat the Democrat candidate in an election, then you need to appeal to as many voters as possible on as many issues as possible – not just on social policy. You need to defeat Democrat fiscal policy with arguments and evidence. You need to defeat Democrat foreign policy with arguments and evidence. If you engage every target using every argument and every piece of evidence, you will get more success and win the battle for public opinion.

Let’s face it. We are not going to win elections if we turn only to people who call themselves Christians and try to get them to vote pro-life. There are not enough Christians – and not every person who calls himself a Christians is one. Focusing only on Christians is not going to get the pro-life majority we are looking for. It may be easier to avoid confronting people outside of our church, but it won’t work. A much better idea is to use every argument against every person – Christian or not. And to be able to address objections on every issue – not just one social issue. If the voters don’t care about one issue, then you can argue on another issue. You must be all things to all people so that you can win some by knowing what to say when they ask you for reasons and evidence. Now where have I heard that before?

Here is a full audio course on economics from famous Christian philosopher Ron Nash which I recommend to those who have not yet learned to integrate their Christian faith with economics. His two favorite economists are Walter Williams and Thomas Sowell – he says so in the lectures. In fact, he actually quotes a lot of Walter Williams material from his public lectures on economics, and Thomas Sowell material from his books on economics.

Note: for those who want MP3s of the Thomas Sowell lecture I posted above, here they are:

These are low-quality so they could be smaller for downloading.

Filed under: Videos, , , , , , , , , , , , , , , , , , , ,

Egan Jones cuts U.S. credit rating again, this time from AA to AA-

Story from CNBC.

Excerpt:

Ratings firm Egan-Jones cut its credit rating on the U.S. government to “AA-” from “AA,” citing its opinion that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country’s credit quality.

The Fed on Thursday said it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market.

In its downgrade, the firm said that issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.’s real gross domestic product, but reduces the value of the dollar.

In turn, this increases the cost of commodities, which will pressure the profitability of businesses and increase the costs of consumers thereby reducing consumer purchasing power, the firm said.

In April, Egan-Jones cuts the U.S. credit rating to “AA” from “AA+” with a negative watch, citing a lack of progress in cutting the mounting federal debt.

Moody’s Investors Service currently rates the United States Aaa, Fitch rates the country AAA, and Standard & Poor’s rates the country AA-plus. All three of those ratings have a negative outlook.

Could this have anything to do with the decision to print $40 billion a month to “stimulate” the economy? Once you’ve given up on letting businesses create jobs by lowering their taxes and removing burdensome regulations, then printing money is all you have left. But no one mistakes that for economic growth, least of all credit rating agencies.

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