patrick.net

HARM

I can't disagree with any of that. I have long thought the Fed should make more use of their dusty "reserve requirement" lever. For example, during the 90s stock bubble many people were scratching their heads at why the Fed didn't use their power to reign in margin requirements. The Fed has enormous powers over member Banks far and beyond the overnight lending rate.

Increasing reserve requirements just a tiny amount effectively deflates the money supply very efficiently and credibly (because it decreases the multiplier). Since velocity is only increasing day-by-day, it hardly seems a reach that we unmultiply the money supply a bit. In a theoretically perfect world we could have infinite velocity with zero transactional friction and 100% reserve requirements with no money multiplier at all. We'll never get their for obvious reasons, but that should be the direction we head.

@eburbed,

Actually, for most of the people I saw daily and worked with (not a statistically representative sample, I know), the car tax was a minor issue. The license for illegals issue was by far the biggest anger-inducing/hot button issue for them, followed by the car tax, and then the deregulation debacle.

Allah…the quote still has validity.

Yes. It does have validity, but the quote still wasn't made by Jefferson.

From an article on bullnotbull.com:

Thought Exercise: Now Pretend You're the Bank
Take a look at this quote, which can be found all over the internet:

This quote is attributed to Thomas Jefferson, though it is most certainly apocryphal. However I use it because it is instructive in many ways. First, don't believe anything just because you read it, even if you've read it many times. You can find this quote on a hundred web pages attributed to Jefferson. Second, even though Jefferson didn't say it, there is still wisdom in whoever did: "First by inflation, and then by deflation..."

@Randy H,

I think we are mostly in agreement. IMO, the biggest failing of the Fed in recent years (aside from dropping rates to 1% and holding it there) was Greedspan's refusal to use any of his other regulatory powers to contain/defalte asset bubbles, esp. the reserve requirements lever you mentioned. Instead of taking away the punchbowl when needed, he turned the Fed into a serial bubble-blowing machine.

"The license for illegals issue was by far the biggest anger-inducing/hot button issue for them, followed by the car tax, and then the deregulation debacle."

I totally agree with HARM on this - exactly the same experience here.

Chesapeake,

You're probably a nice person, and I hate to come off so harshly. But in my opinion you lose all credibility when you make these outrageous statements and claims. And you do a disservice to the folks who really do have legitimate complaints, criticisms and suggestions for reforming the Fed.

We "need to abolish" the Fed? As I asked earlier of someone else, what exactly to you propose as an alternative to central banking. Not in the Bizzaro world, but here, today, in the world where every other significant economic power on the planet has a central banker.

I wouldn’t say “gold carleton crowd.”
There are many good arguments to go back to a gold backed currency again.
This country needs to abolish the Fed. We cannot trust them with what they say at all. It’s all propaganda designed to keep us doing what we are doing here. While they laugh at us spinning in circles.

By the way, true inflation, is, monetary inflation, which is running so far at about 10.5%.

Even Peter Schiff (Dr. Doom) doesn't think inflation is that high right now and he is the most bearish (besides Roubini) commentator that I know!

We “need to abolish” the Fed?

The Feb definitely serves some purpose. We need to abolish the UN though.

We really do not need a tearoom for talking diplomats.

Inflation is not one number. If you feel that your standard of living is dropping fast with the same amount of spending money, inflation is high to you.

Peter P,

I see no problems with the UN, some of it even does some good.

Perhaps we can relocate it to Kansas City or Detroit or Buffalo, and free up some valuable NYC real estate. Plus, no more parking ticket issue.

I see no problems with the UN, some of it even does some good.

I just don't see much value in it. Can you give some examples?

Perhaps we can relocate it to Kansas City or Detroit or Buffalo, and free up some valuable NYC real estate. Plus, no more parking ticket issue.

Yep. The HQ should be converted to condos. :)

If any kind of inflation is steadily at 10.5%, I want to know, so I can buy the securities that track it.

Nothing is steady all the time. ;)

That which we talk about on this site has experienced high inflation until recently.

Peter P,

Condos? I'd turn it into "housing for the homeless"! Oh and THEN collect on parking tickets! How about moving it any place but here? :)

Actually *trader said it best:

"Ideally, the end of the cycle - wages and spending will feed back into the top - industry and hiring. And eventually the ignition from housing won't be required. That was what the Fed hoped for.

Well clearly this didn't happen. Each rate reduction was met by indifference from industry (while it was lovingly embraced by the consumer). Cap-ex languished and after several meetings it should have been pretty obvious these were "REIC Designated" dollars but hey! (Any port in a storm!)

While I tend to side w/Randy on much of this debate it's so apparent the Fed is irreversibly politicized that we may have to see some sort of re-alignment?

How about moving it any place but here?

Exactly. Anywhere but here. :)

How about some mand-made islands off the continental shelf?

Peter P,

UN runs vaccination, food and peacekeeping programs. Maybe not as well as they could be, but its better than nothing. It offers a forum for smaller countries to speak and grab some attention from the global behemoths. It forces most nations, this one currently excepted, to act with a veil of legitimacy.

Maybe these things are not important to you, but they are somewhat useful functions as far as I'm concerned. I rather spend money on UN children's programs than astrologers.

astrid,

O.K, then perhaps it's time we quit "hogging all the glory" and let someone else take the credit! (Oh... and the bills). :)

UN runs vaccination, food and peacekeeping programs.

True. They could be more effective.

It offers a forum for smaller countries to speak and grab some attention from the global behemoths.

They will get attention but not action.

It forces most nations, this one currently excepted, to act with a veil of legitimacy.

This function failed miserably. One cannot enforce law without power. This is why international laws are unenforceable against powerful large countries.

Maybe these things are not important to you, but they are somewhat useful functions as far as I’m concerned.

These things are very important to everyone. But UN acts against the very nature of humanity -- self interest -- without a balance of power. It cannot possibly succeed.

I have more faith on the Bill and Melinda Gates Foundation.

Okay, I sounded like a meanie.

So no rates dropping by the Feds, and they are making rumbly noises that it'll go up before it'll go down. No help for the FBs, there.

Peter P,

Now there's an idea! Maybe Bill and the Mrs. can take over the UN's functions, make it more efficient AND pick up the tab!

To discover the real increase in the money supply, you have to subtract the increase in the efficiency of the economy and the increase in population from the growth in the M3.

So if M3 is growing at a 10% rate like you say and efficiency is growing at 3.5%/yr and population growth is at 1%/yr, then the "real" money increase rate is more like 5.5%.

If inflation (as measured by a basket of goods and services) is only growing at 3%, then the rest must be going into asset inflation.

The Fed doesn't care about asset inflation, but maybe somebody should.

Now there’s an idea! Maybe Bill and the Mrs. can take over the UN’s functions, make it more efficient AND pick up the tab!

Perhaps. First, everything will be running Windows Vista. :)

Still waiting for Randy to poke holes in my undoubtedly weak understanding of macroeconomics...

Treasurys rally as Fed drops 'tightening' clause

NEW YORK (MarketWatch) -- Treasurys rallied Wednesday, sending yields lower, after the Federal Reserve left interest rates unchanged as widely expected, but omitted a crucial clause from its accompanying statement that was viewed as signaling a tightening bias. The Fed kept rates on hold for a sixth consecutive meeting, maintaining its federal funds rate target at 5.25%. But investors were keenly focused on the accompanying statement for clues about what might happen in the remainder of the year. The statement omitted the clause seen in recent statements that "additional firming may be needed." "The tightening sentence is gone -- that's the biggie," said Joe Balestrino, senior portfolio manager and fixed income market strategist at Federated Investors. "The market wasn't expecting that with inflation so high and above what the Fed is comfortable with.

Jimbo,

Uh, does anyone have a line on that M-3 data? Maybe that's why AG never missed an opportunity to tout our "productivity gains" throughout the 90's?

Peter P,

While I think very highly of Gates/Buffet/Soros and their philanthropic activities, I prefer to trust my tax dollars with fiduciaries (however distant from me) than hope for a benevalent tyrant.

I hope Mssrs. Gates/Buffet/Soros feels the same way.

Human nature is more than the grab for the last piece of sushi. We would never have gotten out of our caves if our ancestors didn't cooperate at least occasionally.

Also - Vista sucks.

M3 used to be published regularly. Here is the historical data up to Feb 2006:

http://www.federalreserve.gov/releases/h6/HIST/h6hista.txt

The Fed stopped publishing M3 at that point and now only published M2, but I have no idea why. I think we spent some time speculating on the reasons but I can't remember what everyone came up with.

Something dark and mysterious, related to their cabal-like powers, no doubt :-D

Jimbo,

IIRC the Fed offered the explanation that it was obsolete, out-dated and unecessary. My guess is that it had become an embarrassment.

Apparently New Century has declined to show up for a round of congressional finger pointing. Honestly, at this point I can't blame them. If they show up, the others will keep using THEM as a scape goat.

I should probably include a link to the story about the congressional hearings, huh?

Also - Vista sucks.

My wife ordered me a refurbished HP laptop with XP. I will see how that goes.

Human nature is more than the grab for the last piece of sushi. We would never have gotten out of our caves if our ancestors didn’t cooperate at least occasionally.

I think people collude more than they cooperate. I have not much faith on fiduciaries because they are also run by people.

Anyway, I hold a very dim view on humanity. I do not expect you to agree with me. I do not even expect people to like me.

The Fed effectively signaled:

* End to Tightening bias, meaning inflation fears are less than or equal to recession/credit crunch fears

* They are worried about the housing market, particularly with relation to people having increasing trouble getting credit (loans) to buy houses

* They are likely to cut to prevent either a recession or a credit crunch

This could have the effect of stretching out a housing price correction over many years. Of course the subprime meltdown could spread and a credit crunch could happen anyway. But short of that contagion, which is far from certain at this point, we may be looking at seeing a good portion of the housing price correction come in the form of inflation -- that is housing real prices drop even while sticker prices stay flat or even go up slightly.

My own current opinion is that we're likely to see accelerating nominal price drops in many areas over the next 6 months, but these won't be anything like 40-50% drops. They'll be maybe half of that or less. Then the rest gets taken out over 3-6 years, mostly due to Fed induced inflation. But house prices won't inflate again for a while due to new lending standards. It will take at least 10 years or longer before the banks forget what they've "learned" in this round.

I have a question about the CPI - which is inflation as measured using prices of certain goods and services.

It's hard to do. The prices of plasma TVs and digital cameras are going down sharply, but their quality is getting better. So they are deflating at a faster rate than indicated by their price. Same may be true for many services. The cell phone plans are much more expensive than they were a few years ago, but they have more features - useless features or not, there are more. So they are not appreciating that much. It's hard to factor these things in, hence the adjustments seem deliberate manipulations to many.

So it seems to me that the real price increases that should be important are food and energy. A glass of milk or a gallon of gasoline hasn't changed it's utility that much. Nor has it changed its features. But these are precisely the items that are not part of the "core" CPI ! To me that IS core CPI.

Just because they are volatile, doesn't mean I am not paying higher/lower prices for them. Can they not use a trailing 12 month moving average or something to smooth out the volatility ?

So is there a good theoretical reason that I am missing ?

We will see if global wage arbitrage allows this.

That may be more sticky than home prices. And there can be stagflation.

Randy H,

I'd heard the Fed's comments described as "tightening lite". Obviously the markets liked it and even the builders rallied but with subprime effectively cut off it's tough to script upside for recent home buyers. :(

Does Home Depot carry wheel barrels?

Randy,

Agreed with your interpretation of the FED decision. This was a preparation for the rate cuts coming in future meetings.

To extend your analysis of its effects on housing, I can say that the near elimination of subprime, credit tightening WITH reduced rates might be favorable to some Patrickiites. You will pay less nominal value in 2008-09 than in 2005, and still get a good low rate. That is if there is no recession. If the recession is severe, the prices may fall more, but our risk appetite may be tamed due to employment uncertainties.

Obligatory note. On the other hand, if inflation keeps increasing, FED will have a tough time reducing more than 100 bp. I don't think they can do that again as they did after the dot com crash. That WILL make the USD suffer more than what the policymakers want.

And there can be stagflation.

Stagflation had been my call for sometime. (Uninformed, uneducated guess. But that's how I am positioning.)

StuckinBA,

Not only that but in addition FB's will do all of the property tax re-negotiation for us as well! Believe me I'm way past laying awake nights worrying about what the Fed does or doesn't do (as they're painted into a corner on this one) but of equal concern is the fear of re-igniting the speculative bubble. Trust me there's plenty of people out there that think they're owed and they'll be looking to make it back. Fast.