Fed begins monetizing the deficit

By Numerian

The Federal Reserve, in announcing the results of this week's meeting of the Open Market Committee, surprised the market by revealing it will begin purchasing US Treasury notes and bonds with the principal income it receives from its vast holdings of Fannie Mae and Freddie Mac mortgage securities. This practice - wherein the Fed buys up US government securities and injects cash into the public market as payment for these securities - is a form of monetizing the debt.

The last time the Fed did this on a big scale was back in the 1960s when it attempted to mop up the excess Treasury securities that were flooding the market as a result of Lyndon Johnson's efforts to finance the Vietnam War. That Fed program was viewed at the time as a failure, since the cash the Fed put back into the economy in exchange for the securities was a big reason - perhaps the major reason - why price inflation accelerated from the late 1960s until a decade later, when Paul Volcker managed to squelch inflation once and for all with forbiddingly high interest rates.

Fraught with risk

U.S. Manufacturing, Hire America & Buy American

Want to see some damning statistics? Read this paragraph, taken from The Plight of American Manufacturing.

Manufacturing employment dropped to 11.7 million in October 2009, a loss of 5.5 million or 32 percent of all manufacturing jobs since October 2000.  The last time fewer than 12 million people worked in the manufacturing sector was in 1941.  In October 2009, more people were officially unemployed (15.7 million) than were working in manufacturing.

See what bad trade deals and global labor arbitrage bring us?

Jobs Program Redux

Obama put forth some elements of a second jobs bill. With that, I strongly suggest all those who were disappointed, disgusted with the first Stimulus, start right now pushing for legislation we need.

Here are the main elements, laid out in the State of the Union Speech.

  • Take $30 billion of the [TARP] money Wall Street banks have repaid and use it to help community banks give small businesses the credit [Subsidized Small Business Loans].
  • Small Business tax credit - one that will go to over one million small businesses who hire new workers or raise wages
  • Eliminate all capital gains taxes on small business investment
  • Tax incentive for all businesses, large and small, to invest in new plants and equipment

Stimulus Not Targeting Job Loss States

Often times, non-economists attribute much more confusion to the ideas of Keynesian economics than is really the case. Take for example the idea of smoothing out business cycles. Anyone who's ever tried to keep to an exercise regime understands the concept intuitively. The fancy graph way of making the case looks like this:

The idea here is simple. The black line is the boom and bust cycle that characterizes un-managed markets. The red line is what happens when the government or private actors step in to manage the economy to smooth out these business cycles. Note that while at any one point, the black line may show a much higher rate of growth than the red over the long run, it ends higher.

Where are the Stimulus Jobs?

Who can forget those beyond incredible job creation projection numbers of the Stimulus Bill.  3.5 million jobs, 4 million jobs, the promise was high and never mind spending almost a trillion dollars for these jobs.  Recently the Council of Economic advisers issued a report on job creation from the Stimulus, at the same time, the White House claimed to have saved 750,000 jobs by August, 2009.

So, what's the catch?  There is no real world, real data on the truth of these claims and there may never be.

We still have theoretical calculations on job creation, based on Stimulus spending as a ratio of GDP, and thus indirectly jobs.