Friday, December 21, 2012

What stimulus?? Fed actions completely offset wage and salary gains!

Every time the Fed announces another round of QE we hear the "know-nothings" in the media, on Wall Street and in the mainstream economics community tell us that we're getting more stimulus. And when the Fed does nothing, they scream about how we need more stimulus.

Well, be careful what you wish for!

For as the chart below clearly shows, the Fed actions have removed an enormous amount of interest income from the economy. In fact, it has removed over $100 bln more in interest income than the total net gain in private wages and salaries since it began undertaking these extraordinary measures.

Followers of Modern Monetary Theory (MMT) know why this is true: Quantitative easing is nothing more than an asset swap. The Fed removes one asset--a Treasury, for example--and replaces it with a cash balance (reserves) in the banking system. The result is that the private sector is stripped of the interest it would have earned on that Treasury, which is more than the zero-percent it earns on cash balances.

Case in point, the $80 bln in profits that the Fed earned and turned over to the Treasury last year, was from income earned on the assets it bought. That was income that would have been earned by the private sector if it still had those bonds and securities.

So while the net change in wages and salaries since 2008 has been an increase of $317 bln, personal interest income dropped by $425 bln. That's not a stimulus by any means. It's mind boggling that the mainstream economics community and the Fed itself, doesn't understand this when they incessantly call for more "stimulus."

4 comments:

Matt Franko said...

What a bunch of morons Mike! ... revealing post!, rsp,

Mike Norman said...

You gave me the idea!!

PeterP said...

Wheb the Fed buys a bond, isn't it paying up front the NPV of those interest payments that it ostensibly removes? Doesn't it invalidate the argument?

Matt Franko said...

Pete,

It looks like the Fed pays the 'market' price from the dealers and then carry them at 'face value'.... this probably requires a reserve adjustment (drain)....

govt bond sales are like "reverse loans", ie the non govt sector normally pays the price to the dealers in reserves and then the govt appropriates the interest balances to the bond holders later... so no interest balances are identified in advance or at issue...

Only if the Fed owns the bonds, the interest is paid to the Fed and then the Fed just sends it back to Treasury .... as Mike points out, this has resulted in LESS interest income to the non-govt sector as a result of this Fed activity, non-govt sector retirees and pension investors have less interest as they have no access to these bonds and are left with the only option is to leave the balances in a bank account...

Let's say a retired couple with 250k in IRA/401k who used to get 6% in a govt bond/CD stood to get $15k, now they are looking at perhaps $3750 or less and this is a $1000/mo hit their household income...

The Fed are morons, Mike has the prima facie evidence here, case closed (except for morons) ... Rsp,