Friday, December 7, 2012

Taxation without Representation

Quantitative Easing: Welcome to the liquidity trap. 

Normally the Fed enacts monetary policy by controlling interest rates, raising or lowering the federal funds rate (inter-bank interest rate with the Federal Reserve) to achieve the desired effect.  It does this by buying or selling short term government bonds, altering the amount of money in the economy while affecting the price and yield of government bonds, which in turn nudges the inter-bank interest rate in the desired direction. 

In 2002 the targeted federal funds rate was 1.75%, in 2006 it was about 5.25%, today it stands between 0 and 0.25%.  A liquidity trap is when increased monetary supply fails to lower, or can not lower interest rates.  An economy in a liquidity trap can not use monetary stimulus to increase output. 

Quantitative Easing is a monetary policy whereby the Fed prints money and uses that money to purchase financial assets from commercial banks with the sole intent of increasing the monetary supply rather than lowering interest rates which cannot be lowered further.  

Laws in the US, UK, Japan, and EU prohibit the central banks from printing money and directly purchasing government debt.  Instead, the government sells bonds to private entities with the understanding of and defacto guarantee, that the central bank will then repurchase those assets.  So in essence we’re saying it is illegal to counterfeit money unless you also launder it. 

Ben Bernake had this to say:
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
When the government imposes a tax (Say $2), it takes that money out of the private sector leaving individuals and business with less money and the government with $2 more.  When the government uses money that didn’t previously exist (prints money) and uses it to buy (Say $10) something on the commercial market, holds it, and then sells it for a profit (Say $12), the difference ($2) is effectively a tax.  The value that the government has earned has come out of the devaluation of all the other currency held in the private sector, including yours.

Between 2009 and 2011 the government has devalued the US currency supply by some $200 Billion dollars.  This is $200B that the government now holds, that was taken from the private sector, all without the approval or consent of congress (although one may argue they have implied consent).  This is effectively a $600 a head tax each and every one of us has paid.

When government has the ability to create and spend all the money it wants, priorities shift, and the concept of budgeting, as most Americans know it, loses all meaning.  Hand a teenager a credit card, and tell him there is no limit and no accountability for what he spends, and the effect would be the same.  Every dollar created and spent by government makes the dollars in your pocket worth less and less.

Taxes? We don’t need no stinkin’ taxes… we can print all the money we need!



Anonymous said...

Bernanke and others argue that the Fed is buying assetts and putting them on their balamce sheet, which is another way of say they are printing money and putting it into circulation to stimulate the economy. In theory, when inflation starts to heat up, the Feg would start selling those assets, which effectively sucks the funny money out of the economy and curbs the inflation trend. The problem comes when the Fed can't find buyers for their assets they need to sell. Besides US bonds, the Fed has a lot of toxic assets that would be very hard to move. The Fed is out of ammunition and our economy is going to get a thurough screwing.

FreeThinke said...

President Reagan defined Inflation as "the cruelest tax of all."

Artificially induced inflation by the Federal Reserve to help give the illusion of solvency does a disservice to everybody, except The Oligarchs who are manipulating the markets and government fiscal policy to weaken us and thus make us increasingly ripe for loss of sovereignty and submission to the One World Socialist-style Dictatorship these scheming geniuses have been striving towards for a hundred years or more.

Before the Progressives got their hooks into us my Grandpa earned twenty bucks a week, raised eight children on it and was able to save enough to buy acreage and build a nice two-family house. The house, which still stands today, though most of the and was sold log ago for development, was built for less than FIFTEEN-HUNDRED DOLLARS. Even in today's down market it would sell for 400K.

Who the HELL do we think were kidding?

A million dollars today very probably has less PURCHASING POWER than 50K had a hundred years ago.

And I NEVER EVER hear ANYONE in congress or the political punditry even WHISPER that the tax on long-term capital gains should be adjusted for INFLATION.

Now why is that?

We are being GROUND DOWN to PULVER by the OLIGARCHS.

Obama is just a SYMPTOM. Eradicating him would do nothing to cure the DISEASE.

Meanwhile, the Evil Geniuses are ever-so pleased to see us filled with contempt and derision for each other and fighting among ourselves.

~ FreeThinke

KP said...

Another thoughful and thought provoking article, Finntann. Thanks.

Jersey McJones said...

The far-righties have been crying "wolf" and "the sky is falling" over Quantitative Easing ever since the mess THEY made in the first place that required the Fed to act, and here we are - NO wolves AND the sky is still above us.

Bla bla bla.


Silverfiddle said...

@ Jersey: "NO wolves AND the sky is still above us.:

Excellent rebuttal to something no one here said.

Finntann said...

@NO wolves AND the sky is still above us.

So, Jersey... do the dollars you put away twenty years ago still have the same value (purchasing power)?

The dollar you socked away in 1992 has declined in value by 47%.

Where has that value gone?

There are two schools of thought on inflation, quantity theory and quality theory.

Regretablly, regardless of which school you subscribe to both the quality of US currency has gone down and the quantity of US currency has been increased.

You're being played like a violin, and you're either enjoying it, or are oblivious to it.

Where did that 47% in value go? To the Fed and to the government, it was used to help finance your entitlement programs, military, wars, and debt.

And if you think the problem is distinctly Republican or Democrat, you are far less intelligent than I give your credit for.


FreeThinke said...

And I ask again:

And I NEVER EVER hear ANYONE in congress or the political punditry even WHISPER that the tax on long-term capital gains should be adjusted for INFLATION.

Now why is that?

Anyone care to venture an opinion? What makes perfect sense to me may seem like gibberish to others. If so, please let me know.

~ FT

FreeThinke said...

I daresay the NUMBER of dollars we take home or possess in savings and investment is unimportant. It is the amount of PURCHASING POWER each dollar has at a given moment that matters.

That's why constantly striking for higher wages has a negative effect on EVERYONE.

All it does is raise the cost of goods and services which in turn reduces the purchasing power of the dollar.

Am I wrong? If you think so, please explain.


~ FT

Finntann said...

You have a point FT, and that has even been recognized by the Treasury:

The preferential tax rate for long-term capital gains would
be repealed. Gains and losses from sales of property would no
longer be classified as either capital gains and losses (i.e.,
gains and losses from sales of capital assets) or ordinary gains
and losses. Thus, net capital gain as defined under current law
would be fully includible in taxable income and subject to tax at regular rates. Moreover, the holding period of property would no
longer affect the tax treatment of gains or losses from sales.

Repeal of the preferential tax rate for capital gains would
be coupled with inflation adjustment for realized gains from
sales or other dispositions of property.

So the problem is recognized, I haven't heard any talk of doing anything about it.


Finntann said...

Sorry about the strange blogspot formatting... no idea why it did that.

Jersey McJones said...

Silver, stop pretending you don't know what I'm taking about. You guys have been crying "inflation" for years, and if anything, we've have damaging deflation. You're perfectly fine with whoring the nations wealth in the name of free trade and "right to work" laws, in the name of foreign tax havens and flattening income taxes, and what have we got?

When we didn't do those things, historically, we did better, all of us. When we did do those things, we did worse, except for a small minority who became absurdly, often crookedly, rich.

Of course, we ostensibly don't have inflation, as recorded on the national level, but we do have lots of inflation in certain sectors that most Americans, regular everyday Americans, feel. But what does that have to do with Qualitative Easing. Actually, almost nothing. The sectors barely merge. This is arithmetic, Silver. Your opinion here doesn't trump the fact.

Take whatever you want, pick a sector, name one in which QE caused inflation. You'll find the opposite - and disturbingly so.

Not only is it not causing inflation in any sector that is experiencing it, but it seems to be causing only more deflation in the sectors it's engaged - treasuries and mortgage securities (something that should not exist legally).

That's where the problem really is - not at the Fed (so much) - but at the lack of security regulation. It is a primary function of government to enforce contracts. If a government turns it's back on a new type of "secure" contract, it is neglecting it's duty. The GOP did that and has been doing that for years.

It's time we better regulate that market. It's a federal prerogative. We have a little more now, thanks to Ron Paul, Dennis Kucinich, Barney Frank, and a few brave compatriots. But we need more regulation of Wall Street, and less regulation of our personal lives.


Thersites said...

Quantitative easing...

That's the words for the government taking and spending the equity that would have appreciated in your home instead of you doing it.

Thersites said...

Did you hear? FHA has gone broke now. THAT is how the government "fixed" the housing crisis through greater "regulation"...

Ever play 3 card Monte?

viburnum said...

Funny how they didn't notice that before the election.

Silverfiddle said...

@ Jersey: Take whatever you want, pick a sector, name one in which QE caused inflation. You'll find the opposite - and disturbingly so.

$ Food.
$ Energy (gas for cars, heating our homes)

And interest rates remain flat, lower than inflation, so people with money in the bank are watching the government literally rob their money in broad daylight.

It's simple, Jersey. If a government prints money (fiat currency) out of thin air at a rate faster than the economy grows, the value of each dollar will be less. It's simple economics.

Silverfiddle said...

And any other sector. Has the price on anything gone down? Maybe from your highrise business owner world everything is great, but people on Main Street are being eaten alive.

Have you raised prices at your restaurant over the past four years?

jez said...

Worth bearing in mind that inflation mskes it easier to service debt.

Silverfiddle said...

True Jez, but there is always a trade-off, isn't there?

Few could argue with incurring a temporary debt for some emergency, but we have made it a way of life.

Finntann said...

U.S. food price inflation increased at a rate of 4% in 2007 and at 5.5% in 2008. Annual food price inflation dropped to 1.8% in 2009 and 0.8% in 2010, before rising to 3.7% in 2011, the USDA projects that annual food price inflation will range from 2.5% to 3.5% in 2012 and rise to 3%-4% in 2013.

Ignorance is Bliss, eh?

@You guys have been crying "inflation" for years, and if anything, we've have damaging deflation.

Uh..yeah, right.

FreeThinke said...

The TRUTH is this:

The individual with courage, brains, ambition, good will and a modicum of faith had a MUCH better chance of owning, developing and enjoying private property and achieving financial independence BEFORE 1913. My own family saga with its very humble beginnings on both sides is proof enough of that.

We've been saddled with ever-increasing amounts of government interference that has created and fed inflation, steadily devalued the dollar, discouraged and crippled initiative and pushed too many millions into trailer parks or Section 8 Housing where before they might have owned a modest, well-designed stick-built house on a tree lined street with a vegetable garden in the back and several fruit trees.

Life has always been a struggle, and it always will be, but in the halcyon days before 1913 the individual had a GOOD chance of fulfilling his dreams. Nowadays, we're lucky just to be able to tread water and stay afloat in meager circumstances for the duration.

When government moved in on Industry -- c. 1900-1908 maybe -- Industry found ways to fight back. Ultimately, the industrial titans joined forces with government in order to regain a measure of control and get back some of their own.

The result has been the oppressive, bureaucratic over-regulated, micro-managed monstrosity we are saddled with today.

Because of Marxist-Socialist-Liberal-Progressive-Fascist-Statist policies most of us are now helpless serfs trapped in a neo-Feudalistic society.

The names we use to describe them may change every few decades, but Alas! the cyclical "whirlpool" patterns that keep sucking us down over and over and over again never do.

It may sound trite, but the truth remains, "You can't get something for nothing."

Whatever temporary "gains" you may make from giving up part of your power to chart your own course and make decisions for yourself are bound to be offset and negated by the loss of liberty.

Today's huge, faceless, heartless monolithic multi-national corporations have accrued as much or more power to exploit, oppress and dehumanize the individual than Industry ever had before 1913.

Industry joining forces with government to protect the best interests of Industry is possibly the worst thing that ever happened to us.

~ FreeThinke

Silverfiddle said...

FreeThinke: Exceedingly well stated. And they call it progress...

Jersey McJones said...

Silver, how the heck does quantitative easing cause inflation in the food and energy sectors???

Silly nonsense.


Silverfiddle said...


You're a business owner and you don't understand this?

Oil is a dollar denominated commodity. Devalue the dollar and the price will go up. Same with everything else.

So answer my question: Have you raised your prices?

And don't take this as an attack only on Obama. Bush did grave damage to the dollar when he was president, and it contributed to the 2008 meltdown.

Jersey McJones said...

Silver, again, how would quantitative easing cause that to happen?

Look, I'm not happy with the Fed or QE in general, but I don't see the connection you're making here.


Finntann said...

Oh for God's sake! The more dollars printed, the less each one is worth.

The dollar is the standard unit of currency in international markets for commodities, and an international reserve currency.

You can't just print them without having an effect on the currency worldwide.

It's hilarious that we accuse the Chinese of currency manipulation... what the hell do you think Q.E is?

Silverfiddle said...

Finn: I think we're wasting our breath at this point.

Keep in mind, we are talking with a studiously ignorant Obama voter.