Is it the Federal Reserve governors' and analysts' intellectual ineptitude
or the act of conniving for economic malaises that causes them to continue using
methodologies and mechanical tools of monetary policy that are obsolete for
helping to fix the American economy? Flawed logic continually exposes itself as
they use the historically errant Large Scale Asset Purchases program for fixing
the economy while publicizing overly optimistic prognoses for real GDP and
inflation, which go so above and beyond the well-researched conclusive
statistical numbers calculated at the end of each year. Debts have reached to
such outrageous levels and this stimulus program has devalued the dollar so
much that the Federal Reserve has been rendered incapable of desirably
affecting aggregate supply and demand as well as being incapable of
implementing the remedies necessary for correcting the disorders. The aggregate
demand curve refuses to be shifted in the desired direction by Large Scale
Asset Purchases, leaving aggregate price levels, real GDP and nominal GDP
remaining stagnant.
According to an October report from the Casey Research Institute, as a result of the Federal Reserve’s practices, a
counterproductive and regressive trend shall continue-----this being the
attenuation in the circulatory speed of money or the number of times a specific
unit of money is spent on new domestic goods and services during a particular
period of time. This is formally known as the velocity of currency circulation.
As public and private debt levels slowly reduced the dynamics in monetary
policy, the final consequence involved having the velocity of currency
circulation reach its pinnacle in 1997 and then begin on its downward slope.
The aggregate demand curve represents planned outlays for
nominal GDP or the raw GDP figures of year-to-year comparisons without the
inflation numbers being factored in. Nominal GDP is equal to the velocity of
currency circulation multiplied by the money stock (the total amount of assets,
liquid instruments and currency available to an economy’s people during a
particular time period). Irving Fisher’s equation of exchange helps to express
this: MV=PT. M is the money stock. V is the velocity of currency circulation. P
is the price for commodities. T is the size of transactions and the production
turnout of goods and services.
Last year the Federal Reserve attempted to foretell a 2.7%
enlargement in real GDP for 2013. Their extrapolations have apparently “missed
the mark” by 50% when compared to the documents of academic researchers and the
conclusive statistical numbers calculated at the end of each year. Federal
Reserve analysts seem to be bedazzled by the “so-called wealth effect” to such
an extent that they believe increasing stock prices will escalate consumer
spending. The Casey Research Institute seems to believe that statistics betoken consumer spending as fluctuating between being slightly responsive and entirely
unresponsive to the ebb and flows of wealth in the market. Consumer spending
had abruptly declined from 5% during the first quarter of 2011 to 2.9% despite
having ongoing speedy enlargements in stock and home prices for the past three
years.
The ratio of the combined public and private debt to GDP had
increased from 152% in 1980 to an awe-striking 296% in the second quarter of
2011 and thenceforth to 273.3% in the first quarter of 2013. The American
economy has agonized with ongoing deficits while trying to manufacture goods
and services sufficient for fulfilling its current debt obligations without
borrowing more money and creating future debt obligations to be its means for giving
what it owes. Economic prosperity becomes hampered when the public and private
debt to GDP ratio surpasses 260%, according to the literature of academic
researchers written throughout the past three years. During each year between
1870 and the 1990s, real GDP expanded by 3.7% in the United States. After the
year 2000 when the debt to GDP ratio surpassed 260%, expansion had slumped to 1.8%
each year. Real median household income or the average number calculated from
the total aggregate income of the country has abated by 4.3%, reaching its
lowest point since 1995.
The Casey Research Institution believes the money multiplier
is on an epoch-making and hell-raising descending drift that has never been
seen before.
The M2 money stock (ordinary green pieces of paper in circulation and deposited monies held by consumers in commercial banks) is divided into the monetary base (currency issued
by the Federal Reserve coupled with commercial bank reserves held on deposit in
the Federal Reserve) for determining the money multiplier. The money multiplier
is the bridge between the monetary base and the M2 money stock. It is the
instrument used for gauging the greatest amount of commercial bank money that
can be generated or the total amount of loans that can be distributed in ratio
with central bank money or money held on reserve by commercial banks.
According to Wikipedia.com and the Federal Reserve’s tablecharts, the monetary base is worth $3.5 trillion and the Casey Research
Institute says the M2 money stock was worth $10.8 trillion in September of this
year. It is said that 3.1 is the level of the money multiplier. The money
multiplier stood at 9.3 during the year 2008 which was precursory to the
Federal Reserve’s mammoth augmentation of the monetary base which supposedly
indicates that each $1 of the monetary base gave support to each $9.30 of the
M2 money stock. The money multiplier’s level of 3.1 is the lowest it has been
since the inception of the Federal Reserve in 1913. In the 4th quarter of the
year 1949, the money multiplier fell to 4.5, but never fell below this number
until 2008.
Economic prosperity and growth will be disappointing for the
last few months of this year with a high probability of not surpassing 1%. This
is more disappointing than the weak 1.6% growth rate that has existed
throughout the entire year thus far.
Are Loan Recipients Being Forced to Pay What They Owe?
Why has the money multiplier dropped to an unprecedented
level of 3.1 in recent years even though the Federal Reserve has implemented 3
sessions of quantitative easing and is continuing its $85 billion-a-month bond
buying program as was reported in the Tribune Review, which has now led up to meting out more than $2 trillion of stimulus funds
into the economy since the financial collapse of 2008? Should we have not seen
the money multiplier lessen in precariousness and substantially increase in
recent years? Where has the money gone? Has it disappeared or has 81.5% of the
money been premeditatedly held in reserves by private banks at the Federal
Reserve, allowing excess reserves to inordinately accumulate from $831 billion in August
of 2008 to $1.863 trillion on June 14, 2013 after excess reserves were
maintained nearly at 0% since 1959? Robert Auerbach tried to sound the alarm in
a HuffingtonPost article published during June of this year. It can be read here.
Does this
signify that private banks are greatly restraining their lending practices and
denying anyone who requests for a loan? Private banks must be incentivized to accumulate and retain excess reserves if the central bank makes interest payments to the private banks for doing so. If interest rates on income earning
assets enlarge (especially on bank loans to businesses and consumers), the
payments of interest the Federal Reserve owes to private banks for the
retention and accumulation of excess reserves will enlarge also. Perhaps this
is what private banks want. At 1% interest, banks could annually receive $18.6
billion. At 3% interest, banks could annually receive $55.9 billion. At 5%
interest, banks could annually receive $93.2 billion. Consumers will receive no
interest payments and stockholders will receive big bonus money from the
government as a result of the fraudulence.
What if the banking system is blindsiding people and
businesses with a now-continuing 4-year long period of “calling in” loans and
forcing its debtors to remit what they owe irrespective of whether or not they
are able or ready to remit what they owe? Surely, the poverty level and the
chasm between low- and high-income earners has increased as the private banks
repossess or confiscate people’s homes, cars and other properties that were
pledged as collateral.
One question is unanswered as of now: How do we entirely
explain why they kept a near 0% of excess reserves for such a protracted period
of time before allowing the excess reserves to rise inordinately? Why have we so abruptly shifted into a contractionary period in recent years?
To be continued.......
