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Taylor Rule Estimate Suggests Fed Fund Rate Differential At Whopping 6.8%
When Zero Hedge initially looked at the Taylor Rule Estimate for the Federal Fund Rate back in January, the prevailing consensus was that, even then, the Taylor-to-Fed Fund Differential was a whopping 6%. For those who wish to familiarize themselves with the Taylor Formulation, we suggest reading our initial thoughts, but in a nutshell Taylor's thesis is that the FOMC sets it fund rate target according to this rule:
i=r*+p+0.5(p-p*)+0.5(y-y*)
where i is the nominal fed funds rate, r* is the equilibrium real funds rate, p is the inflation rate, p* is the Fed's desired inflation rate, y is the (log) level of real GDP, and y* is the (log) level of real potential GDP. (Various banks introduce coefficients that change the weighing of some of the factors, but in its purest, this is what the original Taylor formulation reads).The default calculation assumes a target inflation of 2% and unemployment rate of 5%.
Now of course only Sweden seems capable to pull of a negative Fund rate, which is why monetary policy is futile these days, and the only alternative the Fed has is to promote liquidity via Quantitative Easing.
So the question now is whether after several hundred billion of agencies, MBS and treasuries has already purchased, has the Taylor Rule estimate improved at least marginally, or, in other words, has the Fed Fund Rate to Taylor spread tightened.
The answer is an empathic no, implying that in as much as QE was supposed to be the last bastion of monetary policy, it has failed, and all it has achieved has been to maintain interest rates on mortgages and bonds within a reasonable bracket. And as long as the money multiplier remains suppressed due to the population's perception of the true economy (which is surprisingly objective, despite the media's 24/7 propaganda that everything is now better), this negative metric will persist, and eventually force Bernanke to acknowledge that his monetary policy has been a failure.
The first chart demonstrates a time-study of the Fed Funds Rate superimposed on top of the Taylor Rule Estimate: According to Taylor if monetary policy had free reign, the Fed would need to set rates at -6.55% right now in order to stimulate inflation.
The 6.8% spread between the Taylor and the Fund Rate is the widest it has been in over 2 decades, while the actual Taylor reading is now the lowest it has been since data has been accumulated in the early 1980s.
So now that QE is gradually being unwound and various liquidity measures are starting the be reeled in by the Fed, the key question becomes just what weapon does the Fed have left in its arsenal to stimulate the monetary base in the hope of offsetting prevailing deflation and unemployment. Alas, hope and green shoots do not work here.
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'the Fed would need to set rates at -6.55% right now in order to stimulate inflation."
--^ epic fail
OK... so for those of you who are more financially sophisticated than me... which is probably alot of you... what would happen if we woke up tomorrow to an announcement from the Federal Reserve that they were setting the fed funds rate to -6.8? May be a little far-fetched... but Sweden cut theirs to -0.25% What would happen in real life... to the markets... and the velocity of money... where money flowed... savings accounts... etc...
I would immediately borrow $10 million, live off the positive interest carry, and cut all non discretionary spending except wine women and song.
That's a really good question... I don't know for sure... I think a lot of money would flow into gold.
There was someone talking (forget which idiot academic) that was suggesting we retire bills ending in a certain serial number causing them to no longer be legal tender. This of course would have the effect (I think) of causing a panic out of physical FRN and into A) gold and B) into electronic currency (as there is no serial number associated with checking deposits).
That was Mankiw.
Re chequing deposits, sure there's no serial number, but the thing is, they'd be paying you -6% on your balances, so they got you covered.
The negative interest rate would get linked to your checking account. It would essentially be a cost paid to store your money in the safety of a bank.
People would then have a very strong incentive to take out as much money as they could feel comfortable having at home or investing it in some asset. Due to fractional reserve banking that would create a deflationary spiral that would require even lower (greater) negative interest rates.
Furthermore, if interests rates got low enough, rates tied to loans would also become negative. Thus you would be paying people to take your money. This would again lead to a sharp decrease of loans outstanding, and would exacerbate the deflationary spiral. The only loan that would be made is that to a counterparty that offers greater safety than keeping the money at home (perhaps government securities).
Please keep in mind that in deflation your incentive is NOT to spend, as your money is everyday more valuable. That has very wide ranging implications for commerce.
However, let me point out that it is possible (and often done) to generate real negative interest rates through printing money or quantitative easying. Essentially what we have now (and have often as the Fed slowly infaltion taxes you). A 1.5% inflation rate with 0% Fed fund rates.
That is really interesting though... because you are suggesting that additional cuts to the fed funds rate in the negative world would lead to a deflationary spiral... which is what they are trying to avoid... which then makes you question a little bit about cutting the fed funds rate to where it is now, plus the QE to generate real negative interest rates
http://www.aei.org/outlook/100024
John Makin, from April of this year:
"When the central bank's policy instrument is an interest rate that has been fully used by taking it down to virtually zero, as is the case with the federal funds rate in the United States, it is necessary to devise an alternative measure tied to quantitative easing for driving monetary policy. Analysis by several investment banks and the Fed suggests that, given the current path of unemployment and a trend toward deflation, the fed funds rate should be somewhere between -700 and -800 basis points."
A carry tax could be deducted from each bill upon deposit according to how long the bill was in circulation," Goodfriend wrote in a recent
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Fuck the Taylor rule, cause Tyler RULES!!!!
TD for FED Chairman!!!
I seriously cannot believe this fantastic blog is actually a service provided by a fixed income giant.
How dumb of me to think it was just a few people analyzing and blogging at the intense rate they do. really dumb. Now I dunno if i even wanna read this blog anymore knowing it's backed by a corporation. I liked it for breaking news and covering things that most of the financial MSM didnt or couldnt cover. this sucks...
What?
check out the PIMCO and ZH entry
If this guy believes that, then stop reading you dumbshit!
FO SHIZZLE?
He's talking about the article from this AM -- where some dumbass said Zero Hedge was a service run by PIMCO.
PIMPco, yeah, right.
What difference would it make if it was?
Rule of the internet: Truth has no provenance.
Hear-Hear!
What difference would it make to you if it was?
Rule of the internet: Truth has no provenance.
Relax, this site is not run by Pimco... just do a quick historical search of articles Zero Hedge writes about Pimco and Bill Gross and you'll see most of the comments would never be written by someone getting a paycheck from those guys.
Not saying they don't have contributors from there occasionally. But company sponsored, not a chance.
Companies like Pimco have tightly controlled public relations departments so all of their public facing comments are deliberate and on message. TD doesn't seem to have these restrictions.
Maybe those were nothing but 'red herrings".....?!
FUCK YEAH SPEAK DA TRUTH TA POWA
I don't think that is what that post said... at all... I think you need to re-read it two more times... and this time read for comprehension...
What was the middle part?
What was the middle part again?
Damn Dennis, your CNBC viewer ratings must be really crashing....
Weapon is called printing press? Print their way out and force China to eat our sh** (oh, I mean eat our treasury)...
So now that QE is gradually being unwound and various liquidity measures are starting the be reeled in by the Fed, the key question becomes just what weapon does the Fed have left in its arsenal to stimulate the monetary base in the hope of offsetting prevailing deflation and unemployment. Alas, hope and green shoots do not work here.
-----------
Bernanke could start issuing non-recourse credit cards with no questions asked re purchases, be they to start a business, take a vacation in Vegas, or whatever. And require banks to charge a 3% per annum fee on checking and savings accounts.
"...the key question becomes just what weapon does the Fed have left in its arsenal to stimulate the monetary base in the hope of offsetting prevailing deflation and unemployment."
http://www.wired.com/politics/law/news/1999/10/32121
"Cash and the 'Carry Tax'
Declan McCullagh 10.27.99WASHINGTON -- US currency should include tracking devices that let the government tax private possession of dollar bills, a Federal Reserve official says.
The longer you hold currency without depositing it in a bank account, the less that cash will be worth, according to a proposal from Marvin Goodfriend, a senior vice president at the Federal Reserve Bank of Richmond.
In other words, greenbacks will get automatic expiration dates.
"The magnetic strip could visibly record when a bill was last withdrawn from the banking system. A carry tax could be deducted from each bill upon deposit according to how long the bill was in circulation," Goodfriend wrote in a recent presentation to a Federal Reserve System conference in Woodstock, Vermont"
It is not about cash. Cash is almost irrelevant.
Leaving out the magnetic horseshit, this was done in a number of Austrian and US towns during the Great Depression; 'money' that expired over short periods of time.
It was printed in the towns and used as currency in local businesses. The towns were able to avoid the collapse of velocity that ordinariliy accompanies deflation.
Of course ("Of course," he said, smacking himself in the head with a board!) this will not work when the deflation is the result of shrinking energy supplies. 'Money' is simply a paper claim on resources. If the resources are shrinking, the claims will shrink along with them.
The real basis of wealth and production in the modern world is petroleum and it is being used up faster than it can be found, and the ability of money to 'produce' more reached its limit in 1998.
This is why the 'real' economy is eroding from the bottom. Forget the pump price. What matters is the cumulative price at the end of the energy supply chain that is embedded in every product and service that every citizen in every advanced and advancing country uses.
In deflation, growth ceases, what is left is taking growth from one economy and putting elsewhere, usually by games such as the incredible inflating currency. The currency would give growth in one area until the growth lost in other areas weighed on the growing area by some other means. Done by nations, the outcome of this 'beggar thy neighbor' approach would probably be war.
With the decline in petroleum production the deflation is absolute. Shifting growth is shuffling deck chairs on the Lusitania.
BTW, there is no 'magic bullet'; draconian conservation is the future. Easy or hard, it's coming. It's only a couple of points of lost GDP this year, next year will be more and next year after will really start to accelerate. Oil dependent food production is most vulnerable.
When I say draconian, I mean use reductions to 30% of current or less. That is in all countries, not just the USA. This can be done voluntarily and the result will be some fuel to allow a transition to some sort of post- petroleum future. Otherwise there will be a reduction to 30% tending to zero % by circumstances and no option to develop alternatives.
I will leave you and the management of Pimco to imagine of what happens next.
"just what weapon does the Fed have left in its arsenal to stimulate the monetary base(?)"
The printing press. Little doubt in my mind Bernanke and Obama will continue to throw money at the problem until either China says "no mas" or the dollar cracks and we get hyperinflation. Honestly, they have no other options and I seriously doubt they will do nothing and let it all go to hell. Besides, as long as people continue to buy Treasuries and the yield stays this low there is no reason for them to stop.
Yup, print our way out and have China eat our sh**... And eventually Zimbabwe here we come... better get some exercise so that you can carry big bag of money to go to starbuck...
unfortunately, the majority of the public will stay fat and it wont matter because eventually we will be in a CASHLESS (all on card) society. pun intended
Doubt that starbucks will still exist. Maybe you could carry that bag of money to the MacCafe
My understanding is that a lot of Starbucks (esp. in CA) are getting a new lease on life as supplier of "medical" marijuana.
/agree
The Fed is out of weapons, but not Congress:
Proclamation on the Federal Reserve System of the United States of America www.RevokeTheFed.com March 2008WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";
WHEREAS, on December 13th, 1913 the US Congress enacted the Federal Reserve System;
WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;
WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;
WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;
WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;
WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;
WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;
WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);
WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;
WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;
WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;
WHEREAS, it is recognized that the current time is such a time of great difficulty;
WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;
WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;
WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;
WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;
IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;
WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.
NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.
IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;
FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;
WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.
SO HELP US GOD!
That was a good read...
That's not how things work. If this was true we would have inflation by now.
It does not matter how much Ben print if those bills are not put into the consumers hands it means nothing. The people that want loans could not get it because of bad credit score. The people that can do not need loans. On top of that banks have tighten the standards.
And here is the biggest problem with printing money. It destroy the banks not only the bad one but the good. Ben knows this and if it were that easy this whole mess would have been taken care of very fast.
If we allow the fed to survive they will keep doing what they've been doing forever.
End result = nukes
A lot of people talk about this as a viable alternative--inflate away the leverage. The problem with that scenario in my mind is: 1) The average duration of the U.S. Government's debt is (correct me if I'm wrong someone) like 2-3 years. So any inflation would quickly result in much higher interest rates, and thus much higher debt issuance to pay for this enormous ponzi scheme of a country; and 2) Much of the country's unfunded liabilities are indexed to inflation. Social security, etc.
January, where he stated that "a notable figure in the HF community, who
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Wow. So, uh, deflation it is then.
Time for Bernanke to write a new paper: "A Negative -6.55% Short-Term Interest Rate: Why 'It' Can't Happen Here"
what was that paper he wrote in 2004 everyone always laughs at?
Great post, TD
Of course you won't hear anything about the Taylor Rule in the MSM as the number is virtually impossible to spin. Heh, someone had better start fueling and loading the helicopters.
the roflcopters maybe.
also two points:
1) deflation and currency crisis are not mutually exclusive. and ,
2) hallucinated computer pixels can decouple from physical FRNs if there are bank runs.
Hope there's room for me to hang off the skids.
loading the helicopters with cash, I should have stated (or FRN, if you prefer)
I'm loading them now! We will be dropping the cash over Obama rallies.
Btw I was agreeing with you. Sorry if it came across otherwise.
"One things is sure: piecemeal, gradual, indecisive, subjective and nontransparent fiscal policy decisions will only exacerbate the problem, while increasing the final cost to taxpayers and investors, and prolonging the term of the current Great Depression V2."
Even more true today, TD
They tried trickle down with the banks and they are hoarding and speculating on the market, perhaps they should use the helicopters to target real spenders (non-savers). How about sponsoring the state lotteries and making 50% of tickets pay off big - those chumps would never save it. Helicopters dispensing cash over tent cities would probably also stimulate spending. How about paying people to spend money, like giving them $4,500 to buy a car - wait never mind that's been done.
DEFLATION - not to pop any inflationist's bubble, well actually yes.
I have a "Deflationistas do it for less" T-shirt for sale for $30. Or $1 and a crack rock. Whichever sells first.
If they wanted a stimulus to actually benefit the average joe and companies other than banks and the UAW then they could have sent out debit cards
Or how about 10K for tuition reimbursement for job retraining or paying down mortgage principle. You could opt out and exchange for 10K in TIPS bonds if thought the stimulus would cause inflation.
They'd get none of that back in the form of political contributions though.
You're right, they should send out debit cards with 1% of total spend matched into a campaign finance reform bucket that funds the campaigns of three parties equally!
Rubber ducky, your the one *squeek squeek* You make bathtime lots of fun *squeek squeek* Rubber ducky, Im awfully fond of you!
Ducky... I have to make just one correction to your overall great post... remember that to send out a 'debit' card you actually have to have funds available... so I would revise that to 'credit' card...
You can do the same thing with the coincident index plus CPI growth rates. Add them together and Fed Funds would have to be negative. If you use the 1980 CPI calculation, it would suggest Fed Funds is about right, so maybe the Fed doesn't underestimate inflation when setting policy. The screwed up thing is that the Fed should act like gold and not be loose when the lagging economic indicators move out of negative growth rate. They should never let the lagging index become the strongest index. We had an inverted economy for nearly 3 years because they broke this rule. Having a Fed wouldn't be a bad idea if they didn't break the rules and just act like the gold price. I guess Ron Paul figures the only way to get it right is just go back to the gold standard. Another thing is everybody says inflation is low but Hayek argued against this in 1929-30. Inflation isn't low compared to the economy by any of the measures 1980, pre-Clinton, the current measure, or the one Shadowstats says is the experimental. Keep up the good work.
"If you use the 1980 CPI calculation, it would suggest Fed Funds is about right, so maybe the Fed doesn't underestimate inflation when setting policy."
Good point!
Tyler, what happens if you plug in shadowstats' more realistic measure of inflation into the model?
The commenter above has just illustrated, perhaps, that not even the Federal Reserve believes the published CPI numbers.
He's called helicopter Ben for a reason. If a printing press alone were sufficient, he would becalled PPBen. No, real easing doesn't work unless it can be osmotically and near-uniformly dispersed throughout the economy and economic players (households). QE and blank checks are only transmitting and thus rewarding actors closest to Fed e.g. Primary dealers, financial insiders, GSE & Bond traders. Therefore his helicopter is immediate and instant devaluation of breadth and depth. Like FDR did. What pulled most nations outta the depression.
That is his bazooka. Watch for it.
Executive Order 12631
I think it's a theory not a rule.
There are 3 billion people on earth that have no money at all. Another 2billion who don't have much. Looked at in that odd light it might be worth consideration that a little printing isn't the worst thing imaginable. Now printing it and giving it to Pigmen is dispicable. On the other hand giving it to brown people and little people isn't politically possible so I offer no alternative except one way or another more money is forthcoming.
the real question is when india china and brazil beginsucking up more commodities than america..its only a matter of time..the point in which america no longer controls the cost of basic necessities...fed funds differential is just noise...long term mal-investment into the commodities complex has created (along with toilet paper print fest) a perfect storm...deflationists will at least be able to wipe there asses..proprietary technology can be our only saviour
On the bright side, if you can wipe your azz with paper, life is at least half good.
Bank holiday and purchase gold (devalue the USD by 20%)!
David Einhorn's Greenlight Capital Loads Up On S&P500 Puts (13F Filing) - 24.25% of portfolio
http://www.marketfolly.com/
Y*...potential GDP. Adjust this variable downward and the gap between Fed Funds and the Taylor rule shrinks.
Overestimation of Y* is what will cause hyperinflation.
It was Jan Hatzius of Goldman Sachs who brought up the Taylor Rule back in January. Tyler Durden credited him as John Hatzius. And Krugman mentioned Hatzius' short paper one week before Zero Hedge. Krugman concluded that the Taylor Rule was one reason we needed fiscal stimulus, that is, monetary policy couldn't hack it anymore. Again, that was in January.
Is this Paul Krugman by any chance?
Debate on Taylor rule, with Taylor speaking about it himself:
http://www.calculatedriskblog.com/2009/07/taylor-rule-debate.html
thanks
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Tyler is a BLOOMBERG TERMINAL GOD. I mean most of us monkeys just use it to get quotes. But this guy he does things with the BB terminal that I have no idea you can do.
Conclusion? Tyler must have some serious background experience as a wall street trader. You know, the guys in the pit cussing and bad-mouthing all day while trading away.
George Orwell
dont forget the hookers and blow. i hear pit traders are fond of these two things.
So, this prompted me to go back to the very first ZH post from January, where he stated that "a notable figure in the HF community, who shall remain nameless but who has been rumored to himself have certain dabblings in the world of beginning P and ending in onzi, can be located on over 20,000 sq. feet in another duplex [in the 740 park Ave building]...." Do we know yet to whom ZH was referring?
Ezra Merkin
Sorry, should have been more specific. The post mentioned Ezra Merkin by name, so it looks like ZH meant someone other than Merkin (or Madoff).
dollar down
A non-transferable US$2,500.00 for every citizen including baby to spend.
A non-transferable vouch or debt card of US$2,500.00 for every citizen
including new born baby to spend. Total free and no question asked.
Sure, we'll just borrow more money from the future and go spending. Doesn't strike me as a real solution. (Though, I'll take the money if they're giving it out.)
The dollar is the "last shoe" to drop...bye bye dollar
Thks for the great insights as always. Interesting how Fed extended TALF into next summer, while slowing the pace of Treasury purchases (delaying its conclusion in Oct from Sep).
Someone up high must agree with the need for further stimulus beyond interest rate policy, and yet realizes that it's impossible to pull-off given our net-debtor position. Instead of real levers, they simply created a make believe recovery and have gotten the MSM to go along with it. Squeeze short sellers balls until they pop, driving the market up on no volume to add legitimacy to the inanity. Basically, the game is to pretend that the shit is not hitting the fan in the belief that people are dumb enough to not notice being splattered with financial excrement. It all makes sense now...
Kool Aid is so right on this one. The easiest way to drive interest rates negative is to charge interest on the currency float.
It very much squares with Koo's idea of the balance sheet recession where a shift in what is being optomized. Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
I think you might consider actually emailing John Taylor next time. He would tell you your analysis is incorrect. Just as he recently remarked that Goldman was also incorrect in their application of the rule. Not that the rule's author would actually know what he is talking about.
ok, real fed funds is < 0. isn't that why fed allowed banks to collect on held excess reserves a while back? that's how the fed is already at < 0. i know chopper ben mentioned this and would enjoy someone closer to the banking system expaining how this works...$s depreciate by 6% but the fed pays -4% on holdings?
May we refer to one rule at time of conveniency
How about Marshallian K ?
I do not fear the so called deflation,as assets prices will match revenues and incomes.
It may not be suitable for the banks assets prices collateral
Give everyone a $2,500 voucher, only good for hookers and/or blow.
The hookers will give their money to their pimps. The pimps will use the money to buy blow for their tricks(velocity of money churning back into blow) and buy expensive cars(saving the auto industry, again), expensive clothes and TVs(saving retail) and jewelry(more retail). These new rich pimps will start funding their own record labels and become rappers. These new rappers will help breath new life into the music industry and they will have a huge following overseas and bring money into the US. Any money made will immediately be spent and not saved.
The blow money will funnel to the drug dealers. This will cycle fairly close to the pimp's spending and continue churning.
General Electric will be saved from all of the royalties they will receive from the sudden demand for Scarface posters and DVDs.
The best part is zero dollars from all the revenue will be put into savings.
Unintended beneficiaries are Mexico, Columbia, and the STD drug makers.
Finally, all of those worthless USD's are finally covered in enough blow to actually have some value. Saving us from deflation.
As I wrote BHO in Feb, the only way out is to payoff all motgages under 500k , student loans and credit cards by the Fed ( with profit sharing/tax).
Pay that money to the banks/whom ever. Raise the fed funds to 5 or 7%. And we are back on track. Ps pull back stimulus and TALF and others. It so fucking simple, why wOnt they listen to me..... Ah bankers ect making too much the way it's being done know.
a "cash for clunkers" style voucher program to pay off debt via a voucher to be cashed by the banks would have put things back upright by deleveraging the consumers and cleaning up the bank balance sheets. But instead, we have no idea where that stimulus cash went and things are getting worse.
If we plug in a 21% U6 unemployment rate (http://www.shadowstats.com/alternate_data), the spread would be -18.4%!
The Fed's Yellen said back on July 1 that interest rates are going to stay near zero for years (not just months.)
See http://revolutionradio.org/2009/07/01/fed’s-yellen-says-interest-rates-may-stay-near-zero-for-years/
See also news bites with market timing signals at http://invetrics.com
My quick and dirty extrapolation of this 6.8% differential on the current rate and what the Fed Funds rate should be is this--if you take the money supply and multiply it times 6.8% and then look at that number, that is probably the number that has been extracted from our country's coffers per the paulson/bernake/bush/obaba 'take care of our daddy, the fed' bankheist.
By the way, it is so irritating every day to hear no one talking about the FACT (except zh and a few others) that our country has been robbed, all in the name of saving us and keeping liquidity flowing, when really, the money went into a blackhole and there it will stay--there ain't going to be any lending from the bankheist, and yet, no one seems to get it. Saving these tbtf banks was like saving a murder rapist and then giving him a gun and setting him in the home of a loved one--when can we have our country back from these robbers?
It looks like you have the wrong input for inflation (-2.1) , and it is giving you an overstated result.
That's the default CPI provided by bberg.
Here's an idea - Do nothing! NO stimulus of any kind savings and deflation is what is required to correct this mess. More spending is more that just hair of the dog - it is the final nail in the coffin, the shortcut on the road to ruin. Would there have been a gigantic financial collapse - absolutely and thats what should've happened. And guess what? life would move on - the graveyards are full of important bankers and influential economists. So instead we bail out some bankers and make private debt public so Stan O'Neal can go to the club and work on his short game.
Taylor dismisses use of the formula alone, and says this analysis is incomplete, not accounting for policy lags.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aZ2uJpI.Noj4
the programs will just keep being extneded. the gola os to produce an asset bubble which is happening. the banks are restricting credit.
By providing interest to banks on their borrowings from the fed, it is the same as providing a negative fed funds rate.
The banks are just asking for more coin - more interest on their borrowings - you will never see the benefit - it's not like they would pass along the interest to depositors.
The Taylor rule as a policy making tool is an academic exercise at best. Just ask yourself -- is the rule:
-descriptive (describes the past)?
-predictive (describes what will happen, given current policy)?
-prescriptive (presents a recommendation as to what the Fed should do)?
As John Taylor himself said, his "hypothetical but representative policy rule ... describes recent Fed policy surprisingly accurately."
While the future is largely unpredictable, the Fed has attempted to make it less uncertain by explicitly setting a specific range of goals, such as inflation, unemployment, growth, etc. These desired end states are relatively constant as goals and thus provide for the validity of the Taylor Rule, if it in fact can deliver these goals through its use of mainly the FFR and QE, without explicitly targeting the entire yield curve.
The Taylor rule says nothing about what the relationship should be between short-term rates, which the Fed explicitly manipulates, and longer term rates. Keep in mind that long-term rates actually have some influence over bank lending as well as aggregate demand for goods, services, wages, unit labour costs, etc.
But let's say the Fed could determine what the rate should be.
Here's the thing: there is no denying that the previous years of low inflation is the result of slow wage increases, despite the recent low-interest rate policy regime. Demand is ultimately driven by credit, i.e. money that is either earned or borrowed. With lagging real wages, the thing one can do is exploit all possible credit channels. But as all ZH readers know, debt is already at near-maximum capacity, and is in fact contracting.
So I ask the simple question: in an over-leveraged (indeed, deleveraging) world where firms continue to race towards the lowest wage, where the hell will inflation come from?