Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

[NCR85]

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."

http://www.businessinsider.com/fed-a...y-gain-2012-12

The argument intrigues me. Is there something to it? I've been assuming that when the money multiplier breaks down like it has, QE would still be somewhat effective by conferring demand on the asset market on a 1 dollar for 1 dollar basis, thus leading to stimulus via a wealth effect, but if the above is right then QE's effect could actually end up being negative to the private sector.

[seobook]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

Outside of propping asset prices to push the wealth effect, isn't another big goal of QE to keep flowing subsidies into the banking system (by buying garbage assets above their true value, putting some sort of a floor on asset prices, and by increasing the spread banks get on their loans)?

That increased spread is of course robbing the elderly of income & forcing some of them into taking undesirable (from their own perspective) risks. If that leads to stress-related health issues that could have knock on economic effects too...though I doubt that would show up in any official economic data.

Certainly gutting interest income hurts capital formation, but that just leads to more need for more loans. Yet another bonus side effect for the banks. Our economy has been structurally built around replacing income with credit. When that reverses course it will no doubt be ugly.

I think with a lot of these approaches to "free market central planning" it is better to understand them through the lens of "who benefits from this policy" than to try to view them in the aggregate...as the aggregate stats will often show a wash (or minimal change) while some groups are big winners and others are big losers.

The big issue with MMT in the "free lunch of infinite debt is no problem" is that interest income that someone would have got would have also been someone else's expense ... either through those banks making smaller profits and/or through the federal government having a larger deficit & more debt. EJ has mentioned that (contrary to MMT, which claims US government debt as a myth) there is an upper threshold to government debt.

Not sure how credible that Mike Norman is in terms of seeing the costs of bubbles imploding ... when the real estate market crash was getting underway he was on TV laughing over a person predicting that prices would drop

...and then went on to make videos suggesting that other speaker "gets help."

On the new forced health insurance tax Norman calls it a tax cut! He also created a video titled "Thinking About How Dumb the Gold Standard is"

EJ mentioned that we will likely see inflation pick up before unemployment gets as low as the Fed would like it to be:

Maybe so, but one of the more interesting presentations at the Kremlin Conference agreed with my contention that the Non-Accelerating Inflation Rate of Unemployment (NAIRU) is shifting upward as a result of the Fed’s inflationary policies. They put it at 6.5% now versus 5% at the start of the Great Recession, meaning that if the Fed does not raise interest rates once the unemployment rate reaches 6.5%, inflation will take off, and if the Fed waits until unemployment reaches the old NAIRU of 5%, we'll get a severe bout of inflation. This has implications for the Fed’s rate hike formula above; if he sticks to the 5% formulation, inflation will surprise him.

I think the new NAIRU is higher than 6.5% due to the effect of cost-push inflation on inflation expectations. Readers may recall my January 2011 article “Stagflation, ho! The new NAIRU.”

[don]

Distorting the True Cost of Money (Capital Formation in Savings from the Real Economy)

Outside of propping asset prices to push the wealth effect, isn't another big goal of QE to keep flowing subsidies into the banking system (by buying garbage assets above their true value, putting some sort of a floor on asset prices, and by increasing the spread banks get on their loans)?

That increased spread is of course robbing the elderly of income & forcing some of them into taking undesirable (from their own perspective) risks.

gutting interest income hurts capital formation, but that just leads to more need for more loans. Yet another bonus side effect for the banks. Our economy has been structurally built around replacing income with credit.

+1

[gwynedd1]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

[/FONT][/COLOR]

http://www.businessinsider.com/fed-a...y-gain-2012-12

The argument intrigues me. Is there something to it? I've been assuming that when the money multiplier breaks down like it has, QE would still be somewhat effective by conferring demand on the asset market on a 1 dollar for 1 dollar basis, thus leading to stimulus via a wealth effect, but if the above is right then QE's effect could actually end up being negative to the private sector.

I have held this position ever since Mosler, and for that matter Marx, made me see it in this light. I believe Norman is now heavily influenced by Mosler. The pension funds are getting killed in the fixed income category. Take Illinois for example that raised its taxes due to the state short falls. I have no doubt pension liabilities figure into it. How's that for "stimulus"? If you accept that treasuries are practically as liquid as cash, then swapping them out for cash and removing the interest from the economy just makes it worse.

[charliebrown]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

As a real example, I have been saving for a new car for a few years now. This would have been a lot easier if I was getting interest income. Now nearly every dollar in savings must come from my pay check. I hope I have enough saved before the old one dies.

[lektrode]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

As a real example, I have been saving for a new car for a few years now. This would have been a lot easier if I was getting interest income. Now nearly every dollar in savings must come from my pay check. I hope I have enough saved before the old one dies.

not to mention how much easier/cheaper/faster it would've been, had kash fer klunkaz not happened...

and THEN there's this:

Obama’s hidden-tax heist

Fed policy erodes productivity gains

By Richard Rahn
-
The Washington Times
Monday, December 24, 2012


How is it possible that the government can spend almost twice as much as it takes in without having high inflation? The fact is that over a long period of time, it can’t. In the short run, which can be a few years, the government can paper over its fiscal irresponsibility by expropriating most of the productivity gains in the private sector through regulatory and central bank actions. This is precisely what has been happening in the United States.


The reason real, after-tax, per capita incomes have been able to increase year by year for most Americans for the past two centuries is that productivity has been growing — that is, the amount of goods each worker produces per hour has risen steadily. The reason productivity rises is that workers tend to be better trained, the amount of productive capital per worker rises, and there is a steady flow of innovation, which reduces costs and improves goods and services.


To understand productivity growth, look at the advances of farm and construction machinery — which enable one worker to do more, better and with greater safety. Wal-Mart, Amazon and FedEx have made amazing developments in reducing distribution costs by instituting better equipment and systems. Magnify these individual company and industry gains throughout the economy, and the result is a steady national gain in worker productivity.


Over the past few decades, worker productivity growth has averaged more than 2 percent. Most of this gain eventually ends up in worker paychecks, with some being siphoned off to support people who are not working and pay for various government schemes. Even so, for the quarter-century preceding 2007, after-tax, real (inflation-adjusted) per capita, disposable income grew at about 2 percent per year.


Since 2007, worker productivity growth has slowed, in part because of the lack of new investment. The big change has been that real, per capita, disposable income has slowed sharply since the end of the recession, being less than 1 percent per year, which has yet to make up for the 3.64 percent loss in 2009. By contrast, in the three years after the end of the Reagan recession in 1982, real, per capita, disposable income grew by almost 4 percent per year.


The recent gains in productivity growth have been taxed away by government. The increases in taxes are all non-legislated taxes, largely invisible to most people. First, there is the inflation tax imposed by the Federal Reserve, which currently taxes away about 2 percent of the purchasing power of the individual’s money each year. There is nothing new in this tax; the Fed has been in the business of creating inflation since it was formed in 1914.


What is new is the big tax on savings, again imposed by the Fed. By artificially holding down interest rates to lower-than-expected real market rates, the Fed is, in effect, expropriating interest income (an implicit tax) that savers normally would be expected to enjoy. This interest manipulation enables the government to fund its debt at less than what would be real market rates at the expense of savers, making the deficit appear much smaller than it really is.


There also has been huge growth in the unseen “regulatory tax” over the past four years. A regulatory tax is the cost of regulation imposed on the productive sectors of the economy when the costs of the regulation exceed the benefits. The Obama administration continues to ignore legislative mandates, both on comment periods and cost-benefit analysis, for the tidal wave of new regulation that is hitting businesses — and individuals.


The Fed also imposed the hidden tax of capital allocation as a result of its artificial low-interest-rate policies. Simply put, large institutions with strong balance sheets or companies that have been designated “too big to fail” (a few major financial institutions) can obtain all the loans they want at virtually zero interest. Smaller companies, particularly new ventures, are being restricted in their ability to get funds because of all the new regulations supposedly designed to reduce risk. Those regulations have the same effect as imposing a high tax on smaller firms and startups — which also happen to be the big job creators and innovators. In effect, we have created a system in which small, innovative firms are being “taxed” to subsidize large or government-favored enterprises.


Despite the fact that the government (including the Fed) has managed to heist almost all of the private sector’s productivity gains through hidden taxation, the amount of continued deficit spending is too great to avoid a future great inflation. The Obama administration has made it clear that it is not serious about reining in spending. Its tax-increase proposals would not fund the government for more than a few days at most and would do real damage to the economy. The Republicans, rather than being unified and insisting on ending this scam, which they could do by refusing to vote for all of the spending, seem to be content to slightly slow the rate of the nation’s fall.


The bleak outlook is that most Americans can expect a continued decline in their real, after-tax incomes. History shows that at some time, the monetary bubble will burst. The longer the Fed continues to mask what it is really doing, the bigger the bust will be — only the exact day of reckoning is uncertain.


Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
© Copyright 2012 The Washington Times, LLC

and i dunno about anybody else, but far as i'm concerned, i'm getting screwed _directly_ out of at least 2grand/year in lost savings income - because of all this and I DONT GET A GD THING OUT OF ANYTHING THATS BEEN DONE over the past 4years, all in the name of 'stimulous' ??? - never mind being screwed out of reasonably priced used cars, getting screwed out of at least another grand per year due to increased med ins premiums, and not to mention having my biz income being slashed because of zilch yield causing my customer base to sieze up!

brilliant plan they go goin over there in the beltway, aint it?

and to think we'll have 4 more years of it
just brilliant....

[vinoveri]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

not to mention how much easier/cheaper/faster it would've been, had kash fer klunkaz not happened...

and THEN there's this:

Obama’s hidden-tax heist

Fed policy erodes productivity gains



and i dunno about anybody else, but far as i'm concerned, i'm getting screwed _directly_ out of at least 2grand/year in lost savings income - because of all this and I DONT GET A GD THING OUT OF ANYTHING THATS BEEN DONE over the past 4years, all in the name of 'stimulous' ??? - never mind being screwed out of reasonably priced used cars, getting screwed out of at least another grand per year due to increased med ins premiums, and not to mention having my biz income being slashed because of zilch yield causing my customer base to sieze up!

brilliant plan they go goin over there in the beltway, aint it?

and to think we'll have 4 more years of it
just brilliant....

It is in fact semi-brilliant, not to mention nefarious and tyrannical. The policies, as noted above and elsewhere, are transfers of wealth from both savers (absence of yield in ZIRP) and consumers (inflation via currency depreciation) all to reliquify the banking system and allow the gov to support itself and the economy via massive deficit spending. Its brilliance is evidenced by its continunation and lack of any significant backlash by the population at large. Let's face it, Carlin was right about the "owners" and the rest of us.

[doom&gloom]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

The Fed giveth (to the banksters, the Fed taketh away (from the savers).

[NCR85]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

EJ mentioned that we will likely see inflation pick up before unemployment gets as low as the Fed would like it to be:

one reason why it looks like we're much farther away from NAIRU than EJ's views would imply is because the U-3 figure grossly understates the real rate of unemployment. When involuntary labor force dropouts (a good indication of how many of these are really "involuntary" is too look at the % of labor force dropouts that were not predicted to occur before the 2008 crisis happened. this % is around 75%; no Virginia, these are NOT your regular baby boomer retirees) are included, the unemployment rate is about 2% higher than it is reported. It has also virtually shown no improvement since the 2009 trough.

A U-3 unemployment figure around 10% would also much closer match the size of the output gap relative to the pre-crisis trend.

[seobook]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

Let's face it, Carlin was right about the "owners" and the rest of us.

[llanlad2]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

Over the past few decades, worker productivity growth has averaged more than 2 percent. Most of this gain eventually ends up in worker paychecks, with some being siphoned off to support people who are not working and pay for various government schemes. Even so, for the quarter-century preceding 2007, after-tax, real (inflation-adjusted) per capita, disposable income grew at about 2 percent per year.


Since 2007, worker productivity growth has slowed, in part because of the lack of new investment. The big change has been that real, per capita, disposable income has slowed sharply since the end of the recession, being less than 1 percent per year, which has yet to make up for the 3.64 percent loss in 2009. By contrast, in the three years after the end of the Reagan recession in 1982, real, per capita, disposable income grew by almost 4 percent per year.


The recent gains in productivity growth have been taxed away by government. The increases in taxes are all non-legislated taxes, largely invisible to most people. First, there is the inflation tax imposed by the Federal Reserve, which currently taxes away about 2 percent of the purchasing power of the individual’s money each year. There is nothing new in this tax; the Fed has been in the business of creating inflation since it was formed in 1914.


What is new is the big tax on savings, again imposed by the Fed. By artificially holding down interest rates to lower-than-expected real market rates, the Fed is, in effect, expropriating interest income (an implicit tax) that savers normally would be expected to enjoy. This interest manipulation enables the government to fund its debt at less than what would be real market rates at the expense of savers, making the deficit appear much smaller than it really is.

The above is exactly the sort of propagandist crap you would expect from a Koch brothers sponsored institute. Productivity gains have been expropriated by CEOs and the finance sector not the govt. Outsourcing labour and production to corrupt semi slave and child labour dominated countries has screwed the pricing power of labour. Real median wages have not increased since the 1970s. Cheap Credit supplied by that other free market libertarian worshipper Alan Greenspan made up the shortfall. Govt is an issue but not as much as the corrupting influences of extremely wealthy private individuals such as the Koch Brothers.
As for having higher interest rates in the last few years, that's all well and good except the debtors of the country ( ie most people) who actually pay interest woulda been wiped out resulting in zero interest payments anyway.

[seobook]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

As for having higher interest rates in the last few years, that's all well and good except the debtors of the country ( ie most people) who actually pay interest would been wiped out resulting in zero interest payments anyway.

Such benefits flow more equally to some:

The spread between the 30-year mortgage and the current coupon 30y FNMA security yield hit a new record high today. The previous record was set in 2008 when the so-called "transmission" first became an issue. Loan rates offered by banks remained significantly above where these loans could be financed via Fannie Mae for example. Low bond yields were not "transmitting" to the mortgage market. We are now faced with the same transmission problem once again.

Even the Federal Reserve has a paper analyzing this "surprise"

So if the spreads are at a record high you get:

• savers getting screwed by artificially low interest rates
• debtors paying more than necessary
• banks getting a large risk-free skim off the productive economy

[llanlad2]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

Such benefits flow more equally to some:

Even the Federal Reserve has a paper analyzing this "surprise"

So if the spreads are at a record high you get:

• savers getting screwed by artificially low interest rates
• debtors paying more than necessary
• banks getting a large risk-free skim off the productive economy

There's no denying that the bankers are skimming. But the 30y bankrate is still low. 3.51% is an unbelievable rate for a 30yr mortgage.

And none of this negates my original point. It is economic, trade and fiscal policies promoted by people like the Koch brothers that are the root of the problem.
Do you actually think that higher interest rates would be positive for the economy right now? The time for higher interest rates was 10 years ago.

[LorenS]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

The above is exactly the sort of propagandist crap you would expect from a Koch brothers sponsored institute. Productivity gains have been expropriated by CEOs and the finance sector not the govt. Outsourcing labour and production to corrupt semi slave and child labour dominated countries has screwed the pricing power of labour. Real median wages have not increased since the 1970s. Cheap Credit supplied by that other free market libertarian worshipper Alan Greenspan made up the shortfall. Govt is an issue but not as much as the corrupting influences of extremely wealthy private individuals such as the Koch Brothers.
As for having higher interest rates in the last few years, that's all well and good except the debtors of the country ( ie most people) who actually pay interest woulda been wiped out resulting in zero interest payments anyway.

Maybe so, but it wouldn't be legal if these guys didn't have highly placed friends in the federal government. Play the left/right game if you want, but it's a diversion. Aside from a tire tariff has Obama done anything to realign our trade interests? Has there been any major prosecution for financial crimes (MF global????).

[gwynedd1]

Re: Mike Norman: QE Has Removed $425 Billion Worth Of Interest Income From The Economy

There's no denying that the bankers are skimming. But the 30y bankrate is still low. 3.51% is an unbelievable rate for a 30yr mortgage.

And none of this negates my original point. It is economic, trade and fiscal policies promoted by people like the Koch brothers that are the root of the problem.
Do you actually think that higher interest rates would be positive for the economy right now? The time for higher interest rates was 10 years ago.

The time to raise interest rates is now. We could just as easily wrote down debts to the rental values to do this. Then no real cash flow problem would exist. We don't need nor do I particularly want more bank credit. If banks effectively created money for industrial production then low interest rates would create enough supply . Since they tend to do nothing but make loans against assets we may as well just create the money as a public utility. The only time bank money gets around to goods and services is when people actually spend the money which has no attachments to the actual loan process. So what is the point? Just run deficits particularly by untaxing labor and industrial capital. The high intrest rates would end the asset price bubble as well which keeps getting bloated beyond their real market values.