2008: Does the Fed still have power?
Christopher W. Foster
The 2008 economic state in the US has left many people bewildered. Those in charge of the Federal Reserve and the Federal Government, as well as those seeking the next Presidency, are all left attempting to find ways in which to strengthen the economy. Historically the Federal Reserve has attempted to do so through open market operations (buying bonds to flood the market with money) and also by lowering the Discount Rate (the rate at which it loans money to banks in need). It is in the current economic condition and state of finances in the country in which the threat of diminishing the ability of the Federal Reserve to positively affect the economy is posed.
Historically in bad economic times the Federal Reserve has lowered the Discount Rate in an attempt to generally lower interest rates across the entire economy. Notably, they often look to the Federal Funds Rate (the rate at which banks loan money to each other) as a measure by which they have successfully caused rates to change. The ideal measure to check their effectiveness would be the change in interest rates on loans across all sectors correlating to changes in the Discount Rate itself. For the purposes of this study the Federal Funds Rate is compared to the national Prime Rate.
In January of 1969 the Federal Funds Rate was at 6.3% and the Prime Rate stood at 6.95%. The correlation between the Federal Funds Rate and the Prime Rate from January 1969 to April 2008 is approximately 0.953. This is a very good indication, following the philosophy practiced by the Federal Reserve that as the Federal Funds Rate changes, so does the Prime Rate to most consumers. However, in April of 2008 the Federal Funds Rate was at 2.28%, while the Prime Rate was at 5.24%. Over time from 1969 to 2008, the gap between the Prime Rate and the Federal Funds Rate has grown signifcantly.
There is a possible explanation from basic economics. If you are a lender, and a single borrower is willing to borrow your money at 3%, you might lend it to them to make money. But if a second borrower appears and offer 4%, you would rationally lend to the second one instead. Ideally you would entertain offers until you reach an interest rate at which only one borrower would be willing to pay you, and thusly the demand for your money determines the price (interest rate). In an ideal market, all of the money available to be lent would be at the price the market could bear.
The real world is not a perfect market though. The Federal Government plays the role of a customer that is willing to borrow money at any rate in order to finance their debt. Theoretically, if the supply of money was limited to a point less than or equal to the Federal Government’s total debt, then they would be the only lender at an infinitely high price. In our world there exists more money to lend than the total National Debt (thanks to an approximate velocity of money of about 10 when looking at M1), and so they compete with the private citizens for loans and are only a factor in increasing demand, and placing upward pressure on interest rates as a whole. The exact extent to which the Federal Government’s National Debt causes a rise in interest rates is unknown because of the substantial variables involved, but correlations can be established, and helping us to make predictions.
In January 1969 the National Debt to Nominal GDP ratio was approximately 35.48%. This means that for every dollar produced in the US that year, 35.48 cents represented the amount of the entire National Debt. This is not the amount of the National Deficit (deficit from that year’s budget) but the cumulative National Deficits that had not yet been paid off. Since 1969 this ratio has grown steadily. In 2008 the ratio is approximately 69.4%.
Though the relationship between the rising National Debt to Nominal GDP Ratio and the rising gap between the Federal Funds Rate and the Prime Rate appears to exist at a correlation rate of approximately 0.745, the impact the National Debt has on diminishing the ability of the Federal Reserve to strengthen the economy is not yet determined. Between the years 2000 and 2004, the Federal Reserve lowered the Discount Rate from 6% to 1% in an effort to improve economic conditions. In 2000 the National Debt to Nominal GDP ratio was already approximately 60%, and it has been undetermined as to how much the Federal Reserve affected the economy while lowering rates. As of April 2008, the Federal Funds Rate was 2.28%, and the National Debt to Nominal GDP ratio was at approximately 69.4%. The Federal Reserve is again facing the possibility of lowering the Discount Rate in an attempt to spur the economy. However, they don’t have as much room to lower it as in the past. Even if they did, the significantly higher National Debt to Nominal GDP ratio would seem to indicate that they would have very little effect on the economy in general.
The prospect presented under this analysis is that the economy will probably get worse before it gets better in the immediate future. This is supported under the assumption that the Federal Government does not currently intend to lower the National Debt, but rather the indications are that it will continue to grow. Also, the growth of GDP for the country is expected to be slow if not negative for the Country as a whole for the short term. Those two factors will cause the ratio of National Debt to Nominal GDP to continue to rise. This will have an increased upward pressure on interest rates at a time when lowering them is the goal of the Federal Reserve. In this current year many borrowers have begun to default on their loans, mostly housing, but credit cards are arguably next. This has caused action by creditors and the Federal Government to tighten lending rules in hopes that lenders won’t make loans to people that cannot afford to pay them back. The unintended side effect may prove devastating as it leads the US into a Liquidity Trap. This is the idea that even though money is cheap to borrow (i.e. very low interest rates), borrows either don’t qualify to borrow, still can’t afford it, or lenders refuse to lend. Such was the case in Japan during most of the 1990s.
Solutions are debatable at best for the short term, but the long term solutions are evident in that they seem to require a shift in philosophy for both the Federal Government and the country as a whole. The Federal Government may be forced to make balancing the budget a priority, if not at least trying to keep it growing at less than the rate of GDP growth, and thus minimizing the negative effect the National Debt has on the economy. They may also look for ways to encourage personal savings by the citizens of the country. This will have the effect of increasing the supply of money available to lend, and thus reducing interest rates, as well as helping to ensure less people fail to pay their personal debt. One popular plan aimed at this problem has been the FairTax plan, and government may look to similar legislation as a solution. Even if government does not find a way to influence the citizens’ savings habits, they themselves should recognize the importance of saving money when they can, as they are helping themselves directly and their country indirectly.
How much national debt can the US afford, and when will they exceed it? An exact tipping point before the US heads into a liquidity trap is undetermined. During the 1990s it seemed as thought there was no limit to the amount of national debt the US could accumulate. Though it is possible the US crossed the tipping point in 2000 when the National Debt to Nominal GDP ratio was approximately 60% as the economy hit a cyclical slowdown (even a short technical recession), economic indicators mostly seemed to show the US on a road to recovery in 2005 and 2006. It was during that time that the Federal Reserve also chose to raise the Discount Rate in the thought that the economy may grow too quickly leading to inflation. A study into what percentage of citizens’ incomes are attributed to paying debt, versus what level of income they need to otherwise survive, will give an indicator as to what approximate interest rate the market can bear and still have a growing economy. Current conditions may already present a liquidity trap as an inevitability, but only time will tell. Over the last 8 years nominal GDP has grown from approximately $9.9822 trillion to $14.313 trillion or 43.4%, while the national debt has grown from $5.803 trillion to $9.933 trillion or 71.2%. If that trend were to continue for the next 10 years, then Nominal GDP would be approximately $20.525 trillion and the National Debt would be $17.005 trillion producing a ratio of approximately 82.9% National Debt to Nominal GDP.
Update note 04/01/2009: I originally wrote this article in April of 2008. A lot has changed in a year. Spending by the Federal Government has ramped up considerably. Preliminary estimates show the National Debt in excess of 20 to 30 trillion in the next 10 years. Also, GDP appears to be growing slower than the natural rate used above. Therefore it would not be surprising to see a National Debt to Nominal GDP ratio in excess of 100%. Such a condition is certain to hamper credit markets as the Federal Government seeks to rollover their debt year to year. Hence my political push to pay down the national debt as soon as possible, even at the expense of services and congressional pay. Japan was thought to be in a Liquidity Trap during the 1990s, and their Debt ratio was between 60 and 95%. As of Jan. 2007 it had grown to 160%.
Sources:
GDP, M1, Federal Funds Rate, Prime Rate, and National Debt data all found at www.dallasfed.org, downloaded 09/17/08.
Velocity of money, Nat. Debt to GDP Ratio, Difference between Prime and Fed Funds were all calculated by the author. Velocity calculated by assuming M1*V=GDP.
Wednesday, April 1, 2009
New World Order
It won't surprise me if you have heard of this idea before. Many people have been arguing about it for years, and most have been labeled as conspiracy theorists. As the years pass though, the idea of a New World Order seems to have gained traction. For a quick update, reference the quotes by our recent presidents in this blog: http://newswithviews.com/baldwin/baldwin487.htm
Please note that I am not endorsing Mr. Baldwin's opinion. I simply want to use the references to quotations by the Presidents and such to show that the concept of a NWO is being thrown around by very influential people and not just a backwater conspiracy theory. Please do your own research to validate things in your own mind.
So, what do you really think? Is the planet on the path to a world government and currency? More than that, if we are, is it a good or bad thing?
I have never been one to jump to conclusions. There is ample evidence to support that political leaders are considering the advance of a world currency (a topic at this G20 meeting by the way) as well as the possibility of a world government. I'll even believe that many of them view the UN as a vehicle for this government, and the IMF as a larger version of the Federal Reserve. It's not that hard to believe in politicians wanting the ability to tax and regulate the planet since they have never been app to pass on the opportunity to gain power in the past. In summary, yes I believe that many prominent people have at least considered moving towards a one world government. That was the idea behind the League of Nations and the UN.
What I am not ready to say is that all of these politicians and bankers are in on some conspiracy together to bring it about. I'll bet that Bill Clinton would love to see a NWO, with him as president (or king), but does he want to see it with Bush as the head? For trade purposes it is not surprising that China wants a super currency, but won't Britain ultimately oppose it for the same reasons they held out against the Euro? Make no mistake, not all of these people are working together. I'll fall back on simple economics to explain the push for the NWO as I see it from here.
In the last 200 years the world's economies have become much intertwined. A recession in the US generally will affect everyone, and the result has been forums on issues with the entire world participating to express their concerns. To continue to compete economically Europe formed the EU, much in the same framework as the Articles of Confederation were formed. Because banks and markets in one country can now affect another with the touch of a few buttons, via the great expanse in technology the last few decades, calls for standard regulations across borders have become common. It's very feasible for a company to move from one country to another to avoid taxes or to find a low cost workforce. Naturally that has lead to pleas for standard minimum wage laws and regulations to 'even the playing field’. All in all, I see the NWO as a natural progression of the economy and political pressure. We started with lowering trade barriers, we continue by developing a common currency, and we end with common regulation. That is not a conspiracy theory, but the culmination of the powers that be responding in very human ways to our problems, and advances in technology. George Soros doesn't need secret meetings to push the NWO, it’s happening anyway.
We are left with the decision of whether or not to support the NWO, and then how to go about our decision thereof.
I personally choose not to support it. The truth is that it offers no real benefit to the United States people. We do have industry tycoons and bankers and such that can profit from it for various reasons, but most Americans would simply face higher taxes and more regulations, and worse it would be imposed by elected officials from countries where we have no control. Those things I oppose. I oppose the loss of sovereignty. I have no wish to see control of our rights ceded to the UN or any other organization. I don't want more regulation and higher taxes, regardless of the source. I want the US to serve as an example of how a country should be run, not to serve as the welfare supporter of a NWO. We need to oppose the NWO at all levels, and we can do so by supporting legislation to strengthen our individual rights as laid out in the constitution, and by limiting the power of the government to tax us by passing the FairTax plan. Money is ultimately the power of government, and we need to be mindful to prevent any NWO, or our own local, state, and federal governments from taking too much of it.
Please note that I am not endorsing Mr. Baldwin's opinion. I simply want to use the references to quotations by the Presidents and such to show that the concept of a NWO is being thrown around by very influential people and not just a backwater conspiracy theory. Please do your own research to validate things in your own mind.
So, what do you really think? Is the planet on the path to a world government and currency? More than that, if we are, is it a good or bad thing?
I have never been one to jump to conclusions. There is ample evidence to support that political leaders are considering the advance of a world currency (a topic at this G20 meeting by the way) as well as the possibility of a world government. I'll even believe that many of them view the UN as a vehicle for this government, and the IMF as a larger version of the Federal Reserve. It's not that hard to believe in politicians wanting the ability to tax and regulate the planet since they have never been app to pass on the opportunity to gain power in the past. In summary, yes I believe that many prominent people have at least considered moving towards a one world government. That was the idea behind the League of Nations and the UN.
What I am not ready to say is that all of these politicians and bankers are in on some conspiracy together to bring it about. I'll bet that Bill Clinton would love to see a NWO, with him as president (or king), but does he want to see it with Bush as the head? For trade purposes it is not surprising that China wants a super currency, but won't Britain ultimately oppose it for the same reasons they held out against the Euro? Make no mistake, not all of these people are working together. I'll fall back on simple economics to explain the push for the NWO as I see it from here.
In the last 200 years the world's economies have become much intertwined. A recession in the US generally will affect everyone, and the result has been forums on issues with the entire world participating to express their concerns. To continue to compete economically Europe formed the EU, much in the same framework as the Articles of Confederation were formed. Because banks and markets in one country can now affect another with the touch of a few buttons, via the great expanse in technology the last few decades, calls for standard regulations across borders have become common. It's very feasible for a company to move from one country to another to avoid taxes or to find a low cost workforce. Naturally that has lead to pleas for standard minimum wage laws and regulations to 'even the playing field’. All in all, I see the NWO as a natural progression of the economy and political pressure. We started with lowering trade barriers, we continue by developing a common currency, and we end with common regulation. That is not a conspiracy theory, but the culmination of the powers that be responding in very human ways to our problems, and advances in technology. George Soros doesn't need secret meetings to push the NWO, it’s happening anyway.
We are left with the decision of whether or not to support the NWO, and then how to go about our decision thereof.
I personally choose not to support it. The truth is that it offers no real benefit to the United States people. We do have industry tycoons and bankers and such that can profit from it for various reasons, but most Americans would simply face higher taxes and more regulations, and worse it would be imposed by elected officials from countries where we have no control. Those things I oppose. I oppose the loss of sovereignty. I have no wish to see control of our rights ceded to the UN or any other organization. I don't want more regulation and higher taxes, regardless of the source. I want the US to serve as an example of how a country should be run, not to serve as the welfare supporter of a NWO. We need to oppose the NWO at all levels, and we can do so by supporting legislation to strengthen our individual rights as laid out in the constitution, and by limiting the power of the government to tax us by passing the FairTax plan. Money is ultimately the power of government, and we need to be mindful to prevent any NWO, or our own local, state, and federal governments from taking too much of it.
Monday, April 21, 2008
Campaign update
There has been a step in the right direction. During the last Republican Senatorial convention I made contact with several people that are currently influencing the political landscape. Just as important was that the platform was succesfully defended in all the major areas. The Texas Republican Party Platform is a piece of work deserving of admiration and should be the cornerstone by which all politicians operate.
There is another side to the story that many people don't like to address. During this particular convention I was heavily exposed to the part of politics that is just plain ugly. It seems that more people were concerned about getting their friends and family into certain positions, than having an open and honest debate about the issues that affect our nation.
I want to make this very clear. Anyone involved in my campaigns for the future, needs to be pure of heart. Too often politicians forget that they are little more than glorified servants. We are not elected to rule, but to serve. We are not here to tell you how to run your life, but to stop others from running over it. We are not here to tell you how to run your business, but to protect it from other's illegal practices.
The government is not a moral authority, but it is to abide by the morals of the nation that birthed it.
Jefferson once spoke to keeping government and taxes as simple as possible, so that any man would be able to understand it. Any man could offer insight as to how things should be done, and any man would know when those things were being done the wrong way. We have allowed our governments to become complex institutions that few without a parlimentary degree can even begin to comprehend. It is my wish to change that.
The law should be simple and clear, for that is one of the reasons we were founded.
There is another side to the story that many people don't like to address. During this particular convention I was heavily exposed to the part of politics that is just plain ugly. It seems that more people were concerned about getting their friends and family into certain positions, than having an open and honest debate about the issues that affect our nation.
I want to make this very clear. Anyone involved in my campaigns for the future, needs to be pure of heart. Too often politicians forget that they are little more than glorified servants. We are not elected to rule, but to serve. We are not here to tell you how to run your life, but to stop others from running over it. We are not here to tell you how to run your business, but to protect it from other's illegal practices.
The government is not a moral authority, but it is to abide by the morals of the nation that birthed it.
Jefferson once spoke to keeping government and taxes as simple as possible, so that any man would be able to understand it. Any man could offer insight as to how things should be done, and any man would know when those things were being done the wrong way. We have allowed our governments to become complex institutions that few without a parlimentary degree can even begin to comprehend. It is my wish to change that.
The law should be simple and clear, for that is one of the reasons we were founded.
Tuesday, January 23, 2007
I am running for President of the USA!
Thats right. You heard it here first. In the year 2020 we are having a presidential election and I will be turning 35 almost 2 months before election day. Therefore I am announcing right now that I am declaring my offical run for president to take office in Jan. of 2021. Currently I am sitting ontop of the polls so the campaign looks good. I am fighting for the abolishment of the IRS through the implementation of the FairTax plan as authored by Neal Boortz and John Linder. I am also going to push for nationwide school voucher programs and reduction in the national debt. I know that we have a long and hard road ahead of us, but with diligence and grass root campaigning, we can succeed! God bless America!
If you would like to donate to the "Betterment of Society by electing Chris in 2020" campaign please send all donations to Christopher W. Foster by contacting his campaign manager at garetjaxmer@hotmail.com. Thank you.
If you would like to donate to the "Betterment of Society by electing Chris in 2020" campaign please send all donations to Christopher W. Foster by contacting his campaign manager at garetjaxmer@hotmail.com. Thank you.
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