[Shannon Williams (2011.07.26.0730 CST)]
[From Rick Marken (2011.07.25.1130)]
Thank you Rick. � It seems to me that k2 should empty into a little
pool. �And that to represent repayment of a loan (the part not due to
interest), The composite producer should return money directly to that
pool. It does not go *through* the composite consumer. �It returns
directly to the savings pool. �What do you think?
Yes, I think that is a good idea.� If a large part of leakage is the reserve
requirement then it is money that's in a pool, so to speak, that will be
returned to the economy� -- and strengthen it -- as income inequality goes
down.
Cool. Below is an article which describes a (conservative's) wordy
description of the flows of money right now. I believe that the
simple producer/consumer diagram (with the savings model added)
accounts for all of the nouns thrown around in the description. It
also shows that Bernanke is correct because although people (who have
so much savings that the interest is considered disposable income) are
not now getting this 'disposable' income from their savings accounts
and so are not spending it, the money is still going to the aggregate
consumer and it is still being spent.
Thanks,
Shannon
https://donate.barackobama.com/page/outreach/view/2012/openthespillways
The Steep Costs of Easy Money
by Jim McTague
Monday, July 25, 2011
provided by
The Fed's loose monetary policies have delivered a body blow to
savers�and to the economy.
Aesop and his ants had it all wrong: The advantage belongs to the grasshoppers.
A new study by two economists at the nonpartisan American Institute
for Economic Research concludes that Federal Reserve Board Chairman
Ben Bernanke's crisis management has kept interest rates so low for so
long that it has deprived savers of hundreds of billions of dollars in
interest income. That, in turn, has cost the economy $256 billion to
$587 billion in consumption and 2.4 million to 4.6 million jobs, but
has shaved between 1.75 and 3.32 percentage points to
gross-domestic-product growth.
The beneficiaries of the Fed's policies have been borrowers. In other
words, people employing record-inexpensive leverage&mdashthe
grasshoppers among us&mdashhave been thriving, while the fortunes of
the prudent, savings-minded ants have been wilting.
Bernanke, defending his policies, has cited a study by the central
bank's own economists that concluded the Fed's policy of easy money
and huge asset purchases prevented a ruinous bout of deflation, and
will have contributed to the addition of three million jobs to the
economy by 2012. Minus the Fed's actions, there would have been 1.8
million fewer jobs, the study claims. Bernanke cited the Fed study in
a footnote to the semiannual Monetary Policy Report to the Congress,
which he delivered July 13 to the House Committee on Financial
Services.
Like the American Institute's study, the Fed paper admits that savers
paid a price. But if you read between the lines, the Fed paper is
arguing that its actions significantly boosted the fortunes of people
who own stocks, are inclined to borrow for business, own homes and
purchase cars and major appliances&mdashsupposedly, most U.S.
households. While the Fed study doesn't claim that Bernanke's policies
constituted a magic bullet, it argues that any standard macroeconomic
model would show that the easy money and the asset purchases created a
net positive effect on spending.
"The Fed paper argues that it impacted the economy positively through
three main channels," says Polina Vlasenko, who co-authored the
American Institute paper with fellow economist William Ford.
First, the Fed notes, it has kept rates low to stimulate borrowing;
second, it has created a wealth effect by encouraging savers to move
money from certificates of deposit and low-yielding bonds into riskier
assets like equities. Third, it depressed the value of the dollar,
stimulating export growth. All of these channels worked to some
extent, says Vlasenko, who discussed the research with me by phone
last week. "What we say is that there is another channel affecting the
economy, which is that as you keep rates low for a very long time, you
deprive those who save of their interest income."
Looking at Treasury yields on the first anniversary of nine
business-cycle expansions and comparing them to yields as of June
2010, Ford and Vlasenko found last year's were five percentage points
lower than normal. Each percentage point in lost yield cost $52
billion in consumption, they calculated, assuming $9.9 trillion in
interest-rate-sensitive assets. Total lost interest was $99 billion;
subtracting 25% for taxes left $74 billion. The analysts assume that
70% of that would have been spent on consumption. If the holdings of
life-insurance companies and private pension funds are added,
interest-sensitive assets balloon to $18.8 trillion and consequent
consumption losses rise to $587 billion.
One reason the Fed's actions might not be boosting jobs growth,
Vlasenko says, is that borrowing is off, as banks and individuals have
become considerably more cautious. "They don't want a repeat of what
just happened," she adds. Her analysis of the Fed's flow-of-funds data
indicates that there hasn't been a significant shift of money from
bonds and certificates of deposit into stocks. The Fed would argue
that inflows into bonds are a positive consequence of its action.
Vlasenko says that savings accounts during the most recent quarter
have grown slightly from the second quarter of 2010. Money-market
holdings were higher; investments in corporate bonds and Treasuries
were about the same, and municipal-bond holdings were up.
Money continues to leave equity mutual funds, contradicting the Fed's
assertion. Some of the reluctance to dive into equities might be due
to perceptions that the market is richly valued. Continued risk
aversion most likely is part of the reason too, says Vlasenko.
It is impossible to know where interest rates and the economy would
have been absent the Fed's $2 trillion of asset purchases, known as
quantitative easing. But the research institute's paper assumes that
the lower the rates, the larger the negative impact on consumption.
Back in 2008 and '09, the risk premium demanded by skittish investors
pushed bond spreads to very high levels, and the absence of liquidity
froze the asset-backed market. The Fed's easing was the lubricant that
started the wheels turning again. Whether the Fed should now reverse
course and begin to reward savers is a debate worth having. The
research group's paper is an excellent place to start.
