Young adults today: No school, no job, living at home with mom and dad

Sure, but you don't understand the mechanics behind it. I said that banks don't lend reserves to customers. They are lent, but they are only lent within the Federal Reserve System. Reserves are simply swapped between banks accounts at the Fed, reserves never leave the central bank.

However.....

The fact is that since 2008 the Fed has not used the excess reserve method to manipulate interest rates because there are trillions of dollars of excess reserves. had the functional effect of pushing rates to 0% because there was a massive surplus of excess reserves at the banks. Why? Because the Fed, in order to remove bad investments from the bank's books that would otherwise cause the banks to fail created money and bought those toxic assets. This had the effect of adding trillions of dollars in reserves.

Why didn't this cause inflation? Because banks don't lend reserves to customers. They were required, up to 2008, to hold a percentage of reserves against the loans they made. After QE, there were MASSIVE surplusses of excess reserves meaning banks no longer had to borrow from each other in order to meet their reserve requirements. Any bank that did, still found it easy to borrow as there were so many banks with access.

Today the Fed pays interest on excess reserves as a way to set a rate floor. If the Fed will pay 0.75% on excess reserves (and it does) then banks have no incentive to make loans at less than that amount. Of course in the real world, it's higher than 0.75% because banks have overhead and risk to consider, so the rate floor in the commercial market become somewhere around 2-5% for fix rate mortgages and auto loans.

Here is some reading I respectfully suggest you familiarize yourself with.

This paper, a heavy read, demonstrates empirically what I'm trying to tell you...

This paper is written by the cheif global economist for Standard and Poors explains better than I can how things actually work.

This paper, while written in the UK by the Bank of England, says the same thing

Lastly, here is a piece written by a contributor to Forbes that is probably the best place to start as it's the easiest to read that explain that banks do not lend reserves as I've said......

Here is a chart showing excess reserves. See how it stayed steady up to 2008?


It's no mistake that the level of reserves was fairly consistent from 1984 - 2008, the Fed used its mandate to maintain a system of scarcity in reserves. The level of scarcity determined the interest rate....

 

I respectfully disagree. Or maybe the public market just does not realize how much dollars are on the Fed's balance sheet.
(I mean it hasn't felt the effects yet or foreseen what is coming)

Inflation shouldn't be affected by "money supply", at least theoretically. It should be affected by only how much each dollar is actually worth. (A little more complicated than that but that's as simple as I can plainly state it)

Question is, how long can the Fed keep on doing that? It can't keep on doing that forever because there is an inflationary cost to trying to change interest rates from what the market naturally wants to set them to be.

 

The Fed holds assets equal to what it owes. You can argue that the assets it holds are mostly paper created by the Treasury, but the fact remains that the Fed operates this way.

It's not that the quantity of dollars doesn't affect inflation, it's that the quantity of dollars is a contributing factor in inflation, but in no way, is determined solely by the quantity of money created. It is possible to have deflation while the number of dollars in the economy is increasing, just like it's possible for your tub to empty while you are adding water to it (if more water is going down the drain than is being added at the faucet).

That's just it. In a fiat economy, the natural rate of interest is zero. The Fed must manipulate the market in order to create the scarcity of reserves required to cause rates to go above zero. Of course, as I stated in my response to LB, QE caused the amount of reserves to go so high as to drive rates to zero, which, with or without QE would happen "naturally" in a growing economy (though probably not to the extreme we've witnessed under QE).

 

It's not really a fiat currency, despite what most people seem to think. The very fact that the Fed holds reserves tied to the dollar should suggest to you that this is not the case.

When the Fed expands the money supply and buys up assets (in the private sector), it has to pay a premium for those assets to compensate owners for the returns on that capital they will be forfeiting because they won't be holding it. This isn't really an effect if the Fed was only buying one piece of asset, it's more a macroscopic effect in the market. (Basically there is no free interest to be had by being in the position to manipulate the money supply)

I'm not exactly sure what the natural market rate of return is, but it's probably in the territory of 2.5 - 4.5 percent, if I had to guess.

What I'm saying is that the Fed can't print money and buy up investment capital while holding rates at zero. That's just impossible, unless you're talking about making inflation.

Why would I lend out money to you at zero interest rate when I could use that money myself to buy an investment and enjoy a rate of return on it?

 

That is an interesting claim.

Investopidia defines fiat as:

Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of.

Now you say the fed holds reserves tied to the dollar....

The Fed doesn't hold "reserves" it holds assets whose value is denominated in dollars, but these are not "reserves". If you hold a dollar, you are not legally or in any other way entitled to the assets the Fed holds in exchange for your dollars.

Quick peek at the Feds balance sheet (ignore the highlighting that was for another post)


It wasn't until 2008 the Fed held a significant amount of private sector assets, in this case, MBS', something I think we can agree was set in motion by an extraordinary series of events (doing my best here to leave how I feel about those events out of that last statement).

I expect that the Fed will slowly sell off MBS's back into the market (as it has already begun doing) until it reaches zero. At that point it's securities will once again be held almost entirely in US Treasury securities.

Sure, let's go through this....

The Treasury auctions off T-Secs to Primary Dealers who purchase them with cash. Now the Treasury has cash and the PD's have the T-Secs they purchased. Now the Fed purchases them from the PD's who wish to make a profit so they sell them for more than they paid, but I'm not sure how this denies a bank any capital whatsoever. The bank spent capital equal to the value of the security it purchased it sells them at a premium. When it does this, it increases its overall capital.

So for example, a bank has $100 in cash (this is capital) and it buys a T-Sec for $100 (this is also capital, less liquid than cash, but still capital). It then turns around and sells the T-Sec to the Fed for $105. The bank now has $105 in cash (so now it has more capital and its most liquid form, cash).

I'm just not following you here.

In a market where the economy is growing and lending exceeds repayment, reserves grow and without Fed intervention the market for reserves would cease.

We know this because when a person borrows from a private bank, the bank creates the loan from nothing. That loan is spent and ends up as a deposit somewhere in the system, thus loans create deposits. In a growing economy, the level of reserves would increase and rates would eventually fall to zero as banks would find they have sufficient reserves to make loans without having to borrow from the interbank lending market. The Fed can sell back assets it's acquired to remove cash and add T-Secs to the private sector.

It could, but I can't imagine a scenario where it would want to do that. I believe the Fed holds rates above zero in order to have room to enact fiscal policy in either direction. When rates hit zero the Fed has very little "policy space" to stimulate the economy.

Again, I'm not saying zero is something the Fed wants to target, I'm simply stating the fact that in a growing economy the quantity of reserves increase. The Fed or the Treasury can sell assets in the form of T-Secs to "soak up" dollars and create scarcity in the market for excess reserves causing the interest rate to rise above zero.

 

I never said that "banks lend reserves". That phrase is self-contradictory!

At any moment the FRB can augment or diminish the Reserve Ratio, thus expanding/decreasing the amount of money available within a given economy for lending purposes. (AKA "Money Supply", which is also the money stock or total amount of monetary assets available in an economy at a specific time)

This mechanism effectively controls the Money Supply available to Consumers for borrowing purposes thus impacting Consumer Demand for goods/services ...

 

AN ASIDE ...

Yes, when the SubPrime Mess hit the "market", at the time it was the Best Cop-out that FRB could think of doing. Just take the Junk-Debt off the lending-bank books and they'll start lending again.

To do so, the Fed "bought the debt at a ridiculously low price because they were worth nothing anyway". (The payments had defaulted.)

But, the ruse solved nothing - it didn't succeed as the Fed had hoped. The defaults were ginormous and it brought down leading banksters who has promoted the fraud-mortgages in the first place.

Fitting justice, I say. And the bankster managers should have paid a personal fine to boot for grave mismanagement. Why was nobody at the Fed spot-verifying the underlying mortgages that the investment-banksters (who had bought them from the commercial-banksters) were packaging and reselling to all and sundry around the world? Why were the rating-agencies giving "packaged" fraud mortgages Triple-A ratings????

For an answer to that question, see here: Credit rating agencies and the subprime crisis
- excerpt:

Did anybody at the CRA's go to jail for massive and fraudulent incompetence abetting a crime? Nope - and the fraudsters are now retired in Florida on the links living a great life.

But the rest of America was made to endure the Great Recession the affects of which still exist in a country that has not fully recovered from it ...

 

How silly, do you really think most of the problems in the economy were caused by these bank executives who committed fraud? "Oh, if only we had more banking regulations then, the economy would be just fine today!"

That's just plain denial. People are looking for an easy cause to blame.

 

And when was the last time the Fed changed the Reserve ratio?

 

Humans are not necessary for the supply. The demand must come from humans, though, and that is why we must continue to find ways to push profits back into their hands.

... by removing humans from the processes.

No it isn't. Its a different competence but hardly "higher". Noone needs a degree to do it, an apprenticeship would suffice.

However, prove me wrong - if you can ...

I don't know if we have had more wars or just bigger ones. The point is that it lead to a massive build-up in military capacity as a (unintended) means of redistributing profit from private capital pools to the consuming public.

But that governmental re-distribution by means of enlarged government services really took off with the adoption of the quasi-Marxism of the "welfare state" in Europe and the New Deal.

Nonetheless the US still relies heavily on militarism because its the only governmental intervention that enjoys the popular support of the Right wing.

With respect, I think I would have spent a lot more time there than you.

I would prefer to use the % of workforce engaged in the service sector as the prime indicator of a developed economy.

don't confuse correlation with causation.
There is a closer correlation to the wealth of one's parents. That's also a global phenomenon, and consistent through time for epochs now.
A higher education is mostly a perk of wealth.

That's not to say an education isn't important, but apply the law of diminishing marginal returns to it. A primary education increases human economic value remarkably. Scribes used to be amongst the most valuable members of society because they could read and write.

However, once everyone knows how to read and write, the relative value of a primary education is small. For instance, compare someone in the USA who has no education at all and someone with just a primary education. Chances are they would be in the same income bracket. Same two people in the desert of South Sudan and they would be on very different sides of the local economy.

And so on for secondary education only, where the expected difference in life attainment for a high school grad compared to someone who didn't go to high school at all would be very small. And now its getting that way for college grads too, who scour the very bottom rung of the corporate ladder for career opportunities.

The big difference in income attainment is in scarcity, rather than any intrinsic value of the education itself.

If everyone has a college degree then people with "just college degrees" would be sweeping the streets whilst doctorates do the admin.

 

You live on which planet ... ?

 

This one.
The involvement of human labor in supply is nothing but a cost, which is being eradicated wherever possible for basic commercial reasons. As technology improves humans will be removed entirely from supply because they are not a necessary input.
Meanwhile, demand from humans is being encouraged wherever possible.

 

THE CONSEQUENCES OF AGE CHANGE

You have characterized the "challenge" of any market-economy that is "backwards".

At the center of any market-economy is the Consumer. Cost is just one parameter in the market-economy of Supply&Demand. (And that means not only cost of products/services but also labor production costs.)

Thinking that humans "will be removed" from the equation is childish nonsense. Without humans this planet is dead. Without consumers, the market-economy does not exist.

LIke many others, you are confused by the fact that "ages" are changing. We are leaving the Industrial Age (around since the middle of the 19th century) to the Information Age. Which has triggered a great deal of perturbation. Just like it did in the 19th century when workers abandoned farms and migrated to the cities where hired to work in factories. We left the Agricultural Age for the Industrial Age.

The result was that mechanization replaced them, and farm produce was sufficiently enhanced to feed the population. Whilst factory-workers found good jobs for a decent pay.

Fast forward to the 21st century, today. The same phenomenon is happening yet again.

Industrial production occupies only about 12% of the Labor Force. Where have they all those jobs gone. To the Far East of course. Which means what for developed countries?

That they must follow the trend in terms of human capacity and go "up-market". Meaning that we need badly in the US free post-secondary education, that already exists in Europe. And we need it now - because the "up-market" is one of sophisticated products/services.

We have, in fact, become a Services Nation:

About 55% of American high-schoolers pursue their education to a post-secondary level. The consequence of which is twofold:
*The other 45% (graduating or not from High-School) are shunted into lower-paying jobs,
*And those seeking a 4-year degree upon graduation have a $35K debt to repay. Is that any way to start a career?

No, it isn't.

SO, WHAT'S A COUNTRY TO DO?

Which is why Bernie (and then Hillary) were absolutely correct in proposing the national-subsidy of post-secondary education for every family with an average income of less than $100K a year. (Which is the family income of two-parents working at the median salary of around $50K in the US.)

So, what did America do? It let an archaic Electoral College* swipe the election from the winner of the popular-vote! For the 5th time in the nation's history - and just 16 years after the last time - a Replicant snatched the Electoral Vote from a Democrat winner of the Popular Vote!

The Popular Vote is the ONLY bonafide plebiscite for the Executive office of a nation ...

*Why is the Electoral College grossly undemocratic? Because it is a winner-take-all-vote-where one elector in California needs 350,000 votes but an elector in Idaho only half that amount. And Gerrymandering makes sure that the party-vote in a two-party system of voting is concentrated. Where in hell is the "democracy" in that sort of voting?

 

I think you misunderstood me, I am suggesting humans are not a necessary part of the supply side of the equation.

They are necessary for demand.

The problem is circulating the money that has been generated from sales back to the populace in order to fund their spending.

In the Industrial Age this was (is) through exchanging wages for labor, with expansion of government, military and more recently, health-care, to mop-up surplus labor.

In this "Information Age", the theory is to exchange profit for content. But consumers can only consume so much content, and most content that is consumed is free. The profit so far has actually been scalped via advertising revenues from the industrial processes that are continuing to deliver real goods in the conventional economy.

So we are ending up with a high level of profits capitalization in the upper social classes, leading to asset over-valuations. The economy will benefit from circulating profits lower down in the social hierarchy. But what is the justification when labor is not required?

Back onto the point of tertiary education, sure, but lets stop pretending there's jobs for graduates. Education is a goal in its own right, as is healthcare. But if we are to sustain a functioning economy, the income flow to the populace will need to be independent of jobs

 

A-I?

All Demand (yes) is stimulated by Consumption and therefore ultimately consumers. All Supply is in concert with Demand. I suggest this simple fact underscores the necessity of humans on earth! (No joke!)

What those humans are "doing" is quite a different question. It seems that most parts of both Africa and South America are locked into long-term poverty. Whilst their northern portions race on in terms of economic evolution.

The key bit of logic in the above, however, is that No Supply can be done entirely without waged-workers to do so. If our economy has shifted vastly from an Industrial base to a Services-based, that does not mean that just because machines are replacing humans in the former that they are also doing so in the latter.

Though, I will grant you that we don't really know how far down the road Artificial Intelligence* will get us in replacing ultimately humans there as well ...

*What we do know is that China is investing MASSIVELY in A-I, which many think poses a challenge both economically and militarily to the "West" (meaning essentially North America and Europe).

 

Yes, AI is an emerging threat to the even the high-end jobs.

But in the lead-up to AI there is high-functioning computing, and for most jobs that's sufficient to replace humans.

For much of the supply chain, humans are actually the cheap option and therefore are retained. Computing is cheap to replace humans in the services sector (look at phone operators), and machines are better at repetitive industrial processes. But humans remain cheaper for navigating dynamic physical circumstances and face-to-face interactions.

Our competitive advantage over machines is no longer conventional intelligence (logic and recall) but rather empathy and physical dexterity. These two human features are often sidelined by educational systems.

Jobs that currently apply these attributes are not usually graduate positions

 

The United States are not a democracy.

 

So workers need additional skills in order to fill the more technical jobs. Can you give an example of a more technical job and the skills required to perform that job?

 

This is where I have a problem. We obtain information and respond with other information in any work context. (It's in chitchatting that we humans are better - but that is not the sort of application that will "sell robots". Methinks.)

I saw a news-report about a robot in human form that spoke (Japanese) and was employed as a greeter in an office building. The robot was attractive and looked very human, and when she spoke her lips moved and she smiled.

One simply mentioned the name of a company and she responded which floor and office number.

Now, that process is fairly simple. But the intent was to be simple, since it was a demonstration model. In terms of pronounce word-recognition and understanding of a question put, I wonder if AI is not capable of such now or very soon.

I recall AI when I was trying to sell it in some applications years and years ago. It amused people, but no-sales. It has matured greatly and seems very competent in specific circumstances. They are not quite human-like in that we humans can change subjects quickly, which I suspect will confuse most robots that are still dedicated to either one application or a set of applications within a given context.

Anyway, it is not advisable to say it can't be done because I suspect in another 30/50 years we'll have robots that converse like humans. It's not Mission Impossible ...

 

Enjoy college? It's not a lifestyle, or entertainment, it's vocational training. The satisfactions come in the form of academic achievement, not parties.

Further, why would you want your kids NOT thinking about money? Seems odd.

 

I do like to blame parents

And if parents don't know how to manage money (a nonsense in itself .. we all know how, but not all choose to do so), they ought to bloody well learn prior to influencing any children.

 

Parents ARE responsible for how their kids turn out. If your kids don't have "credentials", it's on you. You failed.

 

If your children have unhappy lives, you've failed.
Credentials are neither here nor there, except to the extent that they can contribute to a happy life.

 

Yes.

If AI becomes that sophisticated then there will be no competitive advantage of a human in any job, regardless of qualifications.

We will need to re-think the entire economic model.

Or economies will evolve themselves to suit (endless bond issues to corporate funds to receive cash-flow at the government level, whilst paying it out again to sustain a total welfare state, which is spent to create company profits that are then capitalized in gov bonds.)

Or there will be vicious recession followed by violent revolution and destruction.

 

Sez you ...