Category Archives: Monetary Policy

Is the Federal Reserve Loosening or Tightening and What Will It Do Next?

Since September, Jerome Powell’s Federal Reserve System has been cutting rates as if a financial crisis were looming. Just as in 2006, Powell raised the federal funds rate to 5.25 percent in the summer of 2023 and left it there until September of the following year. This past September, he cut rates by 50 percent in September and by 25 more basis points at the following Fed meeting just as Fed Chairman Ben Bernanke did Starting in September 2007. We all know what happened next.

That’s where the similarity ends, however, when it comes to overall monetary policy. When Bernanke started his cuts in September 2007, he did so the way the Fed had always done so, with open market operations. The Fed began buying government securities from its member banks, thereby increasing the supply of dollars available to those banks, which forced the federal funds rate down. That’s not the way it’s done anymore.

After Bernanke embarked on what he euphemistically called, “quantitative easing,” which is basically doing the same open market operations on steroids, a new dynamic emerged. Since the member banks accumulated large deposits at the Federal Reserve, something they never had before, interest rate policy became separated from management of the money supply.

No longer did the Fed accomplish a lower fed funds rate by buying securities to supply member banks with more dollars. It now could simply lower the interest rate it paid on member bank deposits at the Fed to incentivize member banks to lend to each other at a lower rate. Doing so without actually increasing the base money supply will encourage commercial bank lending but does not have the exponential effect that both lower interest rates and more “base money” can have.

Commercial banks also create money when they lend on a fractional reserve, but it is limited compared to the money created by the Fed. If the Fed lowers interest rates, commercial banks are incentivized to make more loans, creating new money, but that money is “destroyed” once the loans are repaid. Thus, commercial bank monetary inflation reaches an equilibrium point, with occasional deflations, if the Fed doesn’t change the money supply.

The same money creation and destruction dynamic applies to the Fed itself but on a much larger scale. Money is also destroyed when loans held by the Fed are paid down, thus decreasing the base money supply. But the Fed has always been a net creator of money over the long term, which is why consumer prices have always increased over the long term.

That brings us to today, where the Fed seems to be unburdened by what has been, as Vice President Kamala Harris would say. That’s because unlike in autumn 2007, when the Fed’s balance sheet increased by necessity to achieve its first two rate cuts, its balance sheet has decreased since beginning cuts this past September. This is just continuing the monetary tightening the Fed began in 2022 when its balance sheet peaked at $8.9 trillion. Through August of 2024 it has reduced its balance sheet to $7.1 trillion and kept on reducing it right through its September and November rate cuts to $6.9 trillion, where it stood as of its November 21, 2024 release.

So, the Fed is lowering the federal funds rate while decreasing the money supply. So, is it loosening or tightening? One could make an argument either way and it gets even more complicated than that.

Read the rest at Tom’s Substack…

Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?

Why is the Fed Tightening Credit But Not Money?

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Federal Reserve Board Chairman Jay Powell surprised no one on Wednesday by announcing the Fed has raised its target for the federal funds rate another 50 basis points to the 4.25% – 4.50% range. What did surprise the stock markets, based upon the sharp selloff following his remarks, was his statement,

“Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done”

That’s basically what he has said during every public announcement since embarking on an historically steep round of interest rate hikes over the past six months. That this surprised investors indicates how deeply ingrained the “Fed put” has become in the psyche of the financial community. The stock markets continue to fluctuate below their all-time highs, therefore everyone assumes the Fed will announce a “pivot” at the next meeting, since it always in the past.

So, as each meeting approaches, the market begins to rally in anticipation of an announcement or even a hint of said pivot at Powell’s press conference. Then, Powell reads the same statement he has given after every previous meeting and the market sells off.

Needless to say, this is a terrible way for capital to be allocated, even given the existence of a central bank in lieu of a free market. But over a decade of zero interest rate policy (ZIRP) has trained investors to act even more irrationally and for equity prices to become even more separated from fundamentals than they have been in the past.

The Fed’s Balance Sheet

Ironically, Powell made another statement which is demonstrably false and is receiving no attention from investors or the financial media. He said, “In addition, we are continuing the process of significantly reducing the size of our balance sheet.”

The Fed has not significantly reduced its balance sheet. Let’s remember that in August 2019, the Fed’s balance sheet stood at approximately $3.7 trillion, down from its peak of $4.4 trillion 2014-17. The Fed reversed its modest tightening policy and began easing, increasing its balance sheet to $4.1 trillion by February 2020.

Once the Covid-19 lockdowns began, the Fed exploded its balance sheet to over $7 trillion in just three months, eventually taking the total to $8.9 trillion by March 2022.

One would think that “significantly reducing the balance sheet” would mean something more than Powell’s announced plan to reduce it by a mere $45 billion per month June-August 2022 and then by $90 billion per month every month thereafter. But the Fed hasn’t even managed to do that. As of this writing, the Fed’s assets still total almost $8.6 trillion.

In other words, while the Fed has raised the federal funds rate significantly this year, it has not attempted to reduce the supply of money. As a result, M2 has barely decreased since its peak of $21.8 trillion in March 2022. And without decreasing the money supply, the Fed cannot significantly reduce price inflation anytime soon.

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Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?

Did Omicron Really Kill the Economy or Was It Something Else?

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I canceled cable in June 2020. I made that decision for two reasons:

1. It no longer provided value to me. Until Coronasteria, I was able to watch the so-called news programming, filter out the spin and propaganda, and obtain some knowledge of things happening in the world. As of the beginning of the Covid Regime, that was no longer possible.

2. I didn’t want to subsidize evil. That may sound like hyperbole, but it isn’t. And I don’t want a single dollar of mine helping to perpetuate it.

But I still need to know what they’re telling everyone else. So, virtually every morning, I dutifully visit the websites of CNN, ABC, NBC, Fox, etc. and see what today’s menu of falsehoods has to offer.

I’ve noticed what hasn’t been on the menu the past few days: Covid. At least not the screaming headlines we’ve grown accustomed to over the past two years. Instead, most are leading with the news that Old Man Biden killed a BIG TERRORIST (it turns out he blew himself and his family up during a raid by US special forces).

But the most interesting story featured near the top of a mainstream news site was on CNN, which said, “America’s economic recovery is about to go into reverse.”

The White House is preparing for a dismal jobs report on Friday following ADP’s report earlier this week that the economy lost 301,000 jobs in January. The booming Biden economy seems to have hit a speed bump.

The media want to blame the Omicron virus, but that doesn’t make much sense. No businesses were closed because of Omicron. If you want to blame the knock-on effects of the 2020 lockdowns, or perhaps the disruption caused by Biden’s attempted vaccine mandates, that might be more plausible.

Or maybe it’s because the Federal Reserve is so far keeping its promise to slow down quantitative easing (QE) by $30 billion per month through March and end it completely by March 31.

If Jay Powell doesn’t blink first, we may be about to see how much of the post-lockdown recovery was real and how much was merely malinvestment caused by monetary inflation. The answer might be frightening.

If you want to know who really runs the economy (hint: it ain’t presidents or the free market), download a free e-book copy of It’s the Fed, Stupid here.

It’s also available in paperback here. It’s priced at a pre-hyperinflation level so grab a few copies for friends if you can.

It makes a great introduction to the government’s most economically damaging institution for liberals, conservatives, libertarians, socialists, and independents alike.

Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?

The Federal Reserve has crossed the balance sheet Rubicon

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Fed balance sheet (2) Federal Reserve Chairman Jerome Powell tried once more to tell U.S. markets what they wanted to hear, saying the Fed would ‘soon announce measures to add to the supply of reserves over time.”

A little history lesson for my younger readers:

Back in January 2008, the Fed’s balance sheet was approximately $880 billion in assets.Those were mostly securities (exclusively or mostly U.S. Treasury bonds) purchased in the past during monetary expansions (when the Fed buys a security from a member bank, it takes in the security and gives the member bank U.S. dollars, meaning there are more dollars available to lend out into the economy).

During its various rounds of “quantitative easing” and other inflationary programs in the years after the 2008 crisis, the Fed’s balance sheet increased to over $4.4 trillion. This was a once-in-a-lifetime thing, said the Fed at the time, and the balance sheet would quickly be “normalized” when the once-in-a-lifetime crisis was past.

Well, the Fed began normalizing its balance sheet in late 2017 (with the president screaming bloody murder the whole time) and got down to about $3.7 trillion – still over four times what it was in January 2008.

The normalization effort didn’t last long. Despite Powell’s comments, the Fed actually began adding to its balance sheet again in August. It’s now back to $3.945 trillion – a $200 billion increase in just two months. In other words, the Fed just added to its balance sheet in those two months 1/4 of what it added during its first 95 years of existence (1913 – 2008). This in an economy the Fed says is strong.

The Rubicon is in the rear view mirror. Where this monetary mayhem will take us is anyone’s guess.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Here Comes Another Recession Wrongly Blamed on Capitalism

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recession-coming The stock markets sold off on Friday, and financial media headlines were dominated by an inverted yield curve, a key recession indicator for the past several decades. Was the selloff just a pullback as equity prices consolidate before heading for new highs? Or is this the top of a dead cat bounce after the December market meltdown?

Economic indicators are somewhat mixed. Unemployment remains low at 3.8 percent, although it is always important to consider what kinds of jobs people are doing, what they are producing, and why. Unemployment is always low just before a bubble pops, as monetary inflation leads to unsustainable expansion.

Meanwhile, February saw a nearly subterranean jobs report, and December’s much-ballyhooed number was revised downward from 312,000 jobs to just 227,000. Holiday retail sales, reported as “heating up” during December, ended up declining by 1.2 percent, the biggest drop since 2009.

That a recession is coming is a certainty. The question is when. And whether it hits in 2019 or 2020, you can bet it will take center stage in the political arena, with Democratic presidential hopefuls climbing over each other to blame President Trump and the Republicans. The GOP will find it hard to fight back after taking full ownership of the tail end of this ten-year, inflation-fueled bubble.

As ridiculous as we free-market types always find it, a recession during a Republican presidential administration is always characterized by our opponents as an indictment of capitalism, even though the business cycle is driven much more by monetary policy than anything presidents of either party do. And the Federal Reserve is not a capitalist institution. It’s an economic central planner Karl Marx considered a vital part of moving society towards communism.

Read the rest at Foundation for Economic Freedom…

Greek “no” vote on austerity isn’t remotely heroic or “libertarian”

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greece-referendum-_3365507b The 21^st century global banking system based on fiat currencies and redistribution of wealth through inflation is immoral and destructive. That doesn’t mean stiffing your creditors is at all justified, heroic or remotely “libertarian,” as many on my newsfeeds are suggesting.

The Greeks who decided to take two month vacations, vote themselves useless government jobs and then retire at 50, all on someone else’s dime, aren’t the victims today. They are as much the perpetrators as the so-called “banksters.”

Photo: Sakis Mitrolidis/AFP

The real victims are those hardworking Greeks who have hitherto paid for all of this and the honest creditors who lent them money, although the latter have some culpability for bad judgment.

The Greek “no” vote on accepting “austerity” measures in return for additional loans from the European Central Bank (ECB) was more like a childish tantrum than a blow for freedom.

Imagine if you couldn’t pay your rent and asked a friend for a loan. If she agreed, stipulating you must cut your ice cream consumption from $100 to $50 per month, you wouldn’t be considered heroic for defiantly refusing her terms and still not being able to pay your rent or repay the other friend you borrowed from last month.

The Greek vote had nothing to do with liberty, but it was certainly democracy in action. Over two hundred years ago, John Adams wrote,

“Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.”

The Greek democracy has the revolver to its head. Time will tell if democracy or common sense will prevail.

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

$1.1 trillion budget deal doesn’t change fiscal cliff

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Photo: Jacquelyn Martin/AP

TAMPA, January 15, 2014 – The Associated Press reported today that Republicans and Democrats are ready to support a $1.1 trillion spending bill that would fund the federal government through its current fiscal year, which ends September 30, 2014. Citing a perceived mandate from voters to put aside their differences, Congress largely abandoned the superficial cuts remaining from sequestration.

Those widely reported “cuts” weren’t really decreases in spending. They were merely promises to increase spending less than planned.

Out in the real world, when an employee making $18.00 per hour gets a 5% pay cut, his new hourly wage is $17.10. That’s not how it works in Washington, D.C. When a federal program funded at $3 billion in 2013 is “cut,” it’s funded for $3.1 billion in 2014 instead of $3.2 billion.

What have been called “draconian cuts” and “gutting the military” by hysterical politicians and media are, for the most part, increases in spending that beneficiaries deem inadequate. Now, even that infinitesimal restraint is gone.

Depending upon which poll one cites and the wording of the questions in it, there is some evidence that the public was unhappy with last autumn’s government shutdown and desires more “bipartisanship” in Congress. Representatives on both sides of the aisle were eager to comply in an election year.

“There’s a desire to show people we can do our job,” said Rep. Mike Simpson, R-Idaho.

However, no poll attempts to separate net taxpayers from net tax collectors. It shouldn’t surprise anyone that the latter group would be unhappy with any interruption in government spending. A poll exclusively querying the former group may have yielded far different results.

Regardless of how any part of the public feels about federal spending, it is going to be cut dramatically. The fiscal realities that prompted sequestration and the shutdown have not gone away. Playing nice in Congress hasn’t changed that.

The federal government can only service its $16 trillion debt while its interest rate remains artificially low. The Federal Reserve has attempted to keep it near zero since 2008. It has only been successful because other buyers of federal debt have continued to buy while the Fed has pumped liquidity into the economy with its own purchases.

Should China, the Fed or any other buyer of federal debt cease or even significantly decrease its purchases, interest rates will begin to rise.

When interest rates rise on home mortgages, it hurts. When interest rates rise on $16 trillion, chaos ensues.

According to the White House’s fiscal year 2014 Budget proposal, interest in fiscal year 2013 was $220 billion or 6.2% of all federal spending. That was with interest rates below one half of one percent. It doesn’t take a Nobel Laureate to imagine what happens if the rate begins creeping up to the modest 3-6% levels of the last decade, much less the double digit rates accompanying the crises of the late 1970’s and early 80’s. Annual interest due on federal debt would increase hundreds of millions of dollars.

That would amount to de facto cuts in federal spending on everything else. We’re not talking about make believe “cuts” where spending is still more than the year before. We’re talking about hundreds of billions of dollars less available to spend than the year before. We’re talking about cuts.

Increasing tax revenues isn’t the answer because taxes revenues are already maxed out. The only real debate left on tax rates is whether the top rate on the wealthiest should be 33% or 39%, which is inconsequential to the debt problem. If tax rates are raised significantly overall, revenues go down. That’s already been proven.

So, the federal government tiptoes forward on a fiscal tightrope, dependent upon a set of artificially-created conditions that could change at any time. An overpriced stock market could crash on its own. China could decide to cease or decrease its debt purchases. A natural disaster could occur. Any of these could start the dominoes falling towards higher interest rates, recession for the economy and an unserviceable federal debt.

Even if none of the above occur, the end is inevitable. If printing money to buy your own debt were sustainable, the government could legalize counterfeiting and everyone would be rich. Sooner or later, economic reality will assert itself and the United States will be forced to consume less than it produces. The only question on federal spending is whether it will decrease due to a deliberate act of Congress or the way Greece’s did.

The current budget deal may provide an answer.

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Mitt Romney did not pay less in taxes than his secretary (and raising capital gains tax will destroy the economy)

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TAMPA, December 1, 2012 ― President Obama and the Democrats were successful in 2012 largely on the strength of some rather outlandish demagoguery. “Billionaires pay fewer taxes than their secretaries” was one slogan that was particularly successful.

The Obama campaign successfully made an issue out of Mitt Romney’s taxes, finally getting Romney to admit that he paid around 13% of his earnings in taxes over the past several years. The “fair share” crowd contrasted this with the higher percentage that would have been paid by a secretary in the 28% bracket, for example, who would still pay more than 13% even after deductions.

That Americans bought this specious argument is more worrisome than that the Democrats made it.

Romney’s tax percentage was low because most of earnings came from capital gains, not income. Capital gains are just what they sound like. They are the appreciation in the value of one’s capital. If you buy a stock at $5 per share and its price goes up to $7 dollars per share, you have realized $2 in capital gains. If you sell that stock at a $2 dollar profit, the government wants a percentage.

Right now, Mitt Romney would pay 35% income tax and 15% on capital gains. The average secretary would pay 15% income tax and 15% on capital gains. So, Romney’s tax liability as a percentage of income is more than double the average secretary’s. His tax liability on capital gains is the same. Obviously, Romney’s nominal tax payments in both categories would exceed the secretary’s by orders of magnitude.

That’s how things actually are out here in the real world.

So why is the tax rate on capital gains lower than on income? Because “capital,” by definition, comes from previously taxed income.

Read the rest of the article…

Interview (Video): Christina Tobin of Free and Equal Elections Foundation

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TAMPA, November 4, 2012 – “Remember, remember the 5^th of November.”

So says Christina Tobin, found and chair of the Free and Equal Elections Foundation, a 501 (c)3 non-profit formed to ensure a fair an open electoral process for all. The organization is sponsoring its second presidential debate this election season on November 5^th at 9 PM EST. Libertarian Party nominee Gary Johnson will square off against Green Party nominee Jill Stein.

Johnson and Stein won the right to participate by finishing first and second, respectively, in an online vote conducted after the first Free and Equal debate on October 23^rd. In addition to Johnson and Stein, Constitution Party nominee Virgil Goode and Justice Party nominee Rocky Anderson also participated in the first debate.

While united in their opposition to the two-party system, Johnson and Stein have very different ideas about the role of government and the solutions to America’s problems.

“They do have a different take on things such as healthcare and so on, but my feeling is that the two-party system has been playing us for over a century now and they’ve made us quite divisive. I do foresee, after this election, a huge movement of independents running for office and finding, well, we do have a lot in common across the spectrum,” said Tobin.

Watch the video interview at Communities@ Washington Times…

Read Free Chapters of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America here!

Obama and Romney on reviving the economy: Blow up the education bubble

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TAMPA, October 18, 2012 – Mitt Romney has been able to cruise through two debates with Barack Obama by utilizing a surprising strategy. When Obama has gone on the attack, citing the “draconian cuts” that the delusional on both sides of the aisle imagine Romney would propose as president, Romney has completely defused the president by simply telling the truth.

He’s not cutting anything.

He went a step further during last night’s debate. Like Obama, Romney is not only refusing to cut a single penny from any government program (other than Big Bird), but he’s now on the record that expanding the welfare state is a key plank in his “job creation” plan. In addition to stating “I want to make sure we keep our Pell Grant program growing,” Romney went on to emphasize the importance of keeping student loans available.

Forget the supposedly conservative principle that it is immoral for the government to force one citizen to put up his money to guarantee loans taken out by another, much less force that citizen to pay another’s tuition outright. That principle is long, long gone from the conservative psyche.

What is disturbing is that neither candidate seems to have any idea that their plans for education will exacerbate a bubble that has all of the same characteristics of the housing bubble.

Continue at Communities@ Washington Times…