The Weiner Component #116 – The U.S. & the Federal Reserve

In 1935, Cret designed the Seal of the Board o...

English: Janet Yellen being sworn in by Fed Ch...

English: Janet Yellen being sworn in by Fed Chair Ben Bernanke (Photo credit: Wikipedia)

By Friday January 9, 1915, the Federal Reserve had turned over $98.7 billion to the Treasury for the year 2014. In 2013 it was $79.6 billion and in 2012 it was $88.4 billion. All of this was the interest on the National Debt bonds, much of which the Federal Reserve had purchased since 2009.

In 2008, the last year of the Bush Administration, the country faced the explosion of the Real Estate Bubble that had been gradually building over the prior thirty years. The big banks had been going crazy with denial in 2007 with their abuses when the oncoming failure became obvious. In essence every dollar in circulation suddenly dropped in value to about a dime. The Obama Administration did two major things in 2009 and 2010. They were able to avoid through rapid action an economic crash potentially larger than the Great Depression of 1929 and they passed Affordable Health Care (Obamacare). In 2010 the country elected a Republican majority in the House of Representatives and thereafter nothing was done by the House to alleviate conditions caused by the Real Estate Bust. In fact Congress passed laws to exacerbate the negative conditions.

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It should be noted that the Federal Government has two major tools to deal with downturns in the economy. One, used by the Federal Reserve, is Monetary Policy and the other, used by Congress and the President, is Fiscal Policy. This is Macroeconomics.

Fiscal Policy has to do with Congress passing bills that add money to the economy. Keep in mind that all currency has nothing behind it other than the word of the National Government. All money is now a means of exchanging something of value for something else of value, goods and services for goods and services.

In 2011 or 2012 President Obama proposed a bill that would create jobs by updating the infrastructure of the United States. The electric grid across the U.S. is well over fifty years old, much of it predating World War II, and parts of it are in constant danger of breaking down. It has not dealt with the changes in demography or increases in population that have occurred over that period. The country has come close to power outages because of cold weather conditions or for other reasons. Many of the bridges throughout the nation are also well over fifty years old. A number have collapsed; many are still waiting to be refurbished.  Also many schools, some of which were built over one hundred years ago, also need refurbishing or replacement throughout the country. Many of the sewers in cities are well over one hundred years old; a few have collapsed in parts.

All of these and many other projects will have to be done at some point in the future. Maintenance is required to keep all aspects of society properly functioning. From 2011 on the House of Representatives with its Republican majority has tended to squeeze the society, downsizing government and adding to unemployment, in fact at one point it closed down the Federal Government by refusing to fund it. The present is an ideal time to do a lot of these fiscal projects as interest rates are at just barely above 0.

Monetary Policy is a tool of the Federal Reserve. It can be used to increase or decrease the amount of money in circulation. Ordinarily the Fed adjusts the money flow in the economy by increasing or decreasing the amount of money it borrows through the sale of bonds. What happens is decided by the rate or non-rate of inflation. The Fed is always cashing out and selling bonds. There are short term, medium term, and long term bonds, lasting from a few months to a number of years. The rate of sale is determined by the level in interest paid on these bonds. The higher the interest the greater the sale and the lower the interest the less the sale. These interest rates are determined by the level of inflation in the country. The higher the inflation the higher the interest. Here money is taken out of the national cash flow so that there is less available to be spent, thus gradually forcing down the rate of inflation. If the opposite is true then the Fed will sell less bonds than it cashes out and continually add currency to the national cash flow.

With no help from Congress during a period of recession or depression the Fed under the chairmanship of Ben Bernanke had to be quite innovative to pull the nation out of the Real Estate Debacle. This was done by the Fed buying $85 billion worth of bonds each month for well over two years: $45 billion in mortgage paper and $40 billion in government bonds. The effect of these two actions was to add well over a trillion dollars to the national cash flow per year; and also to essentially resolve the big banks activity in splitting up individual mortgages into well over one hundred parts. By my estimate it would have taken well over twenty years to straighten out the housing mess if the Fed had left it alone. The Fed did it in a relatively short time by buying most of the pieces. We again have new construction and older houses are being resold.

What is interesting to note here is that 40 billion was utilized on traditional monetary policy while 45 billion dollars was used to purchase mortgage paper from the assorted hedge funds which each owned fractional pieces of mortgages in each of their funds that had been very sloppily catalogued. For the Fed to collect or foreclose on any of these properties it would have to set up a table of all the homes on which it held mortgages within the 50 states and gradually build up its portfolio to the point where it owned over fifty percent of each particular mortgage. The cost of setting up this information bank would have been prohibitive even for the Federal government. The probability is that the Fed did nothing with this paper and a percentage of the population ended up living in their homes for nothing, in essence the government forgave these loans.

Of course the people living in these houses still had to pay property tax. If they did not the municipality would eventually foreclose on the property and sell it for back taxes. These people would suddenly have a lot of disposable income, which many of them spent freely, and they could not claim any home interest payments on their income taxes. This, in turn, added billions of dollars circulating in the National Cash Flow throughout the country.

The practice of adding money to the economy was ended in October of 2014. Janet Yellen, the new Fed chair left the ending of the policy tentative. It could be started up again if the need arose.

Interest rates had also been dropped to a fraction of one percent, practically giving the banks free money from all the savers and checking accounts which they could lend out at a decent rate of interest. Currently the Fed is considering when to raise interest rates. Meanwhile most of the larger banks have announced large profits for 2014.

What is interesting here is that the Federal Reserve used part of the National Debt as a means of positively controlling the amount within and the flow of national currency. They actually increased over time the flow of money by trillions of dollars and, in this way, diminished the effects of the Real Estate Debacle caused recession.

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What Bernanke did was to use part of the National Debt as a means of getting the country out of a serious recession. Since Congress would not act he used the Debt itself as the tool by which a large percentage of recovery was gradually brought about.

The National Debt is divided into two parts: public debt which the government owns and private debt which is held by private countries and by individuals. For example the two largest holders of U.S. debt are China which as of November 2014 held 1.25 trillion and Japan had 1.24 trillion.

All foreign holdings at that time were 6.11 trillion dollars. It should be noted that the National Debt currently is 18 plus trillion dollars. Who owns the balance? Private individuals and companies within the United States and elsewhere would hold at least another trillion dollars. The balance would then be held by the U.S. government and its agencies. For example Social Security has well over 2 1/2 trillion in government debt. All this means that the Federal Government holds well over 50 percent of its own debt and pays the interest on that debt to the U.S. Treasury.

It should be noted that Treasury securities are seen as one of the world’s safest investments. This has been the situation in the world and will, in all probability, remain so.

The 114 Congress, which recently met for the first time and has a Republican majority in both Houses, shows no indication that it is even slightly interested in fiscal policy. While unemployment is down to 5 plus percent for the first time in the nation since the 2008 Debacle it still could be a lot lower with fiscal policy.

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Another factor of importance here is population; it is always gradually increasing. According to the Census Bureau’s Population Clock: there is one birth every 8 seconds, one death every 12 seconds, and one international migration every 33 seconds. The result of all this is a net gain of one person every 16 seconds.

That is an increase in the population of the United States of 3.75 people per minute, 225 per hour, 5,400 persons per day, and 1,965,600 people per year, if we count each month as 30 days and do not allow for each leap year. The current overall number of people in the country is in excess of 350 million people.

Most of these new settlers will reside along either of the coastal areas. In order for standards of living to not decrease with this additional population the GDP (Gross Domestic Product) has to increase one or two points yearly. If it stays at exactly the same point or decreases slightly then the overall standard of living has dropped for the bulk of Americans.

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What will happen with this new Congress should be interesting and economically uninspiring. From now until July 2016 when the Republicans hold their Presidential Convention there will be a lot of jockeying for the lead position in the Republican Party. The major issues like immigration, fiscal policy, job creation, plus whatever else comes up will be largely ignored. They will try forms of blackmail with the President in order to achieve some of their goals. This will be done by attaching riders that he will not approve of to necessary bills. That means that President Obama will probably have to veto the necessary legislation causing all sorts of economic and other problems. The question there is who will take the blame for causing all these disasters?

The Republicans will certainly not be creating any new jobs. Janet Yellen, the current chair of the Federal Reserve may have to restart the program of buying bonds for economic recovery to continue since the Republicans will be doing their dandiest to constrict the economy and inadvertently increase unemployment. What will probably occur between the present and the next presidential election is two years that the future historians will in all likelihood essentially ignore.

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

The Weiner Component #115 – The Keystone XL Pipeline

 

Now that Congress has a Republican majority in both Houses of Congress they are sure to push through a Keystone XL Pipeline bill. In fact, the new 114th House of Representatives on its first day of meeting, without any committee meetings or anything else, passed such a bill 266 to 153 with 28 Democrats also voting for the bill. That is still not a 2/3ds super majority

Mitch McConnell, the new leader in the Senate, has stated that he will push the bill through that House as soon as he can. He also does not have a 2/3d majority and the Democrats can filibuster the bill.

If perchance the bill were to pass in both Houses the President has stated that he would veto the bill.   Happenings should be interesting.

The Keystone XL Pipeline is to go from south central Canada south 3,000 miles through the heartland of the United States to the Gulf of Mexico. The pipeline would carry oil tar, a highly toxic plastic-like substance from which leakage could poison the water table of the central United States. The pipeline was first proposed six years ago when oil sold for over $100 a barrel.

Much of the pipeline has already been built by enterprising Republican entrepreneurs, who in all probability have made innumerable large contributions to the Republican Party and expect to get a massive return on their investment. It always struck me as odd that political contributions which buy influence in Congress with one or the other political party are never legally considered a bribe, which they are.

A great deal has been written about the Keystone Pipeline over the last six years. But in the last two or three years I’ve read nothing about oil leaks polluting the soil and poisoning the water table. One or more massive leaks of these oil tars, which after all is a plastic-like guck, could destroy large areas of farmland and poison the underground water table permanently. Somehow this consideration has disappeared.

The Koch Brothers of Kansas, among numerous other things, operate about 4,000 miles of pipeline throughout Kansas, the United States and Canada which transports oil, natural gas, and chemicals. They have and are paying hundreds of millions of dollars in fines at many different times for damages done through leaks in their pipelines. There are currently about four or five leaking oil lines going under and polluting the Yellowstone River.

The earth is not a solid core. It consists of plates of rock and soil over hot volcanic substances. These plates move at times almost imperceptibly and cause earthquakes. The areas where two or more plates meet are called faults and there seems to be quite a bit of movement at many faults. The movement generally is not extreme but it exists.

For example there was a tile counter spread out the full length of the kitchen in my California house. About 2/3ds of the way from the outside wall toward the interior of the room a hairline crack occurred in the counter. The pressure of the movement of the earth had caused this hairline crack, probably it was hundreds or more pounds of pressure pushing in two directions. Lately I also noticed that there is a minor crack in a few sections of the ceiling, particularly on the stairwell going up to the second story.

In laying the XL pipeline, I believe, there is a choice of either plastic or ceramic pipe. The plastic will probably dissolve in certain chemicals so the probability is that they will use ceramic pipe. To also install sensing equipment and automatic shutoff systems would be very expensive. The probability is that the pipeline is and has been installed as cheaply as possible. The earth moves; the pipes do not. Do the assorted owners who expect massive return from the pipeline have the funds available to pay the fines and clean up their messes? I doubt it. Can the messes be properly cleaned? They haven’t been up to now.

If it’s argued by our Republican Congressmen that none of this will happen then consider why don’t they build the pipeline completely in Canada west to the Pacific Ocean. The problem there, from what I understand, is that short areas of pipeline have been built in Canada and there have been some horrendous leaks. The Canadian Government will not allow this to occur in their country but are perfectly alright with building it across the United States.

There is also a major note of irony here. Six years ago, when the project was first envisioned, oil was over $100 dollars a barrel and going up, now it is around $50. Is oil tar worth processing at that price? I believe a barrel is 54 or 55 gallons of oil. How much oil tar would be required to generate a barrel of oil? If it cost around $50 or close to that amount is it worth even bothering with? It is very possible that if the pipeline were to be approved that it would not be used. That would be an interesting note of irony in this longtime struggle.

Consider also that the price of oil is dependent upon its supply and demand. If not enough gasoline is being produced in the world then the price will be bid up. But if too much is being produced, there is more than is wanted available. The various nations producing oil like Russia, Iran, Saudi Arabia, and Mexico to name some of the major ones have planned their yearly budget on receiving over $100 a barrel. Oil is now under or about $50 a barrel and could still drop in price. Mostly these nations are increasing their production in order to try to make up the difference. In doing this they are further adding to the surplus amount of oil available and bringing additional pressure for the price to drop further.

Of course the people who have already put in sections of the pipeline, if they don’t make any profit, might try to sue the Federal Government for not allowing them to make their profit from their endeavors. Or they might try to get the Republicans in Congress to pass a law reimbursing them their losses. After all they did contribute large amounts of money to the Republican Party.

Irony is a wonderful entity. The probability is that the use of the Keystone XL pipeline if it is completed and used will further depress the international price of oil. How far can it drop? That is another interesting question. I can remember buying gasoline over a decade ago at slightly under one dollar a gallon.

Another interesting effect of the oil price drop is that rich oil Sunni Muslim nations like Iran that have had their national income drop by half or more are now extremely limited in their contributions to such terrorist organizations like Hezbollah. One of the effects of these low oil prices may be to limit terrorist activities in the Middle East and in other parts of the world.

The irony is fascinating. On the one hand lower oil prices effect the stock market in a negative fashion and on the other hand, at the same time, they indirectly lessen terrorist activity by supplying less money to radical causes. And, of course, in the middle of this is the Keystone XL pipeline which may be eventually carried out six years too late and prove worthless.

It should be noted that the price of gasoline in February of 2015 has started going up again. This has been caused not by a shortage of oil but instead by a strike at several oil processing plants. A labor dispute in the United States is causing this price rise. At some point the strike will end and the price of gasoline will drop again. It’s a further note of irony.

During the second week of February, 2015 both Houses of Congress have passed a similar bill to authorize the building of the Keystone XL pipeline (which incidentally is already mostly built). There are still some disputes about putting it through certain areas of privately owned land which are currently being dealt with in the courts. There is the question of public domain. Private land, whose owners don’t want the pipeline, have to have sections of their land condemned by the particular state, in order for the pipe companies to be able to use it. These cases are now in state courts.

President Obama has earlier stated that he will veto the bill. It does not have a 2/3 majority in either house. The veto will stop it from being enacted. Some Republican legislators in both Houses of Congress have stated that they will pass the bill again and again after each veto. Others said that they want to attach the bill to every other bill they pass until the President signs it. Still others only want to attach it to important bills that the President has to sign. It’s an interesting or strange situation that can lead to total gridlock and stop all or much of the legislation being passed.

What makes it doubly interesting is the fact that a similar situation is going on with the Homeland Security Bill. The House Republicans have attached a section to this bill that would defund all monies that need to be used to carry out President Obama’s executive order to legally keep illegal immigrants in the country who were brought to the United States as babies or young children and give them a road to citizenship.

The House of Representatives passed this bill and have refused to take any further action on it. The Senate, it seems, would like some sort of compromise so that the Home Security Bill can pass. Funding for this current law ends at the end of February. It should be interesting to see what happens. This is particularly true if Homeland Security ends on February 28 and there is some terrorist activity within the United States afterwards. Who will be responsible? The Congress with its attempt to blackmail the Administration or the President for not buckling under the will of the Republicans or the President for giving in to the Republican demands?

In any event will the Keystone XL pipeline be another situation waiting to see who will blink first? It will be interesting to see if many of the Republicans in their rage act like tantruming five year olds or if they can deal with the problem like adults.

 

English: A map showing aquifer thickness of th...