On Wednesday, February 10, 2016, the Chair of the Federal Reserve, Janel Yellen, met with the House Financial Services Committee to give her semiannual report on the state of the nation and answer questions from each of the members. Again on Thursday, February 11, she met with the Senate Finance Committee to do the same thing. As she has shown prior she emphasized caution and the need for the FED to carefully monitor the tenuously existing economic conditions in the world.
The major problem that exists today is the widening fallout or nervousness from concern over China’s weak currency and economic outlook, which is rattling financial markets around the world. China’s GDP (Gross National Product) had traditionally been around 8%. Over the last year or so it dropped considerably while the value of her currency has increased against other national currencies. A higher Yuan would make China’s goods more expensive overseas. The Central Government stated that they would lower the value of the Yuan on international markets.
This is done, following the Laws of Supply & Demand, by increasing the amount of actual currency available on the international exchanges, supplying more Yuans than are needed. In this way the Yuan becomes more available than all the other currencies and its value against them drops.
This process, in turn, would bring down the cost of Chinese goods in trade with other countries. Of course, all the non-Chinese markets did not appreciate their currencies increasing in value over that of the China. This made numerous other countries nervous and some decided to react in a similar fashion. Consequently a number of governments began attempting to manipulate their currencies. These actions tended to deregulate international trade. The United States dollar rose in value against all the other currencies, being considered internationally the most stable.
China made two attempts to do this. Each did lower the value of the Yuan, but in both instances it fell fractionally. China’s GDP did not rise to its coveted 8%. Their Central Bank, by attempting to raise the GDP actually, lost control of their economy. What they had achieved was a currency oscillating in value. The value of some other currencies have tended to be equally erratic; but the other counties that attempted to manipulate their currency values did not advertise the fact. Will a new equilibrium be reached in the future? Probably, at some point.
Meanwhile most of the stock markets in these assorted countries went on roller-coaster rides, mainly ending downhill. Nervous people sold some or all of their stocks; the different stock markets dropped hundreds of points; automatic computer-controlled programs owned by large holders like retirement funds automatically sold; and the drops became even more dramatic. Exchange rates of the different currencies went on a tetter-totter basis and international stability tethered on a day by day basis
Using this information Ms. Yellen and her Board of Directors at the Federal Reserve have to make projections of what the international and national futures will be. The American Stock Market has lost at least 10%, to date, of its value. Most stocks are down considerably. This is also true of most international stocks.
The Chinese Government has made two attempts to lower the Yuan. They lowered it fractionally both times and then lost control of what they were doing. Everything, inside and outside of China, has been erratic since. The Central National Banks are now waiting for a sense of equalization to come again. So far it hasn’t and everyone is still waiting for some return of normality; and this includes Chairwoman Yellen and the Board of Directors of the Federal Reserve.
In her remarks Yellen said that the Federal Reserve expects to eventually raise its rates slowly; but they are not on any preset course. She commented that it was possible that the recent economic weakness could prove temporary, and if so it could set the stage for further economic growth and a stronger increase in inflation than the FED is currently forecasting. If this occurs then the FED would be likely to hike rates more quickly than anticipated.
Ms. Yellen said that various economic indicators demonstrate that China, the world’s second largest economy, was undergoing a sharp slowdown. But recent declines in the value of that country’s currency have intensified concerns about her future economic prospects.
This uncertainty led to increased volatility in global financial markets and against the background of monetary weakness abroad, exacerbated concerns about the outlook for global growth, which generally caused the nervous or erratic actions within the various nations.
Yellen also stated that the shark decline in U.S. stock prices, rising interest rates for riskier borrowers and further strength in the dollar has translated into financial conditions that are less supportive of growth.
“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer term interest rates and oil prices could provide some offset.”
She stated that the labor market remains solid, creating 150,000 jobs in January. That was enough to push the unemployment rate down to 4.9%. Inflation, however, has continued to fall below the FED’s target of 2% annual price increases. (At the beginning of February it was .7 of 1 %.) The shortfall has been steeper recently because of the renewed drop in oil prices and stronger dollar, which holds down U.S. inflation by making foreign goods cheaper for American consumers.
But Yellen said the Central Bank continued to believe that the energy declines and dollar strength would fade in coming months. Inflation would also begin to move closer to 2% as a healthy labor marker pushes up wages. She also stated that worker pay has started to show its first significant gains since the Great Recession ended 6 ½ years ago.
In late 2015 the interest rate the FED charges banks went from 0 to ¼ of 1%. When the next increase in interest rates will occur is not known. The FED will examine the indicators again in March. Many economists believe there will be few if any increases in interest charged by the FED this year.
After her report Chairwoman Yellen took questions from each of the members of the Committees, for the House on Wednesday and the Senate on Thursday.
What Dr. Yellen implied in her statement was that the economies of China, the United States, and many European nations are far healthier than current economic conditions demonstrate. She indicated that the international economic chaos begun by China will probably soon end in a new financial equilibrium and trade will probably be again balanced between nations.
What has caused the stock markets around the world to go through their current gyrations has been nervousness by investors within the individual nations. It has been fear or an overreaction to the erratic international financing, a sort of terror that the different national economies could follow domestically the international situation.
Of course the irony here is that the currency of the United States is considered the safest in the world and the dollar is the most valuable currency available. Particularly since the U.S. National Debt has supposedly reached about 19 trillion dollars.
Dr. Yellen indicated that the FED is doing nothing but wailing for international trade to stabilize again. At that point the FED will again raise the subprime rate it charges banks another ¼ of 1% bringing it to ½%. There will probably be very few, in any, raises this year; but it will pick up in the future. She mentioned that the average depositor is being financially hurt by the low interest rates they’re receiving from their almost required deposits to the banks.
While she didn’t state this fact the implication is that countries like Venezuela, that function mainly on one major export like oil, and whose economies have suffered from the drop in oil prices, are now looking for other products or raw materials they can export to raise their economic levels within their borders. This may take a few years; but that can’t be helped. The current drop in the price of oil has been matched by the current drops in their standards of living.
After her remarks Dr. Yellen took questions and comments from all the members of the committee. Each had a short period to deal with her. The questions and comments tended to be quite enlightening. The Democratic Congress people were a bit friendlier in their remarks than the Republicans.
One area of interest was that the Federal Reserve has, between 2009 and 2015 transferred over 600 billion dollars to the U.S. Treasury. This is money that is separate from all the taxes and fines collected. It was further denoted as no less than 100 billion dollars a year went to the Treasury.
The sources of these funds were not mentioned. Some of these funds are interest on the part of the National Debt which the U.S. Government owns. The Federal Government admits to owning 40% of its own debt. That is a conservative estimate. I would put it up to, at least, 50% or even over 60%. The Federal Reserve uses parts of the Debt to adjust conditions within the economy at times. Federal bonds are both short and long term. Some are always being sold and other expire and are cashed out. The FED can add money to the economy or National Cash Flow by selling less than it cashes out or the reverse can be done. If inflation is too low or there is a recession they will sell less than they cash out. If, on the other hand, inflation is too high then the FED will sell much more than they cash out. Reducing the amount of money available in the economy. These changes do not necessarily totally solve the economic problem but they were and are a tool that lessens their impact.
Forgetting adjusting economic conditions, the rest of the cash transferred to the Treasury was just a simple money transfer. All of this money was just brought into existence by the FED. After all they control the printing presses and can issue money within legal limits as they decide it is necessary. Remember, what stands behind the dollar is the word of the United States Government. There is nothing else, no entity of value other than the Central Government. All money today is a token, merely an instrument for exchanging goods and/or services for goods and/or services.
There was no mention of the 45 billion dollars a month that was spent for well over two years during this period resolving the housing dilemma created by the banks during the end of 2008 when the Real Estate Market crashed. The FED bought 45 billion dollars’ worth of fractional mortgage pieces in all 50 states and territories upon which it would never be able to collect its investment. In essence the FED bought the economy out of the bank caused Housing Bubble.
One area of concern that was brought up by several Black members of the Committee was the fact that unemployment is far higher in minority areas of the country, that the general 4.9 percent unemployment was as high as 50% in some of the Black and Hispanic neighborhoods and among young minority members entering the labor market. Dr. Yellen stated that Monetary Policy was a general force that worked throughout the economy. It did not differentiate between ethnic or racial groups, that this type of job creation was the province of Congress, using Fiscal Policy to create work projects in area where these people lived.
While she didn’t state it this Fiscal Policy was done from 1987 through 1980 during the Administration of President Jimmy Carter. Assorted Public Projects were built throughout the nation that benefited both communities and created employment in areas that had larger than normal levels of unemployment.
There is another factor which Dr. Yellen did not mention but that is highly important and that is the velocity of money. New currency added to the overall economy or National Cash Flow is spent numerous times before it becomes part of the increased amount of money available in an increased National Cash Flow. It can be spent three to eight times and in some instances as many as twelve times as goods and services are paid for and then reused by the person or institution who receives them. This is a continuum.
If we take five as the average number of times the 800+ billion dollars, the FED added to the economy between 2009 and 2015, as the average velocity in which the money passed through the overall economy the amount of money Dr. Yellen stated was in excess of 4 trillion dollars. And if we add to that the 45 billion a month that was used to resolve the mortgage crisis for a period of over two years, that makes another 540+ billion dollars, from which the government never collected back a dime.
With all this money added to the economy inflation by February of 2016 was 7/10ths of 1%. The indication is that the total United States economy totally needed these funds, not only to avoid a Major Depression but to just function and grow. Keep in mind that the overall population of the country is dynamic, constantly growing.
If we just consider the taxes paid on this money on a municipality, city, and federal level we are talking about survival for local and state governments. For example a state like California charges a sales tax of 7½% Imagine how much additional sales tax would be paid by 40 some million people. States like California and New York have state income taxes which are a small percentage of what the Federal Government collects, but can still be a substantial sum. Try to visualize the additional amounts collected by these or other states that have their own income taxes. And, of course, the increased Federal Income taxes on the additional 4.5 billion plus dollars.
In all probability the United States recovery from the 2008 Real Estate Crash was brought about by this Creative Monetary Policy brought about by the Federal Reserve with the support of the President.
If the Republicans in the House of Representatives were not so Penny wise and dollar stupid as they have been since 2011 when they took control of the House of Representatives they could, as Dr. Yellen suggested in her answers to questions and President Obama earlier proposed, have passed Fiscal Policy laws and the infrastructure of the United States could well be on its way to modernization. This, in turn, on a more focused basis than just Monetary Policy would have brought unemployment well down from the 4.9% it is now and significantly increased the country’s GDP. The difference it would have created in the National Debt by the increased government expenditures would have been made up by the increase in taxes on every level of government. This also could have focused on minority areas which currently have inordinately larger levels of unemployment.
One of the comments made by a Republican legislator was interesting in demonstrating his ignorance of the basic principles of Macroeconomics. His comment referred back to the Golden Era of the Federal Reserve when Alan Greenspan was Chairman of the FED and, in the opinion of the legislator, we were living in a Golden Age. How misinformed or ignorant can anyone be? There should be an economics literacy test for people running for Congress
It is because of people like Barack H. Obama, Dr. Ben S. Bernanke, and Dr. Janet L. Yellen that the country is as economically healthy as it is now. Without them the United States would today be in a dire depression.