Essay on Dreams

The basic discount rate is adjusted from time to time, in light of changing market conditions, to complement open market operations and to support the general thrust of monetary policy. Changes in the discount rate are made judgmentally rather than automatically and may somewhat lag changes in market rates. The immediate response of market interest rates to a change in the discount rate -- the announcement effect -- depends partly on the extent to which the change has been anticipated. If rates have adjusted in anticipation of a change in the discount rate, the actual event may have only moderate effects on market conditions.
Personal Financial Education, FederalReserveEducation.org, 2003 Table A. Revisions in total nonfarm employment, January-December 2012, seasonally adjusted (Numbers in thousands) ------------------------------------------------------------------------------------------ | | | Level | Over-the-month change |--------------------------------------------------------------------- Year and month | As | | | As | | |previously | As | Difference |previously| As | Difference |published | revised | |published | revised | ------------------------------------------------------------------------------------------ | | | | | | 2012 | | | | | | | | | | | | January............| 132,461 | 132,809 | 348 | 275 | 311 | 36 February...........| 132,720 | 133,080 | 360 | 259 | 271 | 12 March..............| 132,863 | 133,285 | 422 | 143 | 205 | 62 April..............| 132,931 | 133,397 | 466 | 68 | 112 | 44 May................| 133,018 | 133,522 | 504 | 87 | 125 | 38 June...............| 133,063 | 133,609 | 546 | 45 | 87 | 42 July...............| 133,244 | 133,762 | 518 | 181 | 153 | -28 August.............| 133,436 | 133,927 | 491 | 192 | 165 | -27 September..........| 133,568 | 134,065 | 497 | 132 | 138 | 6 October............| 133,705 | 134,225 | 520 | 137 | 160 | 23 November...........| 133,866 | 134,472 | 606 | 161 | 247 | 86 December (p).......| 134,021 | 134,668 | 647 | 155 | 196 | 41 ------------------------------------------------------------------------------------------ p = preliminary.

The goal with monetary policy is to accomplish manageable inflation, full employment, and steady growth in the economy. The 12 Federal Reserve Banks are responsible for conducting monetary policy and are referred to as the U.S. central bank. The Federal Reserve Banks' balance sheet reveals to us how these 12 banks are conducting monetary policy.
The asset side of the balance sheet consists of securities and loans to commercial banks. The liability side consists of reserves of commercial banks, treasury deposits, and federal reserve notes outstanding.
The Federal Reserve has three main tools at its disposal to manage the money supply: open-market operations, the discount rate, and the reserve ratio.
Open-market Operations
Open-market operations are the Federal Reserve's most important tool in changing the money supply. Through these operations, the Fed buys government bonds from commercial banks and the public. When the Fed purchases government bonds from commercial banks, the commercial banks give up some of their assets (securities) to the Federal Reserve. Also, by buying from commercial banks, the Fed increases the reserves of the commercial banks. Banks are able to lend money by holding large reserves. After buying bonds from banks, the banks' balance sheet has more capacity to lend because their assets have shifted from securities to reserves.
The same effect occurs when the Fed buys bonds from the public (small businesses and local banks). When the Fed purchases bonds from the public, these small businesses and local banks are left with more cash in reserves and less of their assets sitting in securities. Therefore, businesses and local banks are able to increase their checkable deposits from the cash the Fed paid for their securities.
The chain reaction of open-market operations works like this. The small business receives cash for their bonds, they deposit the cash in the bank which increases the bank's checkable deposits and reserves. These extra reserves allow the bank to make more loans and, in turn, increase the money supply.
The opposite effect happens when the Federal Reserve sells securities to the commercial banks and the public. Securities are increased on the balance sheets of businesses and banks, which decrease reserves and cash accounts, decreasing the money supply.
The Reserve Ratio
A second tool for the Federal Reserve is the reserve ratio. The Fed uses this tool very rarely, but when used the reserve ratio is a very good tool to control the creation of money. If a bank has $1 billion in checkable deposits and the reserve ratio is set at 20 percent, then the bank must hold at least $200 million in reserves. A bank can only lend what it has in excess reserves. So, if the bank has $300 million in reserves, then it has $100 million of excess reserves which the bank can use to make loans. If the Fed increases the reserve ratio to 30 percent, then the bank must hold in $300 million in reserves and, therefore, will have zero excess reserves to make loans. The Fed can also take reserve ratio down to allow banks to increase their excess reserves and the money supply.
The Discount Rate
The third, and probably more common, tool for the Federal Reserve is the discount rate. The discount rate is the interest rate charged to commercial banks on loans from the Federal Reserve. These loans from the Fed to commercial banks shows up on the Fed's balance sheet as a Federal Reserve promissory note (IOU). There are no reserve requirements for loans to commercial banks and, consequently, these loans are immediately added to banks' excess reserves.
When the Fed increases the discount rate, it is making it more expensive for commercial banks to borrow money from the Fed; therefore, the commercial banks will be less likely to borrow and add to their ability to increase the money supply from additional excess reserves. The opposite scenario happens when the Fed lowers the discount rate. Commercial banks are more likely to borrow and increase their excess reserves to make more loans, which increases the money supply.
When the Federal Reserve buys securities, lowers the discount rate, and/or lowers the reserve ratio, economists call this an easy money policy. When the discount rate is increased, sells securities, and/or increases the reserve ratio, it is called a tight money policy.

January 2012 | 0.44% | February 2012 | 0.44% | March 2012 | 0.76% | April 2012 | 0.30% | May 2012 | -0.12% | June 2012 | -0.15% | July 2012 | -0.16% | August 2012 | 0.56% | September 2012 | 0.45% | October 2012 | -0.04% | November 2012 | -0.47% | December 2012 | -0.27% | Blue indicates current components of the Annual Inflation RateRed indicates Deflation (falling prices)-0.50% monthly = 6% Annual Deflation
.10% monthly= 1.2% annual inflation
.20% monthly= 2.4% annual inflation
.25% monthly= 3% annual inflation
.50% monthly= 6% annual inflation
.85% monthly= 10.2% annual inflation
1.00% monthly= 12% annual inflation |
By looking at the monthly inflation rate we can see the various components that make up the annual inflation rate.
The annual inflation rate is made up of the 12 most recent monthly rates. So when a small or negative (deflation) monthly rate is replaced by a large positive monthly rate we can see a significant jump in the annual inflation rate in a single month. Conversely if a large monthly inflation rate is replaced by a smaller one inflation will decrease.
Stimulus
The $787 billion economic stimulus package was approved by Congress in February, 2009. The package was designed to quickly jumpstart economic growth, and save between 900,000-2.3 million jobs. The package allocated funds as follows: * $288 billion in tax cuts. * $224 billion in extended unemployment benefits, education and health care. * $275 billion for job creation using federal contracts, grants and loans.
To find out exactly how these funds were allocated, see American Recovery and Reinvestment Act Details.
The package was designed to be spent over ten years. However, to give maximum impact, $720 billion, or 91.5%, was budgeted for the first three fiscal years: $185 billion in FY 2009, $400 billion in FY 2010 and $135 billion in FY 2011.
Stimulus Plan Results
What were the actual results? In fact, the package did better than planned. By the close of FY 2009, (October 30, 2009) $241.9 billion had been spent: $92.8 billion in tax relief, $86.5 billion in unemployment and other benefits and $62.6 billion in job creation grants.
By August 29, 2012, the program spent $770.5 billion: $297.8 billion in tax relief, $232.2 billion in entitlements and $240.4 billion in contracts, grants or loans. (Source: Recovery.gov)
The Congressional Budget Office projected the stimulus package would increase GDP growth by 1.4%-3.8% by the end of 2009. (Note: This did not mean GDP growth would be up1.4%-3.8%. It just meant the economy would be that much better, even if it remained in recession. Actually, the CBO projected the economy would contract 3% for 2009.) In fact, the economy contracted 2.6% in 2009, and expanded 2.6% in 2010.
The economic stimulus bill was supposed to save 900,000-2.3 million jobs. As of October 30, 2009, it saved 640,329 jobs.(most recent report).
Why the Economic Stimulus Package Was Created
The main purpose of the economic stimulus package was to instill the confidence needed to restore economy growth. Monetary policy had done all it could, and it was clear fiscal policy was needed. The stimulus plan also aimed to restore trust in the finance industry by further limiting bonuses for senior executives for companies that received TARP funds.(Sources: CBO, Letter to Senator Grassley, March 2, 2009; Economic Projections; Recovery.gov))
Once in office, Obama realized he needed to dramatically increase the fiscal stimulus from the $190 billion plan he proposed in his campaign. Since the economy was still spirally down, dramatic and aggressive action was needed to stem further economic crisis. Some components of his campaign plan, such as enacting a foreclosure moratorium, had already been implemented by Fannie Mae. Others, such as eliminating taxes for seniors making up to $50,000, were still part of Obama's economic agenda elsewhere.
Obama's biggest challenge was to create enough of an economic stimulus to soften the recession, but not big enough to create further doubts about the ballooning Federal Debt. Unfortunately, the plan has been blamed for doing both -- failing to stimulate the economy enough reduce unemployment below 9%, and adding to the debt. Even so, the stimulus plan was not blamed as much as health care reform, Medicare and Medicaid for the debt.
How Does the Plan Work?
Obama's tax rebates were supposed to encourage consumer spending, but many experts doubted it. Why? The rebates showed up as less tax withholding. Unlike the Bush tax cuts, workers did not receive checks. As a result, most people weren't aware they got a tax rebate.
The Stimulus for Small Business helped create jobs, increased lending from the SBA and community banks, and reduced capital gains tax for small business investors. The state aid helped, but many states were so underwater that their losses outweighed the Federal aid.
The public works construction was probably the most well-publicized, since signs were posted wherever stimulus money was used to construct roads or public buildings. It was estimated to retain or add 3 million jobs, many of which were sorely needed in the construction industry.
Was the Stimulus Act a Success?
By most economic indicators, the Economic Stimulus Package was a success. In March 2009, before it was launched, Q1 GDP was -6.4% (it has since been revised to -4.9%)and the Dow had slid to 6,500. By Q4 2009, GDP was +5% and the Dow had risen to 10,428. Not all of that success can be attributed to the Stimulus Package, since expansive monetary policy and strong emerging markets also helped boost the economy. However, those were all in place in March 2009. No doubt, the economic stimulus package inspired the confidence needed turn the economy around.

http://www.treasury.gov/resource-center/economic-policy/Documents/20120323InfrastructureReport.pdf

NEW ECONOMIC ANALYSIS OF INFRASTRUCTURE INVESTMENT
A REPORT PREPARED BY THE DEPARTMENT OF THE TREASURY
WITH THE COUNCIL OF ECONOMIC ADVISERS
MARCH 23, 2012
Good roads and canals will shorten distances, facilitate commercial and personal intercourse, and unite, by a still more intimate community of interests, the most remote quarters of the United States. No other single operation, within the power of Government, can more effectually tend to strengthen and perpetuate that Union which secures external independence, domestic peace, and internal liberty.”1
Williamson, John, “Federal Aid to Roads and Highways Since the 18th Century: A Legislative History” Congressional Research Service, January 6, 2012.

"To use [Fed Chairman Ben] Bernanke's own analogy, let's assume he printed up a billion dollars of brand new money and he flew over your house ... and dropped it on your lawn," Cashin told King World News. "But you were so worried about the market, worried about the economy, worried about everything that you simply picked it up and put it in the garage. That's why we haven't seen any inflation with all this aggressive money printing." * By Jeff Uscher, Contributing Writer, Money Morning - February 13, 2013
http://moneymorning.com/2013/02/13/why-veteran-trader-says-inflation-in-2013-is-imminent/