Tuesday, July 18, 2023

Foreshadowing Marxism: Labor Theory of Value Errors

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is giving some serious consideration to writing a series of columns this fall about Marxism and communism.

In the meantime this little cartoon does a good job of exposing just one logical fallacy prevalent in several key Marxist tenets including its reliance on the labor theory of value, the alleged extraction of surplus value from the workers, and the "violent exploitation" (their words, not mine) of the laboring classes by the parasitic capitalist.

ps. The Economics Correspondent found this meme on a Reddit post commenting that it proves workers do everything and are being robbed by CEO's. Said meme poster evidently had no idea the whole point of the cartoon is exactly the opposite but hey, it would hardly be the first time in history that Marxists were lacking any connection to reality.

Tuesday, July 11, 2023

Fed's Interest on Reserves Payments Swell to $160 Billion in 2023

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2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff posts an update on the Federal Reserve’s ballooning interest on reserves payments to commercial banks, which are approaching $160 billion this year.

Click to enlarge

The Fed’s yearlong campaign of interest rate hikes has dominated financial news headlines for some time now, but buried deep in the Fed’s latest quarterly report is a little-reported yet huge offshoot of its rapid tightening policy.

The Fed is on track to pay U.S. commercial banks over $160 billion in risk-free interest payments in 2023.

But before CO Nation harps on the banks, it’s worth noting the payments are the result of three major monetary policy shifts, all championed by the Fed itself.

1) Even since 2008 the Fed has conducted monetary policy on a “floor system” where it creates trillions of dollars in new reserves to buy assets from banks, but pays them interest to sequester those reserves and discourages them from lending aggressively which would make inflation far worse than it already is.

2) Instead of reducing its balance sheet as it tried from 2015 to 2019, the Fed ballooned it again in early 2020 as a response to the Covid pandemic. So instead of paying interest on $1.5 trillion in banking system reserves in September 2019, the Fed now finds itself paying interest on $3.2 trillion in reserves today.

3) Lastly, paying interest even on $3.2 trillion in reserves may not have been a big deal when the Fed’s “interest on reserves” policy rate was only 0.15% in early 2022. But over the last year the Fed has completed its Bermuda Triangle trifecta by rapidly hiking the interest on reserves rate to 5.15% as of this writing, and it’s likely to climb even further after the Federal Open Market Committee’s July 25th meeting.

Anyone with a calculator who understands Fed policy can estimate paying an interest on reserves rate of 5.15% on $3.2 trillion will equal a windfall for the commercial banks (about $160 billion), but nothing confirms it more than the Fed’s own quarterly income statement.

Scanning the Fed’s finances under expenses (picture attached) the Fed’s Q1 interest on reserves payments to banks is denoted as “Interest Expense: Depository Institutions and Others.” 

Amount paid? $37.852 billion vs. just $1.955 billion a year ago.

Also keep in mind these numbers reflect the first quarter of 2023 (Jan 1-Mar 31) when the interest on reserves policy rate sat anywhere from 4.4% to 4.9%. Now that it’s up to 5.15%, and going even higher soon, subsequent interest payments will be that much greater.

And that translates to a bottom line of more than $160 billion in risk-free, zero maturity interest for U.S. commercial banks by the time 2023 is over.

The Economics Correspondent isn’t particularly on the bash-the-banks bandwagon and doesn’t blame them for the current arrangement. Rather, the floor system and payment of interest on reserves was entirely the brainchild of academic theorists at the Fed who lobbied Congress hard for authority to implement their new operating system in the mid 2000’s.

Even when they put it into action during the 2008 financial crisis, the interest on excess reserves rate was 0.25% on $1.1 trillion of reserves in late 2009 (just $2.75 billion per year in payments) and 0.25% on a peak $2.84 trillion of reserves in 2015 (still only $6.9 billion per year).

But as of 2022 the Fed has really screwed the pooch ballooning system reserves to $4.2 trillion in 2022 and struggling to bring it down to $3.2 trillion today, all while dropping the ball on inflation and being forced to raise the interest on reserves rate to 5.15% and climbing.

Data source links:

1) Federal Reserve 1Q2023 quarterly financial report (page 3 for interest expense).


2) Reserves of depository institutions.


3) Interest on reserves rate (July 2021 to present).


4) Interest on excess reserves rate (October 2008 to July 2021).


Sunday, July 9, 2023

Left Coast Correspondent: Just Another Poop Day in San Francisco

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The Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena shares just another day in the progressive workers paradise that is far-left San Francisco.

OK not quite just another day as it appears some maverick prefers canine poop over the human variety.

Tuesday, July 4, 2023

The Fed vs The Roman Empire's Debasement of the Denarius

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3 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff dedicates the CO chart of the day to Cautious Optimism regular Keith Shapiro who follows silver and the silver market.

Inflation and devaluation of money weren’t invented only when governments first bestowed central banks with legal monopolies over printing currency—the first such western monopoly granted in 1844 Great Britain.

The Roman Empire and even some provinces of ancient Greece played a similar game, only they did it with precious metal coins instead of paper bills.

At one time the Roman denarius coin was widely admired for its fineness and around the year 100 A.D. was composed of nearly 99% silver. Over time successive Roman emperors melted down and reminted the denarius, using lesser and lesser amounts of silver to facilitate additional production of coins (i.e. inflation) and service their growing government debts, incurred to finance wars of territorial expansion and the growing Roman welfare state.

Over time the denarius’ steadily falling silver content caused its luster to fade and the public began to discount the coin. So in 215 the emperor Caracalla added 50% more silver back but restamped one denarius coins with the new denomination of two denarii—the so-called “double denarius.” Hence the denarius regained its visual luster, but the silver content per unit of currency had been further eroded by 25%.

By 268 A.D. just 2% of the denarius’ silver content remained, applied exclusively upon the coin’s surface to conceal its bronze base. However as the coins circulated the thin silver sheen quickly wore off revealing the denarius’ unremarkable base metal composition. 

Shortly afterwards the empire switched exclusively to bronze coinage inaugurating the famous Roman hyperinflation that defined the Crisis of the Third Century. In 301 the emperor Diocletian enacted some of history’s first price control laws to halt the inflation but they failed, leading only to widespread shortages of goods.

If the Roman Empire debasing coins from 99% to 2% over 168 years sounds terrible, it was. But consider comparing the denarius’ rate of debasement to that of modern-day currencies.

According to the Minneapolis Federal Reserve’s online inflation calculator the Fed has devalued the U.S. dollar by 96.9% since opening its doors in 1914, an annualized inflation rate of 3.2277%.

At that continued rate the dollar’s debasement will equal the denarius’, but after just 123 years compared to the Roman Empire’s 168.

Incidentally 123 years from the Fed’s establishment will be the year 2037. Which means the Fed will have pulled off a denarius-like devaluation of the U.S. dollar fourteen years from now, and done it 45 years faster than a succession of corrupt Roman emperors.

If the same average rate of devaluation continues for a total of 168 years, as it did in Rome, the U.S. dollar’s final purchasing power will settle at 0.48 cents (lower than the denarius’ roughly 2 cents) in the year 2082—right before the Fed resumes devaluing it even further.

ps. Under America’s bimetallic (1792-1879) and then classical gold standards (1879-1914) the U.S. dollar’s purchasing power fell from $1 in 1792 to…. 

…well, actually it rose slightly to $1.04 by 1914. But a currency whose purchasing power rises from $1 to $1.04 over 122 years is for all practical purposes unchanged, although mathematically that’s an annual inflation rate of negative 0.033%