Thursday, September 28, 2023

Fed Interest on Reserves Payments Rose to $44 Billion in Q2 Alone

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff posts another expensive Federal Reserve interest on reserves update.

From the Fed's 2Q23 Financial Statement

The Fed has released its second quarter financial statement and the central bank paid out over $44 billion in risk-free, zero maturity interest on reserves to private commercial banks. That’s 487% higher than a year ago ($7.48 billion), over $176 billion on an annualized basis, and a huge contributing expense to the Fed's growing operating losses (subsidized by the Treasury/taxpayer).

With several Fed governors talking about one more rake hike in 2023 we’re looking at an even bigger payout before year end.

Paying higher interest on reserves wouldn’t be a problem if the Fed didn’t hold so many assets, but it has been incredibly slow winding down its balance sheet with commercial banks today still holding $3.23 trillion in reserves versus, well… $3.23 trillion in June of 2022 when the FOMC decided to finally get tough on inflation. 

Yes, tough as it got the Fed really hasn’t put a dent in the banking system’s reserve balances.

By contrast in the summer of 2008, before the Fed adopted its new “abundant reserves” floor operating system, the banking system held just $46 billion under its traditional corridor system. If the Fed had been paying banks the same 5.4% interest on reserves rate it pays now under that regime the industry would have collected just $2.48 billion a year in payments, not the $180 billion its on track to receive over the next twelve months.

(Links to IOR policy rates, system reserves, and the Fed's Q2 quarterly statement below)

Monetary economist George Selgin, a longtime critic of the floor operating system and a favorite of the Economics Correspondent, recently argued in a Mercatus Center podcast that…

“If you go back and look at all of the arguments given for switching to a floor system, after the fact, mind you, because when the switch happened during the 2008 crisis… …all kinds of rationales were given for making it permanent, claiming that it would keep banks liquid, that it would make monetary control easier and blah, blah, blah. Every one of those complaints has been shown to be false. The system has not proven easy to operate, and the cost has been immense.”
(reference links from the Economics Correspondent)

System reserves

Interest on reserves rate

Federal Reserve second quarter financial statement (page 3 for income/loss)

Tuesday, September 26, 2023

Walter Block Jokes With Competition Regulators on Pricing

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A nerdy competition joke from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Walter Block
Loyola University economist Walter Block told this two part joke (for real) before an audience of government pricing and competition regulators/attorneys.

Part one. Three state workers were languishing in the Soviet gulag. As usual they shared stories of what got them in jail.

The first worker said "I came to work late every day and they accused me of stealing state funds."

The second worker said "I came to work early every day and they accused me of brown nosing party bosses for a promotion."

The third worker said "I came to work on time every day and they accused me of owning a western wristwatch."

The audience laughed (really).

Part two. Three businessmen were languishing in an American prison. As usual they shared stories of what got them in jail.

The first businessman said "I charged a higher price than my competitors and they accused me of price gouging."

The second businessman said "I charged a lower price than my competitors and they accused me of predatory pricing."

The third businessman said "I charged the same price as my competitors and they accused me of price collusion."

Nobody laughed.

Monday, September 18, 2023

Automobiles: Complexity, Reliability, and CAFE Standards

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers a few words about how most of the U.S. auto industry got stuck in the current moneylosing EV-quagmire. Not being an auto mechanic, the Correspondent invites those who know more about cars than he does to offer comments and corrections.

No spare tire?
CO has posted many articles about lower-than-anticipated demand for EV vehicles and the large financial losses automakers like Ford and General Motors have incurred producing them. Such stories invoke images of “go woke, go broke,” and the industry certainly talks like it's woke—boasting of the collective green conscience that inspires their EV crusade.

The Economics Correspondent would like to defend the industry, but only a teeny bit. Because the primary reason they are producing so many moneylosing EV’s is not wokeness or some love of red ink, but instead because Barack Obama forced them to.

The story starts around 2007 when the George W. Bush White House contemplated raising CAFE (corporate average fuel economy) standards for the first time since the 1980’s.

At the time any company selling cars in America had to meet a minimum average fuel mileage standard for their entire fleet of 27MPG. Which is also why automakers, even in 2007, still sold millions of compact cars that Americans really didn’t want and which they largely lost money on, making up the losses with larger, higher-margin cars and particularly light trucks and SUVs: so the entire fleet would meet the CAFE average requirement.

The Bush administration worked with the industry and basically asked “We want to raise the standard, but we don’t want to overly disrupt either the industry or the consumer. What’s a realistic standard you can meet at reasonable cost?”

The two sides then negotiated a new standard that auto fleets must meet a revised average fuel efficiency of 35MPG by the year 2020. The auto industry would achieve this goal by applying continuous technology improvements such as higher engine compression ratios, variable valve timing, transmissions with more speeds/gears, better camshaft and valve designs, and lighter materials such as greater use of aluminum in engine blocks and other components.

However when Barack Obama became president, his administration told the auto industry (paraphrasing) “Don’t get too comfortable with 35MPG. We’ve got new standards.”

In 2011 the Obama administration imposed a 54.5MPG CAFE fuel efficiency standard by the year 2025, a 56% increase and over double what it had been in 2007.

The industry was displeased not only with the dramatic increase from 35MPG to 54.5MPG, but also that they weren’t even consulted. Unlike during the Bush administration there were no good faith negotiations, and when the industry complained to the Obama EPA that 54.5MPG was unrealistic government bureaucrats unsympathetically responded “You’ll think of something.”

(an old article about the industry’s outrage is available at the end of this article)

Well think of something they have, but it has cost them billions in losses and also made cars less dependable for consumers—although many consumers don’t even know and many who do blame the greedy car companies without a clue the government is behind their mechanical problems.

To meet such standards or at least come closer and reduce billions in fines automakers have shed every pound of weight they can with extreme measures such as, for example, getting rid of the spare tires (I know because my car came with no spare tire). Automakers have dropped six-cylinder naturally aspirated engines and replaced them with four-cylinder turbocharged engines. Ford has even recently placed a 1.3 liter 3-cylinder turbo engine in the Ford Focus.

Gasoline direct injection systems (GDI), which produce marginally higher efficiency but create major valve carbon buildup issues, and rubber-belt driven continuously variable transmissions or CVT's are notoriously break-prone.

(Mechanics joke that CVT stands for “continuously variable trash heap” and “constant vehicle trouble”)

Automakers have installed “autostop” systems in cars that automatically shut off the engine at stop lights and then turn them back on when the driver’s foot comes off the brake pedal. Such systems have required reengineering cars’ entire electrical systems so that climate control, radio, power steering, etc… don’t shut off when the autostop kicks in.

And the Correspondent’s personal pet peeve is the transition to turbocharged engines which have more failure points and are generally less reliable than naturally aspirated engines. Although turbo enthusiasts can feel free to disagree in the comments, turbos spin at extremely high RPMs with a microscopic layer of oil preventing mechanical failure, the added components of wastegates and intercoolers introduce more points of failure, the highly compressed hot air and fuel mixtures in small combustion chambers wear out engines faster, require premium fuel and synthetic oil, and turbo compressors are notoriously unforgiving of any owner who runs over his or her maintenance schedule by a hair.

(If the Correspondent has gone wrong here or left something mechanical out anyone with auto mechanics experience feel free to comment)

And all this new complexity has added an anticipated $5,000 in repair costs to the average car while under warranty. Automakers have compensated by raising car prices to cover added financial liabilities associated with all the extra warranty work (see article below).

Meanwhile most of the general public, unaware of the unreachable CAFE standards and associated costs, blame the automakers’ for what they view as an irrational love of complicating cars for the sake of itself and “greed.” The Correspondent has seen news reports about the rising absence of trunk spare tires where multiple car owners and mechanics accuse automakers of taking out the tire to “save money” and for “greed.”

No, it’s to squeeze out every extra fractional mile-per-gallon to avoid massive regulatory fines.

But the biggest change of all is EV’s.

As the Obama administration intended, automakers have been forced to scramble to produce more EV’s since, not consuming any fuel whatsoever, every EV sold improves the entire fleet’s average fuel mileage immeasurably over a car even with a turbocharged four-cylinder engine, gasoline direct injection, CVT transmission, autostop, and no spare tire.

So auto companies have effectively been forced to produce millions of EV’s and hope the public gets on board with wokeness and the (not really so) green crusade because their financial results depend on it.

Auto executives have put on a brave face and made speeches about how great EV’s are and how they are saving the planet, in part because they themselves are somewhat woke, but in larger part because the survival of their companies depends on public demand for EV’s—all thanks to Barack Obama.

However the Economics Correspondent isn’t ready to let auto executives off the hook too easily. In his opinion they’d be a lot less deserving of their moneylosing predicament if, instead of joining the woke crowd and declaring love of EV’s, they told the public the truth and explained they’re losing money on EV’s because the government has forced them to.

Frank, monthly TV ads explaining the consequences of one politician’s edict would go a long way in educating the public on much of why their cars have gotten so much more expensive, why they are so much more complex, why they are more prone to failure, why the spare tire has been taken away, and why so many moneylosing EV’s are being produced: because they have to, not because they really want to, all to satisfy one person who was in power for eight years.

Unfortunately auto executives more often than not are cowards and kneel to not only government regulators, but also to the noisy woke crowd. So the Economics Correspondent's sympathy for them has strict limits, even knowing they’ve been bullied by regulators into their current predicament.


Read USA Today/Detroit Free Press "54 mpg?: Auto industry rips stricter gas mileage levels" at:

Wednesday, September 13, 2023

Government Spending: Social Security, Part 4

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff concludes his series on Social Security spending with a look at a more nuanced defense of the program's alleged non-contribution to the national debt.


Lastly we discuss one more great defense of Social Security often thrown out by its more informed liberal proponents: that it (along with Medicare spending) has nothing to do with raising the national debt.

The argument here is Social Security is “off budget,” and its spending proceeds are paid for with payroll taxes, not income taxes. Therefore, they say, it’s military spending and income tax cuts for the rich that are to blame for our huge deficits and debt.

This is a clever argument, but one with a giant accounting hole that the Economics Correspondent believes many liberals themselves are unaware of.

First of all, Treasury bonds in the Social Security trust fund are being redeemed to make up the shortfall between current payroll tax receipts and retiree benefits. But tax dollars used to pay off Treasuries are being diverted away from deficit reduction. So yes, Social Security is contributing to the deficit as we speak.

But the more nuanced problem with the progressive claim that Social Security is deficit-neutral is an even bigger mistake.

We’ll explain.

It is true that Social Security, Medicare, and Unemployment, despite collectively spending $3 trillion in 2023 (more than three times the official defense budget including aid to Ukraine), don’t draw their money from federal borrowing because their annual outlays are funded by a separate tax (payroll taxes). Therefore, as liberals argue, the remaining federal income and business taxes that pay for the military and other non-entitlement programs are insufficient to pay for everything else.

The problem with this argument is payroll taxes siphon an enormous amount of money off of literally every American’s paycheck—$1.68 trillion vs $2.33 trillion for income taxes—that in turn reduces the space remaining to impose income taxes to pay for everything else.

Worse yet, unlike income taxes Social Security and Medicare taxes are imposed on the very first dollar of income earned by everyone. Income taxes only kick in after one’s income is greater than the standard or itemized deductions plus other credits and even the Earned Income Credit.

So a minimum wage worker typically pays zero income tax in most states and even gets an Earned Income Credit (i.e. payments from the government), but he doesn't get away from paying payroll taxes on every dollar he earns.

Another telling statistic is that while tens of millions of American workers pay no income tax every year, 100% of workers pay payroll taxes.

Such an all-encompassing, universal tax, at 15.3% of everyone’s income (6.2% SS + 1.45% Medicare plus the same from employers) on up to $160,200 a year for individuals, places a heavy tax burden on most Americans right from the starting gun and crowds out the federal government’s ability to impose sufficient income taxes to pay for everything else. If Congress tries to raise income taxes the public rightfully complains that their total tax bill, a huge portion of which goes to Social Security, is already too high.

Putting it another way, if we were dealing with a mattress then Social Security and Medicare would claim 42% of the bed first and every other government program would be forced to try sleeping on the last 58% with many sleeping on the floor (a deficit). But Social Security and Medicare never have to sleep on the floor because they always get first dibs at America’s paychecks and every other program just has to cope with what’s leftover.

Which is part of the reason they're called “mandatory” spending programs.

Now imagine if some politicians really wanted to balance the budget through income tax increases, only this time Social Security, Medicare, and their associated payroll taxes never existed.

It would be a lot easier to tell Americans “Your income taxes are going up a little to pay down the debt” once they knew they were no longer sacrificing 15.3% of their first $160,200 of income to payroll taxes.

On a side note, all income tax collections will yield the federal government an estimated $2.33 trillion in 2023, yet the budget deficit is forecast to be $2 trillion at a time when the unemployment rate is 3.5% and total federal tax revenues are at their highest share of GDP since World War II (except for the dot-com bubble of 1999-2000).

So just to fill the $2 trillion deficit income tax revenues would need to increase by 86% from $2.33 trillion to $4.33 trillion.

Like Ronald Reagan said, government doesn’t have a revenue problem. It has a spending problem.

These two giant entitlement programs carve out their claim on Americans’ paychecks first, a very large claim on workers who don’t even make enough to pay income taxes, and all the other programs have to struggle to find the money to fund themselves. Hence a deficit.

So yes, Social Security does contribute to the debt, by withholding funds that could otherwise be used to close the deficit.


What few liberals know of this explanation don't like it, and a few even deny a causal link between confiscating $1.68 trillion of workers' paychecks for Social Security/Medicare and not being able to tax enough of what's left to pay for everything else.

So what would happen if the taxes were reversed? With retirees’ pension and medical expenses paid out of the income tax, but only after a “military payroll tax” of 15.3% was imposed on the first $160,200 of every American’s income?

If, after the military got its taxes first, the remaining income taxes proved insufficient to pay for entitlements, then every time Congress tried to raise income taxes across the board Americans would also scream bloody murder.

But especially liberals. Why? Because they’ve already paid so much up front “for the military” that the tolerance of Americans to endure a big income tax increase to pay for everything else is greatly limited. Just like Social Security.

Under such a scenario liberals would be blaming the “Pentagon payroll tax” for making it too difficult to raise the income taxes needed to balance the budget. Yet under the current system liberals try to have it both ways and argue the military is responsible for the national debt because it’s just cheeky that Social Security and Medicare get first dibs at 15.3% of everyone’s paycheck.

And lest we forget, there’s another giant entitlement program: Medicaid. It will cost another $500 billion in 2023, and its budget is paid out of income taxes as well, not payroll taxes. So Medicaid is yet another program that increases the debt, in this case directly.

ps. When playing out the military tax role reversal keep in mind the military budget is considerably lower than Social Security plus Medicare and wouldn’t need anything on the scale of a 15.3% payroll tax either. Here’s how much the federal government alone will spend on the largest programs in 2023:

Social Security: $1.35 trillion

Medicare: $830 billion

Medicaid and other health programs: $890 billion

“Income Security” including unemployment: $792 billion

Education, Training, Employment, and Social Services: $269 billion

TOTAL “ENTITLEMENTS”: $4.13 trillion

National Defense: $815 billion

Veterans Affairs: $305 billion

TOTAL “MILITARY”: $1.12 trillion

(source: White House budget tables)

Friday, September 8, 2023

Krugman Now Giving Economic Advice to the CCP

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff has found the silver bullet that will bury China's economic growth story for good: New York Times columnist Paul Krugman.

Krugman recommends China remedy their current slowdown with a retread of Japan's last three decades: a monstrous campaign of government debt-financed stimulus spending.

In case anyone doesn't remember how that turned out, Japan borrowed and spent so much money on public works projects and bridges to unpopulated islands that it went from the best fiscal position of any OECD country in 1990 to the worst by the 2010's with a national debt equaling 260% of GDP (the USA currently sits at 120%).

And what did they get for it? Three lost decades and counting... plus an enormous debt burden to boot.

Krugman also complains that to get their economy moving faster the Chinese need to stop acting so much like Republicans and more like communists.

Not that Republicans believe the state should be dictating to firms every nuance of their day-to-day operations to serve the Party's interests (that's Democrats actually) or canceling companies that won't spy on the domestic and foreign civilian populations (that's Democrats too), but at least Krugman is starting to openly show his true colors: communism is preferable to Ronald Reagan's policies.

So if you want to see China's economy slow down and stagnate for the next half century, write a letter to Xi Jinping's office begging him to pick up and read Krugman's column.

Read "Paul Krugman warns China is headed for a 'very nasty fall' as Xi Jinping sounds more like a Republican than a communist" at:

Sunday, September 3, 2023

Government Spending: Social Security, Part 3

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues his series of articles on Social Security spending, this time addressing some of the more common progressive clich├ęs repeated by apologists.


Whenever anyone criticizes any aspect of Social Security—and there are plenty of them (Ponzi scheme, mismanagement, disability claims abuse, Congress spending the entire trust fund surplus, payroll taxes high enough to fund millionaire pensions if handled privately)—one of the more common retorts is “You’re in the minority. Social Security is one of the most successful/most popular government programs in American history.”

The logic here is that tens of millions of people not only receive Social Security benefits, but even voluntarily line up for them. Therefore, the thinking goes, it’s a “successful”—even loved--program.

But seniors lining up to get a refund on money that was previously taken from them by the government, with an explicit and very loud promise to pay them back later, does not mean the program is “successful” or “popular” unless you’re referring to the program’s capacity to take trillions of dollars from Americans as “successful” or “popular” in the eyes of politicians.

Otherwise, “popular” and “successful” could be said about a common thief.

Imagine a mugger runs around town and successfully steals lots of cash from virtually everyone who lives there.

Later the robber is caught by the police and a staggering billions of dollars he stole is sitting in huge money bags in his garage. A public announcement is made that victims can file a claim and get at least some of their money back.

Predictably, everyone who was robbed shows up to collect.

That the victims voluntarily participated in the refund process doesn’t make the robber “one the most popular people in history.”

Trying to get a refund on money that was taken by force, especially when the taker promises to pay you back later, does not make the whole trauma of being mugged and collecting later "popular."

In fact, if asked most people would say they prefer they were never mugged in the first place. The Correspondent wagers many of them would also like to see the mugger go to jail so he can’t rob anyone else.


Often times as the arguments for preserving Social Security in its broken form start to run out after being corrected over and over, a popular last refuge among apologists is “Well if you don’t like it then opt out.” This response implies nothing is forcing you to deal with the program.

Of course as soon as someone replies “OK I'm happy to opt out. Just give back all the money that was taken from me plus interest, stop extracting future payroll taxes from my salary, and I forfeit all the promised benefits. I can do a lot better on my own..."

…the offer to “opt out” suddenly changes to “No, you can only opt out of benefits but the government gets to keep all your money.”

When the counteroffer is reduced to "OK, just give me all the money taken from me and I'll even forgo interest" the answer always remains "you don't get it back and still get no benefits."

Which exposes the misnomer of “opt out” which really means “You can’t opt out of the taxes, just your partial refund” or, put more bluntly, “By ‘opt out’ we mean you become an involuntary donor to the state whether you like it or not. You love 'freedom' don't you? Well that's freedom."

That kind of “opt out” is tantamount to “opting out” of eating at a restaurant, but you still have to order thousands of dollars of dishes from the menu and pay. You just don’t get to eat anything and are required to leave immediately after paying.

Well not quite. The difference is that unlike Social Security no one can force you to physically walk into a restaurant, sit down, and order. And unlike the payroll tax you don’t keep going back to the restaurant every payday just to keep ordering/paying for more meals just to get nothing. Social Security forces you to pay regularly whether you like it or not (or “opt out” or not).


Currently Social Security imposes a payroll tax of 12.4% (6.2% from the employee, 6.2% from the employer) on all income up to $160,200.

Likewise, pension payments are capped too: at present a maximum monthly payment of $4,555 for high income earners retiring at age 70 or above.

In the meantime, every time news breaks of Social Security’s upcoming fiscal shortfall proposals to fill the gap are floated everywhere such as raising the payroll tax above 12.4% (the 21st payroll hike since the program's enactment in 1935), raising the retirement age, cutting benefits for wealthy retirees who “don’t need” Social Security, or some combination of the three.

But one of the favorite panacea solutions for left-progressives is “You don’t have to make any of those hard choices. Just remove the income cap for payroll taxes.”

So under the “higher cap” or “no cap” solution, if a wealthy earner such as a doctor makes $400,000 a year the government is not only entitled to withhold 12.4% of the first $160,200 (i.e. $19,864) but 12.4% on the entire salary (i.e. $49,600 a year).

Not that the Economics Correspondent particularly likes this “solution,” but if the government were to take 2.5 times as much in taxes from this worker’s paycheck but in return pay them 2.5 times as much during retirement, that might be a halfway reasonable tradeoff. Still not fair as retirees only get a fraction of what they paid in plus interest, but at least there would be some correlation between how much more is paid and how much more is received.

But of course this is the last thing liberal progressives have in mind. They want to take 12.4% of all income without limit, but still cap retirement payments at the current level of $4,555 per month (plus inflation).

So a millionaire earner would be forced to pay over $120,000 to the program annually (plus income taxes). By the Correspondent’s math, if that worker started at age 30 and earned 9% annual interest, then by age 72 he/she would amass $19.3 million earning $145,000 a month. 

But under the progressive "solution" the government would still pay a capped maximum pension of $4,555 a month and the retiree forfeits the entire $19.3 million nest egg too.

(all calculations assume zero inflation to keep them consistent).

So by raising the cap on the taxes but preserving the cap on benefits, our high earner is gypped of 97% of his/her monthly pension payment and loses 100% of the giant nest egg. Which means the “remove the cap” solution turns Social Security into what so many progressives already understand and want: a vastly larger instrument of income redistribution than it already is.

Saturday, September 2, 2023

Left Coast Correspondent: Days Before Opening, Giant Spiked Fence Surrounds New SF Total Wine

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The Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena sees only one winner from this store opening: City Hall. It will shift the epicenter of homeless, tents, poop, and syringes ever so slightly from the Tenderloin and Civic Center towards Total Wine.

Read more at San Francisco Chronicle: