Saturday, May 30, 2015

Rand Paul Issues Statement on NSA Battle

Washington, D.C. - Today, Senator Rand Paul issued the following statement on his ongoing battle to defeat the NSA spying program:

"I have fought for several years now to end the illegal spying of the NSA on ordinary Americans. The callous use of general warrants and the disregard for the Bill of Rights must end. Forcing us to choose between our rights and our safety is a false choice and we are better than that as a nation and as a people. 

That's why two years ago, I sued the NSA. It's why I proposed the Fourth Amendment Protection Act. It's why I have been seeking for months to have a full, open and honest debate on this issue-- a debate that never came. 

So last week, seeing proponents of this illegal spying rushing toward a deadline to wholesale renew this unconstitutional power, I filibustered the bill. I spoke for over 10 hours to call attention to the vast expansion of the spy state and the corresponding erosion of our liberties.

Then, last week, I further blocked the extension of these powers and the Senate adjourned for recess rather than stay and debate them. 

Tomorrow, we will come back with just hours left before the NSA illegal spying powers expire.  

Let me be clear: I acknowledge the need for a robust intelligence agency and for a vigilant national security.

I believe we must fight terrorism, and I believe we must stand strong against our enemies.

But we do not need to give up who we are to defeat them. In fact, we must not.

There has to be another way. We must find it together.

So tomorrow, I will force the expiration of the NSA illegal spy program.

I am ready and willing to start the debate on how we fight terrorism without giving up our liberty.

Sometimes when the problem is big enough, you just have to start over. The tax code and our regulatory burdens are two good examples.  

Fighting against unconditional, illegal powers that take away our rights, taken by previous Congresses and administrations is just as important.

I do not do this to obstruct.  I do  it to build something better, more effective, more lasting, and more cognizant of who we are as Americans."

Tuesday, May 26, 2015

The Fed Considers a More Seasoned Approach

By Peter Schiff

Just as the steady torrent of awful economic data, which began in the First Quarter and continued well into April and May, had forced many market analysts to grudgingly concede that 2015 would not see the robust economic growth that most had expected, the statisticians arrived on the scene like a cavalry charge and routed the forces of pessimism with a wave of their spreadsheets.
The campaign began in late April with some seemingly groundbreaking analysis by CNBC's Steve Liesman showing that over a 30 year time frame GDP data had consistently measured first quarter growth at 1.87%, which was far lower than the 2.7% rate averaged in the following three quarters of the year. He pointed out that the trend had gotten even more pronounced since 2010, when first quarter growth averaged just .62% and the remaining three quarters averaged 2.3%. The disparity caused Liesman, and others, to question whether first quarter data should be regarded as reliable.
The problem hinges on the efficacy of the "seasonal' adjustments that are baked into the GDP methodology. These filters are designed to smooth out the changes in spending, production, and consumption that occur over the course of the year. After all, business and consumers behave differently in December than they do in July.
When Liesman pressed the Bureau of Economic Analysis (the government entity that supplies the data) to explain his findings, the agency responded "BEA is currently examining possible residual seasonality in several series, which may lead to improvements in...the regular annual revision to GDP." We should understand "improvements" to mean changes that make first quarter GDP higher. A few weeks later the BEA provided some specifics saying methods for counting government defense spending and "certain inventory investment series" could be improved to help address the distortion. It promised to correct these deficiencies by July 30. It promised to correct these deficiencies by July 30. But to make sure that everyone understood that the help was definitely on the way, the BEA issued a blog post on May 22 in which it specified a number of areas in which it will eliminate what it calls "residual seasonality." This term should be accurately defined as "areas that we think should be higher."
As if on cue, the Federal Reserve itself waded into the debate with its own new study (released by the San Francisco Fed - Janet Yellen's former stomping grounds) that seemed to confirm and expand on Liesman's analysis and the BEA's concessions (makes one wonder if these campaigns are coordinated).  Fed economists took a hard look at the disappointing .2% annualized first quarter 2015 growth, and determined that the seasonal adjustments that have been in use for years were insufficient to fully reveal the true health of the economy. When the San Francisco Fed added a second level of seasonal adjustments, it determined that Q1 growth should have been measured at 1.8% annualized. While that growth rate would not be considered strong, it is much closer to the 2.7%-3.0% that most forecasters had predicted at the end of 2014. No matter that the Atlanta Fed's "GDP Now," which was designed to be a more objective and contemporaneous measurement tool, was confirming near zero growth in Q1, many economists and media outlets jumped on the Fed study as proof positive that the economy is stronger than the pessimists portray.                    
In reality, few people actually understand how the complex and opaque seasonal adjustments really work (I know I don't). Fewer still have the patience to wade through the formulas to determine inefficiencies and potential remedies. This provides the statisticians with a good deal of convenient refuge against critics. But it's important to realize that unlike straight GDP measurement, which is ideally a strict accounting of spending, these adjustments can introduce an element of subjective institutional bias. 
Government entities (and to a lesser extent media outlets) have many reasons to suggest that the economy is better than it really is. The Fed wants us to believe that its policies are effective; the Federal government wants us to believe that the economy is healthy, and financial media outlets depend on confident investors. I'm not saying that these biases are insidious or conspiratorial, but it does produce an environment where there is more emphasis placed on finding reasons to explain why GDP measurements are low, than there is to find reasons why it is too high. The subjectivity of the seasonal adjustments gives these biases room to run.
People understand that holiday spending juices GDP at the end of the year, and that post-holiday depletion and cold winters cause consumers to retrench. This causes them to try to compensate for the weakness in the first quarter. But there is no pressure for them to find reasons that GDP may be too high in December and May (when Christmas lists and pleasant weather should be encouraging shopping).     
Given that, why do we really need seasonal adjustments in the first place? Yes December is different from July, but those differences persist every year. If we are looking at full year GDP, which is the measure that everyone is really after, why not keep a cumulative tally that we compare to prior years rather than prior quarters? Wouldn't this strip out a needless and opaque system of adjustments from a measurement system that is already overly complex to begin with? I believe the truth is the system is getting more complex because we want it that way. We prefer the ability to manipulate figures rather than allowing the figures to tell us things that we don't want to hear.
The real disconnect lies in the failure of the economy to grow, as most people assumed that it would, after the Fed's quantitative easing and zero interest rates had supposedly worked their magic. But as I have said many times before, these policies act more as economic depressants than they do as stimulants. As long as these monetary policies persist, our economy will never return to the growth rates that would be considered healthy.
In any event, many market watchers are grabbing at the San Francisco Fed report to conclude that Janet Yellen will raise rates this year, despite the weakness that the unadjusted GDP reports indicate. Such a conclusion is premature. I believe that the Fed wants us to think that the economy is strong, in the hopes that perception may one day soon become reality. If people think the economy is strong their optimism could influence their spending, hiring, and investing decision. As a result, optimistic Fed pronouncements should be considered just another policy tool; call it "open mouth operations." But I do not believe the Fed has any actual intention of delivering the rate increases that it may expect will damage our already weak economy.
Sources: 123 

Read the original article at Euro Pacific Capital.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube

Saturday, May 23, 2015

Friday, May 22, 2015

The Originary Interest Rate

The inherent component of gross or market interest rates which represents the ever fluctuating ratio between the values assigned to want satisfactions in the immediate future and those assigned to want satisfactions in the more distant future, In short, the difference between present value goods and gross market goods. In addition to the originary interest component, gross or market interest rates include the entrepreneurial component (uncertainty of repayment) and the price premium component (anticipated changes in the future values of the particular goods, including the monetary unit, under consideration.)

(via Percy Greaves in Mises Made Easier)

Tuesday, May 12, 2015

Hensarling Letter

June 20, 2014

The Honorable Jacob Lew

U.S. Department of the Treasury
1500 Avenue, NW
Washington, DC. 20500

Dear Secretary Lew:

In testimony before the Senate Committee on Finance on October 10, 2013, when asked
whether the Treasury Department (?Department?) could prioritize payments on Treasury
bonds in the event the debt ceiling was not lifted thereby ensuring that a default on
Treasury bonds could be averted and market panic could be forestalled you testi?ed:

We [the Department] write roughly 80 million checks a month. The systems
are automated to pay because for 224 years, the policy of Congress and every
president has been we pay our bills. You cannot go into those systems and
easily make them pay some things and not other things. They weren?t
designed that way because it was never the policy of this government to be in
the position that we would have to be in if we couldn?t pay all our bills.

In a May 7, 2014 letter to the Committee on Financial Services (?Committee?), you painted
a somewhat different picture of the technological feasibility of prioritization:

If the debt limit were not raised, and assuming Treasury had suf?cient cash
on hand, the New York Fed's systems would be technologically capable of
continuing to make principal and interest payments while Treasury was not
making other kinds of payments, although this approach would be entirely
experimental and create unacceptable risk to both domestic and global
Financial markets.

Departmental and Federal Reserve System documents reviewed by the Committee staff
demonstrate that, as early as March 2013, Department and Federal Reserve Bank of New
York staff had documented in writing and in painstaking detail the steps the Department
would take to successfully carry out any directive to prioritize payments on Treasury bonds
if the debt ceiling were not raised. These plans raise the question whether you knew or
should have known that it was possible to prioritize such payments when you testi?ed
before the Senate Finance Committee in October 2013. The plans additionally raise the
question whether there was an adequate factual basis for your assertion that ?Mon cannot
go into those [payment] systems and easily make them pay some things and not others.?
Documents and e?mails reviewed by the Committee staff relating to planning in the event
the Department chose not to fully prioritize debt payments despite its apparent ability toThe Honorable Jacob LBW

June 20, 2014
Page 2

fully make such payments also call into question the basis for your testimony; such
planning suggests that the government could. pay certain bonds while rolling forward the
dates on other bonds.

I. Documents indicating that the Department and/or the Federal Reserve System
could fully prioritize Treasury bond payments and thereby prevent default on
Treasury bonds

The following documents reviewed by the Committee staff suggest that the Department
could instruct the Federal Reserve Bank of New York to process principal and interest
payments on Treasury obligations if the debt ceiling were not raised, and that the Bank?s
payment systems could carry out those instructions:

I Treasury Debt Ceiling Internal Securities Procedures (March 2013) [See
Document from Bates Stamp 224-#244]
?Fedwire Securities Delayed Payment Support"(September 2013); and
?Fedwire Securities Delayed Payments Wholesale Internal (October
2013) [See Document beginning at Bates Stamp 308]?

The documents, which were prepared by the Federal Reserve Bank of New York prior to
your Senate Finance Committee testimony, exhaustively detail how the Department and
the Bank would implement any plan to prioritize payments on Treasury bonds. For
example, they describe how, during any ?suspension period," the Department could
determine whether suf?cient funds existed to make payments scheduled for settlement the
next day and that, if the Department ?determine to make principal and interest
payments (or only the interest payments), the payment wires [would] need to be released no
later than 4 pm. Eastern." The documents include sample e-mails for use by the
Department and/or the Federal Reserve to communicate the Department?s actions to third
parties and to communicate the Department?s instructions to the NY Fed; they further
describe how status messages could be posted to an Internet-based portal accessible to such
third parties. The documents also include a dial-in number and passcode for Treasury and
Federal Reserve staff to communicate with each other about debt ceiling prioritization

Simply put, the documents do not appear to support your October 2013 testimony that
?[y]ou cannot go into those [payment] systems and easily make them pay some things and
not other things.? In fact, the Committee?s preliminary review suggests that the
Department failed to share with the American public, and with holders of US. Treasury
debt, material information that could have prevented needless market volatility in the
Treasury bond market in the period leading up to the congressional debate over the debt
ceiling. A similar misleading representation by an issuer of publicly traded corporate bonds
could result in exposure to liability for securities fraud.

1 The documents the Department made available for the Committee?s review do not provide an
adequate basis to fully assess the Department?s unsubstantiated claim that it might not be able to
raise suf?cient funds in auctions to continue making principal payments if the debt ceiling were not
raised. Documents in the Department?s possession that have not yet been produced may contain
information probative of this question.

The Honorable Jacob Dew
June 20, 2014
Page 3

11. Documents and e-mails re?ecting additional planning by the Federal Reserve
Bank of New York to minimize market disruptions if the Department decided to
partially delay Treasury bond payments

Nothing in the documents indicates that the Department would be unable to prioritize
payments on Treasury obligations. Yet the documents also indicate that out of an
abundance of caution the Federal Reserve further engaged in extensive planning to prepare
for the contingency that the Department would choose not to prioritize Treasury bond
payments, and choose to default on those obligations, in order that the Department might
cause a brief market panic and thereby induce a quick resolution of the debt ceiling vote.

Those documents, as well as various emails to which James Narron (the of?cial then in
charge of the Federal Reserve Bank of New York?s Fedwire' Securities System) is a party,
demonstrate that the Federal Reserve had extensive operational plans in place to roll
forward maturity dates on outstanding securities (including choosing to roll forward only
some batches of securities on a particular maturity date); to track any maturity dates rolled
forward and make future payments on deferred payments; and to continue ?business as
usual? with respect to discount window acceptance of Treasury obligations as collateral and
to continue to value that collateral.2 The Federal Reserve Bank of New York also
determined during previous planning efforts in 2011 that even if the debt ceiling were not
lifted ?[dluring the summer of 2011, most large clearing banks indicated they would likely
still be able to clear trades and perform other services for their clients including custody
services, tri-party repurchase agreements, and securities lending, albeit with substantial
manual intervention.?8

In the event that the Department chose to default on principal and interest payments,
despite its clear ability to prevent that from occurring, the Federal Reserve was also
prepared to conduct open market operation repo transactions directly with dealers to
further forestall market disruption caused by an unfortunate decision by the Department to

In a scenario in which the Department chose to default, the Federal Reserve further
determined that legislation may be required to compensate ?holders of securities affected by
delayed payment on Treasury debt for the delay in these payments? but that ?market prices
of Treasury securities would take into account the possibility of such compensatory
Accordingly, the Federal Reserve proposed policies and procedures to
accommodate such compensatory payments in planning documentation which would have
been of considerable material value to potentially affected debt holders in 2013.6

It is clear that these documents and emails would provide ?nancial markets with
substantial comfort the next time that the Congress and the President contemplate a vote

3 See Bates Stamp #578, 747, 759, 899.
3 See Bates Stamp #882.

4 See Bates Stamp 1064?1065.

5 See Bates Stamp 884.

6 Id.

The Honorable Jacob Lew
June 20, 2014
Page 4

to increase the debt ceiling. It is clear that the substantial bene?t of this information to the
American public outweighs any political calculation that has led you to keep these
materials secret.


We note that the Department has thus far failed to cooperate fully and completely with the
Committee?s legitimate oversight and that the Department?s failure may have inhibited the
Committee?s assessment of the Administration?s debt ceiling contingency planning. First,
the Department has permitted the Committee to review the above-described documents,
together with certain other documents, on an in camera basis only, notwithstanding that
the documents marked merely as ?sensitive but not classi?ed? are not subject to a
legal privilege that might qualify the Committee?s right to obtain custody and control of
them. Second, despite the Committee?s previous requests, the Department has failed to
provide assurances that it produced all known responsive documents for the Committee?s in
camera review. As a result, the Committee cannot rule out that the Department has
withheld responsive documents in its possession.

It may have been in the Department?s strategic political interest to keep its extensive debt
ceiling contingency plans secret during 2013. This Committee nevertheless has an
obligation to insist that those secret debt ceiling plans be shared with the American people
without further delay. We trust that the American people and holders of U.S. Treasury
debt will then be in a position to reach their own informed conclusion about the veracity of
your statements concerning the debt ceiling. Accordingly, by July 1, 2014, please produce
all documents and other records that are responsive to the Committee?s previous requests
on this matter. In addition to producing the documents previously reviewed by the
Committee on an in camera basis, please produce any other known responsive documents
and records.

Please contact .W. Verret or Joseph Clark of Committee staff at (202) 225?7502 with any
questions regarding this matter.


Chairman Chairman

Subcommittee on Oversight
and Investigations

cc: The Honorable Maxine Waters
The Honorable Al Green
The Honorable William. Dudley

Monday, May 11, 2015

The Yield Curve

Reading a Yield Curve

Generally short-term securities yield lower returns than those with longer maturity -- investors require a premium to tie up their money for a longer period. If we plot the yields on a graph, you will see that the yield curve slopes upwards, with longer maturities returning higher yields. However, there are times when the market inverts and short-term yields exceed long-term yields. The yield curve then slopes downwards and is referred to as a negative (or inverted) yield curve.


Negative yield curves have proved to be reliable predictors of future recessions. This predictive ability is enhanced when the fed funds rate is high, signaling tight monetary policy.
  • A flat yield curve is a moderate bear signal for equity markets.
    Banks suffer from a margin squeeze, as they pay mostly short-term rates to depositors while charging long-term rates to borrowers, and are reluctant to extend new credit.
  • A negative yield curve is a strong bear signal.
    Normally caused by the Federal Reserve raising short-term interest rates to slow the economy, investors may contribute by driving long-term yields down -- switching out of equities into more secure investments.
  • A steep yield curve is generally bullish for stock investors.
    The Fed may drive down short-term interest rates to stimulate the economy and investors contribute by switching out of bonds into equities, causing long-term yields to rise.

Yield Differential (or Spread)

The yield differential plots the difference between ten-year Treasury notes and 13-week Treasury bills as an approximation of the yield curve:
  • A yield differential above 2% is a positive sign, indicating a steep yield curve;
  • A yield differential below 1% signifies a flattening yield curve;
  • A yield differential below zero signals a negative (or inverted) yield curve.

Sunday, May 10, 2015

Embarrassing Economists

By Walter Williams

So as to give some perspective, I'm going to ask readers for their guesses about human behavior before explaining my embarrassment by some of my fellow economists.

Suppose the prices of ladies jewelry rose by 100 percent. What would you predict would happen to sales? What about a 25 or 50 percent price increase? I'm going to guess that the average person would predict that sales would fall.

Would you make the same prediction about auto sales if cars' prices rose by 100 percent or 25 or 50 percent? Suppose that you're the CEO of General Motors and your sales manager tells you the company could increase auto sales by advertising a 100 percent or 50 percent price increase. I'm guessing that you'd fire the sales manager for both lunacy and incompetency.

Let's try one more. What would you predict would happen to housing sales if prices rose by 50 percent? I'm guessing you'd predict a decline in sales. You say, "OK, Williams, you're really trying our patience with these obvious questions. What's your point?"

It turns out that there's a law in economics known as the first fundamental law of demand, to which there are no known real-world exceptions. The law states that the higher the price of something the less people will take of it and vice versa. Another way of stating this very simple law is: There exists a price whereby people can be induced to take more of something, and there exists a price whereby people will take less of something.

Some people suggest that if the price of something is raised, buyers will take more or the same amount. That's silly because there'd be no limit to the price that sellers would charge. For example, if a grocer knew he would sell more — or the same amount of — milk at $8 a gallon than at $4 a gallon, why in the world would he sell it at $4? Then the question becomes: Why would he sell it at $8 if people would buy the same amount at a higher price?

There are economists, most notably Nobel Prize-winning economist Paul Krugman, who suggest that the law of demand applies to everything except labor prices (wages) of low-skilled workers.

Krugman says that paying fast-food workers $15 an hour wouldn't cause big companies such as McDonald's to cut jobs. In other words, Krugman argues that raising the minimum wage doesn't change employer behavior.
Before we address Krugman's fallacious argument, think about this: One of Galileo's laws says the influence of gravity on a falling body in a vacuum is to cause it to accelerate at a rate of 32 feet per second per second. That applies to a falling rock, steel ball or feather. What would you think of the reasoning capacity of a Nobel Prize-winning physicist who'd argue that because human beings are not rocks, steel balls or feathers, Galileo's law of falling bodies doesn't apply to them?

Krugman says that most minimum-wage workers are employed in what he calls non-tradable industries — industries that can't move to China. He says that there are few mechanization opportunities where minimum-wage workers are employed — for example, fast-food restaurants, hotels, etc. That being the case, he contends, seeing as there aren't good substitutes for minimum-wage workers, they won't suffer unemployment from increases in the minimum wage. In other words, the law of demand doesn't apply to them.

Let's look at some of the history of some of Krugman's non-tradable industries. During the 1940s and '50s, there were very few self-serve gasoline stations. There were also theater ushers to show patrons to their seats. In 1900, 41 percent of the U.S. labor force was employed in agriculture. Now most gas stations are self-serve. Theater ushers disappeared. And only 2 percent of today's labor force works in agricultural jobs. There are many other examples of buyers of labor services seeking and ultimately finding substitutes when labor prices rise. It's economic malpractice for economists to suggest that they don't.

Walter E. Williams is a professor of economics at George Mason University.

Thursday, May 7, 2015

Phillips Curve

From Murray Rothbard in Making Economic Sense:

Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the government to stop its inflationary creation of new money.

The tradeoff doctrine is based on the alleged "Phillips curve," a curve invented many years ago by the British economist A.W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemployment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic establishment.

By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, inflation was only about one to two percent per year, and unemployment hovered around three or four percent, whereas later unemployment ranged between eight and 11%, and inflation between five and 13 %. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation- unemployment tradeoff.