Today’s mythbusting: the Fed is not suppressing interest rates

Summary: Here’s another in my series of economic myth-busting articles, explaining that the Fed is not suppressing rates. It is a follow-up to Ignore The Bond Bears, The Fed Will Not Raise Rates.

The Federal Reserve Monster

Part of the magical, even divine, powers attributed to the Federal Reserve is their ability to set interest rates — both short- and long-term. Since the quantitative easing ended we have seen this taken to the logical extreme — with the Fed suppressing rates without visible action! In physics that’s quantum mechanics. In finance it is mythology.

Economists, both Left (e.g., Paul Krugman) and Right (e.g. Tyler Cowen) acknowledge that the post-crash low rates do not result from the Fed’s action. They do so for good reason.

The Fed is not buying bonds — their most effective (almost the only effective) means of depressing interest rates. QE3 ended on 29 October 2014. Two years ago. On that day total Federal Reserve assets were $4,487 billion. As of 19 October 2016 they were $4,467 billion. See the graph.

In theory the Fed could affect prices by buying and holding a substantial fraction of the $64 trillion in outstanding US debt and loans. Taking the fraction they own from 3% to 6% over 7 years (2008-2014) did not seriously change the bond market’s structure. Perhaps the structure of credit spreads differs from what it might have been if the Fed had not added the Treasury securities and government-guaranteed mortgages. It’s difficult to determine such things. But it the effect on credit spreads, if any, is unlikely to have affected interest rates.

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Hidden but important truths from the presidential debate

Summary: The last debate was mostly chaff, like the campaign mostly entertaining demonstrations of the obvious. But there were moments revealing deep truths about our government and us. They were, of course, ignored. Here is the story of one such moment, a statement by Hillary Clinton that is rich with useful insights — if we dig into it.

“Fire destroys all sophistry, that is deceit; and maintains truth alone, that is gold.”
— Leonardo da Vinci, from his Notebooks. A bad solution for political structures built on lies.


More essential insights from Glenn Greenwald at The Intercept: “In the Democratic Echo Chamber, Inconvenient Truths Are Recast as Putin Plots”…

“Donald Trump, for reasons I’ve repeatedly pointed out, is an extremist, despicable, and dangerous candidate, and his almost-certain humiliating defeat is less than a month away. So I realize there is little appetite in certain circles for critiques of any of the tawdry and sometimes fraudulent journalistic claims and tactics being deployed to further that goal. In the face of an abusive, misogynistic, bigoted, scary, lawless authoritarian, what’s a little journalistic fraud or constant fearmongering about subversive Kremlin agents between friends if it helps to stop him?

“But come January, Democrats will continue to be the dominant political faction in the U.S. — more so than ever — and the tactics they are now embracing will endure past the election, making them worthy of scrutiny. Those tactics now most prominently include dismissing away any facts or documents that reflect negatively on their leaders as fake, and strongly insinuating that anyone who questions or opposes those leaders is a stooge or agent of the Kremlin, tasked with a subversive and dangerously un-American mission on behalf of hostile actors in Moscow.

“To see how extreme and damaging this behavior has become, let’s just quickly examine two utterly false claims that Democrats over the past four days — led by party-loyal journalists — have disseminated and induced thousands of people, if not more, to believe. …”

Both are straightforward lies by Team Hillary about the Wikileak emails of John Podesta, propagated by good liberals and her loyal journalists — allowing them to ignore the emails’ damaging content. His conclusion is spot-on.

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U.S. Cyber Command Attacks ISIS. Slow Progress. Few Results.

Summary: Our war with ISIS is almost invisible to Americans. Only lightly reported by the press, visible mostly in the domestic terrorism it inspires. Even less visible is our cyberwar with ISIS. One of the most active fronts of the war, it is a harbinger of future conflicts. Here Emilio Iasiello briefs us on the US attacks by the lavishly-funded US Cyber Command. What are they doing? What successes?  Second of two posts today.

Screenshot: you have been hacked by ISIS.

Screenshot of an ISIS cyberattack

ISIS hacked the Argonne National Laboratory in July 2015. Details here. Click to enlarge.

U.S. Cyber Command’s ISIS Efforts. Slow Progress. Few Results.

By Emilio Iasiello from CyberDB.
Reposted with his generous permission.

Mid-July 2016 reporting reveals that U.S. cyber offensives against the Islamic State of Iraq and Syria (ISIS) online recruiting and propaganda activities has not yielded the types of results that were initially anticipated. According to the news article, the debut effort of the U.S. Cyber Command (CYBERCOM) has not been effective, despite officials declining to provide any specifics as to the types of operations being conducted.  What was revealed was that CYBERCOM’s commander Admiral Michael Rogers had created a unit charged with the mission of developing digital weapons to support this effort.  Joint Task Force Ares, a 100-person strong unit, will not only build tools, but may engaged in other possible missions such as disrupting the terrorist group’s payment system and denying access to their current chat application of choice.

Nevertheless, despite aspirations and being the first publicly declared online military operation by any nation state, success has been fleeting. This is certainly a disappointing turn of events for a country largely believed to be the most cyber capable in the world.  The recent slow progress is impeding the normalization of how cyber attacks can be used as a potential military tool.  Officials hoped that the ISIS campaign would help normalize how cyber attacks can be leveraged similarly as airstrikes to support military objectives, to take cyber out of the shadows and provide a bit more transparency, according to a senior Pentagon official.  As of now, there has been little anecdotal evidence showing this type of success.

Part of the problem may be that CYBERCOM, despite being an official sub-unified command for approximately seven years, is simply not ready.  Admiral Rogers conceded that the first dedicated cyber troops will be operational by early fall, and expected the command to be fully operational by September 30, 2018, calling into question the capability and talent of the current staffing levels.  Such speculation has been raised in a June 2016 article that highlighted CYBERCOM’s struggles with identifying, recruiting, and retaining top talent. The Command’s Cyber Mission Force will eventually have 6,200 people split into 133 teams, half of which will be assigned to protecting networks, 20 percent dedicated to combat missions, 10 percent assigned to national mission teams to protect critical infrastructure, and the remaining fifth assigned unspecified “support” functions.

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Why New Home Construction Is Slow, And Will Remain So For A Long Time

Summary: September housing starts were weak, as they have been since the crash. Their failure to recover has been a surprising and large drag on this economic cycle. Demographic change and slow GDP prevent a housing recovery. On the other hand, housing busts create recessions; this slow expansion (without a boom) is more sustainable — and might run unusually long.

Slow growth of housing

September housing starts were weak, -15% YoY NSA (year-over-year, not seasonally adjusted) and -9.0% MoM SA. The weakness in this key industry is one facet of secular stagnation. How weak is it, compared to past expansions? See this graph of annual housing starts per 1000 people. After 7 years of economic expansion, starts run at less than half of the previous peak (Jan 2006), and two-thirds of the average during the previous two expansions. They rose to the 1963-2007 lows – and stalled.

Annual housing starts per 1000 people

See the rest of the article at Seeking Alpha!

Turning points in history – are we at another?

Summary: What do turning points of history look like? To see those in the future, let’s look at those in the past. Here’s a quick look at big events of history that were not, and some that were.

Turning Points of History

The Atlantic asks “What was the worst year in history?” It’s a powerful question, offering a deeper understanding of history. Most of the answers fell into three categories.

  • Inevitable events: the Chicxulub asteroid impact 65 million years ago (disastrous, but cleared the planet for the rise of mammals), the invention of firearms.
  • Lots of people dying early: pandemics (e.g., smallpox in 1918, plague in 1347. These people were all going to die eventually.
  • One of humanity’s countless wars: Sack of Antwerp in 1576, King Philip’s War in 1675, US Civil War, WWI, WWII.

These are the normal events of history. The occurrence of these individual events was chance, but as a group they are the rhythms of life. Shifting the dates and details of these events might change history, but probably not significantly alter the course of humanity’s evolution. Consider a different and more useful perspective on this question.

What events changed the course of history for the worse?

(1) The lost computer revolution of the 19th century

My favorite candidate is 1832 — when Charles Babbage halted construction of his difference engine (a mechanical calculator) due to a dispute with his engineer, Joseph Clement. This resulted from Babbage’s great creativity and lack of focus. In 1842 the British government ended support for the project. Swedish academic and inventor Martin Wiberg build a working version in 1875, but lacked government sponsorship and was unable to sell it. Mechanical calculators became commercially available only after 1900.

Imagine a contrafactual, an alternative world in which Babbage finished his calculator and printer by 1840. His design was sound; both were built from his plans and successfully run in 2000 using tools and materials available to Babbage.

That’s the small news. With that success Babbage might have built his analytical engine — a programmable analog computer and its software (several assembly languages). He had designed most of it by his death in 1871. Better funding and more encouragement — powered by a 1842 success of his difference engine — might have produced a working model by 1871. If not, his son, Henry Prevost Babbage, might have done so (he did continue his father’s work, and produced a working component). IBM built the first modern version in 1944.

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