Archive for May, 2011
Debate of QE Termination a Head Fake – Expect Market Rallies Upon Completion of QE2
“The USSR had two newspapers, Pravda and Izvestia. In the Russian language, “pravda” means truth and “izvestia” means news. The saying amongst the Russian people put the situation in a nutshell: “There’s no Pravda in Izvestia and there’s no Izvestia in Pravda”.” – The Privateer
‘You heard it here first’ and ‘Mark my words’ are the hackneyed phrases that come to mind as I begin to type this missive. I will add the oft used ‘I’m going out on a limb’ as I write the following:
Would You Pay Your Bank To Not Make You a Loan?
Currently there are about $1.2 trillion in “excess reserves” in the banking system, an amount held by banks above and beyond their reserve requirements (needed to “back up” their existing customer checking account balances.) Commercial banks are free to lend it out to their customers however most banks keep their excess reserves parked at the Fed, and get paid by the Fed an annual percentage rate (APR) of 0.25 percent (25 “basis points.”) This means that the banks’ excess reserve balance grows annually by 25 basis points, a convenient way for banks to earn interest by incurring no risk. Whenever money is lent out there is a risk associated with it even if the underlying asset and the borrower are outstanding. If you’ve been wondering lately why banks are so picky with their lending guidelines you will find your answer in this article.
Few economists (mostly Austrian) pay attention to the Fed’s chairman fine print where Bernanke frequently mentions the Fed’s ability to offer higher interest rates on excess reserves. The question is why would Bernanke be prepared to entice commercial banks with higher rates to keep their money parked at the Fed?
Is It Time For A Bold Tax Rate?
Another new year has arrived and its time once again to propose a radical thought to assist America. The cost of Social Security Insurance to American workers and American business continues to soar upward. American workers will pay 4.2% (reduced from last years 6.2% taxable rate to help spur the sluggish economy) SSI tax on earnings up to $108,000 and an additional Medicare tax rate consisting of 1.45 % on all of their earned income for the 2011 calendar year. Business will pay out a SSI 6.2% taxable rate on all of its employee’s earnings up to $108,000 and a 1.45 Medicare tax rate on all of the employee’s earnings.
The combined cost of the employees SSI taxes and the Medicare taxes to businesses discourages employee hiring. A reduction in the amount of matching the SSI taxes to business would encourage more hiring. A reduced SSI tax on employee’s income would also allow employees to keep more of their earnings. The more employees keep the more they would have to spend or to save. The more the employees spend, the more encouragement for business to hire more workers, and therefore the unemployment rate would drop and the country would be able to prosper.