Kokomo Tribune; Kokomo, Indiana

Breaking News


January 3, 2014

MICHAEL HICKS: The Fed's year-end actions

Why isn't monetary growth having effect?

The Federal Re-serve’s decision last week to ease its efforts to stimulate the eco-nomy were widely expected, though I thought they might wait another month until the new Fed chairwoman, Janet Yellen, took over the helm. What was unexpected about the announcement was just how minimal the changes were.

To remind readers, the Fed is now actively engaged in something known as QE3, or the third round of quantitative easing. This involves buying government bonds and mortgage-backed securities from banks. That process injects $85 billion each month directly into the economy.

According to a traditional money multiplier analysis, the effect on the actual money supply ought to be equal to $85 billion divided by the reserve requirement of banks, which is less than 2 percent. So, $85 billion divided by 0.02 is $4.25 trillion in additional money per month if banks were to lend it out. Over 2013 that is more than $51 trillion in “potential” new money created by the QE3. This is more than three times the size of the U.S. economy and more than nine times the money we need for transactions each year.

I apologize if you are scared by the math, but, trust me, it is the number of zeros that is the most terrifying. Clearly that growth in the overall money supply is not following this simple money multiplier. We know this because we still have low inflation. The challenge is that this transmission mechanism of the Fed’s monetary policy to the overall economy is weak. With this persistent problem continuing it hardly matters whether the size of the QE3 is $75 billion or $85 billion a month. The question is simply, why is this level of monetary growth not having a more visible effect?

To explain it simply, businesses borrow money to buy capital equipment, from which they can expect a rate of return. If the market interest rate is beneath the rate of return for this capital then borrowing makes sense. If the market interest rate is above the rate of return on this capital than businesses will not borrow. Thus, the Fed depends upon the actual rate of return on capital, which economists term the natural rate of interest.

Text Only | Photo Reprints
  • STATE SEN. JIM BUCK: Changes pave way to a brighter future In recent legislative sessions, Indiana has enacted substantial policy reforms that resulted in greater economic freedom and stronger economic growth. Economic growth has real implications for Hoosier families: jobs for those unemployed; promotions f

    April 24, 2014

  • JEFFREY McCALL: U.S. networks struggle to cover economic news Network television newsrooms often must cover stories for which they have no internal experts. That's why aeronautic engineers and pilots are put on the air to analyze airplane emergencies. Judges and lawyers are paraded out to discuss whatever sensa

    April 24, 2014

  • Rob Burgess House of Burgess: You've gotta keep 'em separated

    In my career as a journalist I have served my time reporting on city council, county supervisor and state regulatory meetings, to name just a few. Whatever else they might have been, they weren’t holy places. In the many, many hours I spent there I never felt the presence of anything that might be described as transcendent or spiritual.

    April 23, 2014 1 Photo

  • ANDREA NEAL: A committee of 10 picked Ind. capital Editor's note: This is one in a series of essays leading up to the celebration of the Indiana Bicentennial in December 2016. Anyone who's ever served on a committee can relate to the old laugh line: A committee is a group of people who keep minutes a

    April 23, 2014

  • MAUREEN HAYDEN: Judge in gay marriage decision is no activist When U.S. District Judge Richard Young recently ruled in favor of a lesbian couple seeking recognition of their out-of-state marriage, opponents of same-sex unions called him an activist judge who was unilaterally trampling the law. The label didn't

    April 22, 2014

  • TOM LoBIANCO: Turner ethics case tests bounds of 'citizen legislature' When a legislative ethics panel meets this week to review the case of House Speaker Pro Tem Eric Turner, members could have trouble finding clear-cut answers, in large part because of the Indiana General Assembly's status as a "citizen legislature."

    April 22, 2014

  • Cleaning up Indiana could be as easy as a bottle deposit Scan the roadside on a drive through the Wabash Valley, and you might spot an empty pop bottle or two. Or two dozen. Or 200. Drink bottles have become our litter du jour. They compose an estimated 40 to 60 percent of all litter, according to the Mich

    April 21, 2014

  • Wolfsie: High-tech got you down? I love where I bank. It’s a branch inside of a big supermarket. I can make a modest withdrawal and then go and blow every last penny in the cookie aisle. The tellers at the window appreciate me. They know about my obsession with round numbers and und

    April 21, 2014

  • Vasicek: Celebrating Easter I have shared a few bits of Easter humor over the years, so I thought I’d start with a new one. Joseph of Arimathea was the wealthy Pharisee who is famous for helping to bury the body of Jesus. He procured the body, asking Pilate’s permission, and, w

    April 20, 2014

  • DAY: God trusted us with them Well, you heard about my wife and I, and our families from the past, so it is time for me to tell you about two of the prettiest girls I have ever known. They are our daughters Debbie and Patty. They are the greatest gifts from God that we have had i

    April 19, 2014

Latest news
Featured Ads
Only on our website
AP Video

Click HERE to read all your Parade favorites including Hollywood Wire, Celebrity interviews and photo galleries, Food recipes and cooking tips, Games and lots more.
Kelly Lafferty's video on Tom Miller