Georgia has to decide who can guide its state political economy through a rough patch of inflation

Raphael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta, recently released a video reiterating the Board of Governors of the Federal Reserve System’s policy of achieving an inflation rate of two percent. President Bostic defined inflation as an imbalance between aggregate demand for goods and services and aggregate supply of the same.  Achieving the two percent inflation rate during a “soft landing” is achievable but will be rough, according to the Atlanta Fed president.  A soft landing is defined by Investopedia as a moderate economic slowdown following a period of growth.  Central banks line up on their economies’ runways hoping for a soft landing while raising interest rates for the purpose of curbing inflation.

The Board of Governors uses a number of monetary policy tools to curb inflation including changing its target range for the federal funds rate; buying and selling securities; changing the reserve requirements for its member banks; changing the amount of interest it charges at its discount window for loans to its member banks; and changing the amount of interest it pays on commercial bank excess reserves held at the system’s twelve federal reserve banks.

Mr Bostic also noted an apparent imbalance in the United States’ labor markets where only 60% of available and open jobs have been filled.  There is where I think about the state of Georgia’s management of the political economy.

The role of government is to act as a transfer agent between taxpayers and bondholders.  Government taxes the spread between a taxpayer’s work efforts and what the taxpayer yields from those efforts.  Government takes its cut and passes on the rest to its bondholders.  As a people manager, government creates narratives to encourage more yield and implements policies to encourage or support actions that create that yield.

State governments are less incubators of democracy and more incubators of tax-generating activities.

In the case of Georgia, bond holders and bond traders should not only keep their ears open to narrative spun by Georgia’s gubernatorial candidates, but keep their eyes open when reading the policies proposed by the candidates.  How well do their proposals lend to the need for yield creation?  Are their proposals designed solely to tug at heart strings or can proposals be tied to activities that ultimately increase yield from taxpayers that can ultimately be transferred to bond holders?

Followers of state elections rarely if ever tie state government policies to national dollar and monetary policies.  I think bond holders and bond traders should start looking at state and federal governance of the American political economy to best understand how well the United States is doing on generating yield.          

 Alton Drew

25 May 2022

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Survey Shows Consumers see Future Tax Increases and Expansions of Government Assistance and Insurance Programs as Increasingly Unlikely

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the April 2022 Public Policy Survey, which is part of the broader Survey of Consumer Expectations (SCE), and provides information on individuals’ expectations regarding future changes in a wide range of public policies.  Tracking individuals’ subjective beliefs about future policy changes is important for understanding their behavior as consumers and workers. These data have been collected every four months since November 2015 and have been released publicly since October 2019. In addition to several assistance programs, the survey measures respondents’ expectations about social insurance programs, labor market policies, taxes, and fees. For each program or policy, the survey asks respondents to assign the percent chance of an increase/expansion, a decrease/reduction, or no change over the next twelve months.

The April 2022 survey shows several interesting changes in the public’s expectations regarding federal assistance and social insurance programs. Following the outbreak of the pandemic in March 2020 and the 2020 general election, and lasting until about August 2021, there was a steady rise in the average likelihood respondents assign to an increase or expansion in housing, welfare, and unemployment benefits, in subsidized preschool education and in federal student aid. Since then, the survey shows a strong reversal in the average likelihood of expansions in these programs as respondents increasingly expect no changes in these policies over the next twelve months. As shown in the interactive charts on the survey website, largely similar patterns emerge for expansions in Medicare, social security benefits, parental leave policies, and for an increase in the federal minimum wage.

While expectations of future program expansions in April 2022 remain somewhat above pre-pandemic levels, this is a notable turnaround in the general public’s beliefs, one that followed the implementation of large economic stimulus and relief packages and coincided with a gradual improvement in economic conditions and a changing political landscape less conducive for such expansions. Interestingly, this pattern also appears for expectations of increased student debt forgiveness. While current readings of an average 32 percent chance of such an increase remains well above the December 2019 level of 18 percent, it has seen a meaningful decline since reaching a peak of 43 percent in April 2021, revealing a considerable decline in optimism about an increase in student loan forgiveness.

With the recent reductions in perceived prospects of future expansions in government support programs, the survey also reveals a decline in the reported likelihood of future tax increases. Following a steady rise in the perceived likelihood of an increase in capital gains, income, payroll and gas tax rates between December 2019 and April/August 2021, the survey shows a decline in such expectations since. For most tax rates, consumers consider it increasingly likely that these rates will remain unchanged in the year ahead. In the case of gas taxes, in addition to an increased expectation of no-change, the survey also shows a considerable uptick in the perceived chance of a cut in gas taxes.

Finally, the results reveal little change in respondents’ expectations regarding future changes in the mortgage interest deduction and in public college tuition, and a slight rise in the prospect of higher public transportation fees.

Key findings from the April 2022 Survey are:

Expectations about Public Assistance Programs

  • The average perceived likelihood of an increase in housing assistance and affordable housing over the next twelve months declined to 37 percent in April 2022, from a peak of 52 percent in August 2021.
  • The mean probability of an expansion in free or subsidized preschool education dropped to 34 percent from 40 percent in April 2021, and a peak of 43 percent in August 2021.
  • The average probability assigned to an increase in federal student aid or Pell grants dropped to 28 percent from a series high of 39 percent in April 2021, with the average percent chance of no change in student aid increasing by about the same amount. The mean probability of an expansion in federal student debt forgiveness fell to 32 percent from a series high of 43 percent in April 2021.
  • Prospects of an increase in welfare or unemployment benefits declined sharply over the past year, with the average probability assigned to an increase falling from, respectively, 49 percent and 45 percent in April 2021 to 35 and 26 percent in April 2022.
  • Similarly, the average perceived likelihood of a rise in Medicare or social security retirement benefits dropped to 24 and 25 percent from series highs of 31 and 29 percent, respectively in August 2021.
  • The mean probability assigned to an increase in the federal minimum wage declined to 39 percent from a series high of 50 percent in April 2021. In contrast there was no meaningful change in the perceived prospects of a rise in the state minimum wage.
  • The average likelihood of an expansion over the next twelve months in paid parental leave fell to 26 percent, from a peak of 34 percent in August 2021.
  • The recent declines in the measures above were largely broad-based across age, gender, education, and income groups.

Expectations about Taxes and Fees

  • The average perceived likelihood of an increase over the next twelve months in the capital gains tax rate declined to 42 percent in April 2022, from a peak of 52 percent in August 2021.
  • The mean probability assigned to an increase in gasoline taxes decreased sharply to 47 percent from 61 percent in December 2021 and 63 percent in April 2021. The average probability of a gas tax decline jumped to 15 percent from 7 percent in December 2021.
  • The average perceived likelihood of an increase in the average income tax rate declined to 45 percent from a series high of 53 percent in August 2021. The average likelihood of an increase in income tax rate for the highest income bracket declined to 49 percent from a series high of 65 percent in December 2020.
  • The average probability assigned to an increase in the payroll tax rate also declined to 40 percent from a series high of 50 percent in August 2021.
  • Expectations about year-ahead changes in the mortgage interest deduction were largely stable over the past year.
  • Similarly, the mean perceived likelihood of an increase in public college tuition was mostly unchanged.
  • Finally, the average probability assigned to an increase in the cost of public transportation increased to 49 percent from 42 percent in April 2021, a new series high.

Detailed results are available here.

Source: Federal Reserve Bank of New York

23 May 2022

The money: Why Republicans, Democrats, and political action committees ignore black voters …

Strategic Communications

A couple days ago, a 63-year-old black woman called into director/producer Tariq Nasheed’s show suggesting that blacks take a crowd-funding approach to reparations specifically and black political empowerment in general. 

The caller suggested that blacks, rather than waiting on reparations, start a crowd-funding project that raises five dollars from each person in the 40 million plus black community.  The caller also took issue with the term, “white supremacy”.  She argued that she did not see whites as superior and using that phrase only furthered that incorrect perception.  Rather, she believed that the phrase “white domination” was reflective of the actual power dynamic and relationship between American blacks and whites.

Mr Nasheed and a significant number of his YouTube followers hastily discounted her suggestions due to her religiosity and status as an older baby boomer. They also further discredited her idea on account of the very small amount of money (thirteen dollars) garnered by her crowd-funding attempts. Mr Nasheed and a significant number of his supporters also took issue with the caller’s argument that white dominance was a better assessment of the power relationship between blacks and whites than white supremacy.  He argued that she was splitting hairs on semantics and that the reality of the political and social environment is one where whites are calling the shots making the use of the phrase “white supremacy” an appropriate one.

I usually do not leave comments on YouTube videos but felt compelled in this case.  This is what I wrote:

 “Domination” and “supremacy” are not the same. To dominate is an action; to rule or control by superior power. To be supreme is a place; a position of high rank or power. You use a tactic, domination to achieve a strategic position, which is supremacy. The distinction goes way beyond semantics. If you believe whites are “supreme”, then getting them out of that position entails anticipating and directly attacking their tactics for domination. Acknowledging the differences between “supremacy” and “domination” will help to refine your tactics.

From a strategic communications view, the narrative that whites are superior or supreme only engenders apathy amongst blacks.  Sitting in a position of resignation is not where you want to be strategically.  You only set yourself up for further abuse due to sitting in someone else’s narrative.

Blacks can’t afford to be naïve as to where they sit in the power dynamic.  Realizing that no one should be held to sit in a position that is “superior” to them is one thing, but taking the appropriate actions to mitigate positioning is another.  Blacks should be taking practical actions to influence political behavior to their benefit.  The caller’s investment approach is one such pragmatic action.

Investing in influence is a major tactic in the political industry.  You can’t influence the vote or any policy without funding action.  This is the language that the Democrats, Republicans, and political action committees recognize and are receptive to.  Blacks have yet to come to terms with this reality.  While blacks are very good at using social and traditional media to share the “pain and suffering” and “white supremacy” narrative, blacks are deficient when it comes to funding the necessary tactics that make a dent in influence.

Blacks rather be led by media entrepreneurs hawking product versus approaching the political industry for what it is: a political venture capital system that seeks out candidates that can provide the highest political returns.  Priming that system requires making an investment.

 Alton Drew

22 May 2022    

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A side note: Why the issue of colonial status in the United States Virgin Islands is a non-issue …

For years the Virgin Islands of the United States has struggled with the issue of whether it should remain an unincorporated territory, become a state, or go the route of an independent sovereign nation.  The territory is nowhere near self-governance, not even a recipient of all the constitutional rights guaranteed to citizens living on the mainland. 

Going its own way by shedding its colonial status requires a process that goes deeper than a constitutional convention or ballot referendum.  Besides the issue of creating a national identity that not only includes ancestral Virgin Islanders (those who can directly trace their ancestry to a grandparent born and living in the old Danish West Indies on 31 March 1917) and native Virgin Islanders like myself who were born in the territory but have no lineage to March 1917, there is the political economic issue that undergirds the definition of colony. 

Getting clarity on the definition is important because clarity will guide you to the primary stakeholders whose buttons have to be pushed.  In my opinion, the button-pushing has focused heavily on 80% of the USVI population of African descent who are being treated as second- or third-class citizens by the world’s best-known democracy, and for this painful reason the status of the USVI has to be resolved.  Status has become another civil rights issue on steroids.

Let’s look at “colony.”  According to Webster’s New World Dictionary, a colony is a group of settlers in a distant land that is under the jurisdiction of their native land.  It is territory ruled over by a distant state with a community of the same nationality or pursuits.  As a territory, a colony is part of a country or empire that does not have full status.

What is missing from this definition is the economic aspect of colonization.  If you take the classic case of the original thirteen British colonies in North America in the 17th and 18th centuries, we had transplanted Brits that extracted natural resources and sent those resources to Great Britain for further processing and packaging where part of the finished product was sold back to the colonists.  This was the basic crux of the relationship.  We had landowners in North America trading with investors and manufacturers in Great Britain, trading on a platform of cheap land and free labor in the form of African slaves.

But when it was time to press for independence, the philosophy and narrative came from the landowners in the colonies.  The philosophy and narrative were created by a wealth class that stood to benefit from reallocating Great Britain’s monopoly on taxes from the monarch to American government.

Fast forward to the 21st century Caribbean.  I believe that if the USVI is going to move from its unincorporated status, that move will have to be initiated by the group that has the most to lose or gain economically from a change in status.  That group is not the 80% of the population that descended from African slaves.  The groups calling the shots on removing colonial status will be the owners of USVI tourism assets and financial institutions and the investors on the US mainland and in Europe. 

Should these groups see economic benefits and political influence stemming from a change in status being greater than the current political economy status, that is when the non-black wealth class will agitate for that change in status.

In the meantime, change in status is a non-issue for the majority of Virgin Islanders.  They have no control over the political economy and will settle for now with the current level of American citizenship.

Alton Drew

20 May 2022

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Is it time for the Federal Reserve to pursue a single mandate?

12 USC 221 of the Federal Reserve Act provides four main purposes for the Act:

  • To establish Federal reserve banks;
  • To furnish an elastic currency;
  • To afford the means for rediscounting commercial paper; and
  • To establish a more effective supervision of banking in the United States.

The legislation provides statutory support for the Federal Reserve System’s objective of regulating the United States’ money supply.  Specifically, under 12 USC 225a, the Federal Reserve System’s monetary policy objective is to:

“[M]aintain long run growth of monetary and credit aggregates, commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Among the tools the Federal Reserve System uses to achieve its monetary policy goals are the usual suspects: open market operations; the discount window and discount rate; reserve requirements; and interest on reserve balances.

Over the next several days I will be addressing the monetary policy and legal questions, “What factors does maximum employment address?” and “What factors do stable prices address?”

The media when reporting on maximum employment often references the unemployment rate for labor, while referencing the consumer price index when addressing the achievement of stable prices.  My issue is, why is labor the be all and end all of the full employment issue?

If the Federal Reserve’s goal is to maintain long run growth of money and credit that is commensurate with the economy’s long run potential to increase production, shouldn’t the Federal Reserve System consider or assess the full employment of America’s productive capacity beyond labor? 

The media gives productive capacity a secondary thought and its lack of emphasis on productive capacity does not, in my opinion, keep the trading and merchant community fully informed on how well the economy is actually doing.

I would make the same argument for prices as well.  The Federal Reserve System’s narrative is that too much inflation is bad and it has to be contained.  But is that narrative truly in line with the expectations behind wealth accumulation?  Is it line with creating in consumers a necessary illusion of wealth that results from inflated home prices? 

Growth in asset values gives the average American the impression that her wealth is increasing.  She wants to use her house as an automatic teller machine but can’t do that if rising interest rates slow down demand for her house resulting in a decrease in her value.  Is monetary policy helping her achieve that balance?

It is clearer at this point to see a more direct connection between the Federal Reserve System’s influence on the interbank market for excess reserves and interest rates versus pursuing a four percent unemployment rate (historical full labor employment) via its monetary tools.  For that reason, should not the Federal Reserve focus solely on interest rates?

Could a single mandate may be better for traders who need as clear an assessment of the markets as possible?  Maybe. Maybe not. Let’s explore.

Alton Drew

18 May 2022

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Peyton Gendron and the ineptness of the black political leadership class …

Shifting to the political portion of the political economy.  The mass shooting in Buffalo, New York where a teen-aged white male by the name of Peyton Gendron exposes an oft overlooked dimension of black politics: we cannot protect our own.

We have been seeing the predictable roll-out of platitudes by the Biden-Harris administration and the expressions of incredulousness on social media by members of the black community with most demanding that “something has to be done.”  The inconvenient truth is that the black community, given its lack of political leverage and ownership of less than two percent of American capital, should not expect anything from a government that does not look like it, does not share its lineage or story, and has no interest in promoting the interests of blacks.

For a person to travel three hours to another city with the expressed purpose of murdering black people should tell black political leaders that there is an intelligence network operating against the black community; that there is an organized war being waged against the black community.  Black political leadership should be asking themselves why a government that can thwart terrorist attacks overseas cannot be as aggressive here at home when it comes to terrorist attacks against black Americans. 

Instead, we get a black leadership that is fast to blame centuries old terrorist attacks on the delusion that the domestic environment of racial violence is orchestrated by one political party.  Never mind that Mr Gendron has been described as a left authoritarian, political nomenclature that would put him in the box along with democratic socialists as well as Nazis.

No. Rather black political leadership prefers to politicize the event for vote getting purposes when it should be asking if there is a system in place to provide citizens warning that a rabid terrorist dog is heading to their community.

The black political class is the last group of individuals that those interested in protecting the physical and emotional integrity of the black community should be looking to for help.

Alton Drew

17 May 2022

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Joe Biden and the Federal Reserve: The competing inflation fighting narratives …

John Williams, president of the Federal Reserve Bank of New York, today remarked on the state of inflation in the United States and the Board of Governors of the Federal Reserve System’s (“Board” or “Federal Reserve”) efforts to address rising prices throughout American markets for food, energy, other goods and services. 

Mr Williams reminded listeners of the Board’s dual mandate of maintaining stable prices and attaining maximum employment and reiterated that the Board has the monetary tools to address inflation stemming from congestion in the supply chain, China’s recent attempts to combat the surge in new Covid cases, Russia’s invasion of its Eastern European neighbor, Ukraine.

With demand exceeding supply and a tightening labor market, Mr Williams expects monetary actions to cool the demand side of the equation.  The Board has already embarked on cooling down the demand side, first by announcing during its last Federal Open Market Committee meeting (a committee that Mr Williams is a member of) an interbank overnight lending rate range of .75% to 1.00%. 

In order to influence its member banks to borrow excess reserves from each other within this range, the Board will begin unwinding its holdings of US Treasury notes and agency-backed securities on 1 June.  In theory, as more securities hit the market for sale, the price of these securities fall while the interest rates paid on these securities increase.  As interest rates increase, the Board believes the increase will be accompanied by a slow-down in lending by commercial banks and borrowing by businesses and consumers which is expected to result in a less heated economy. 

But as the campaign season heats up in the United States, how well will the Biden-Harris administration manage the political economy during a downturn?  Today, Mr Biden, in remarks addressing inflation, spun a narrative that inflation is the result of Vladimir Putin’s antics in Ukraine and by a federal budget deficit caused by wealthy individual and large corporations’ unwillingness to pay their fair share of taxes. 

Admitting that monetary policy is the purview of the Board of Governors, Mr Biden offered up a fiscal solution contained in his Build Back Better agenda.  Components of the Build Back Better agenda offered in his remarks included investment in renewable energy infrastructure; passing clean energy and electric vehicle tax credits; promulgating fuel regulations that would increase miles per gallon for fossil fuel vehicles; and releasing one million barrels a day from America’s strategic petroleum reserves.

Throughout Mr Biden’s speech, Vladimir Putin’s name was cited repeatedly giving me the impression that remarks were intended to drum up electorate support for continued U.S. and NATO involvement in the Ukraine-Russia conflict versus resolving the inflation issue.  I also get the sense that by early summer, Mr Biden will tie Mr Putin to former president Donald Trump, thereby turning the inflation messaging into a strategic communication that garners more electoral support for the Democratic Party.

As an economic narrative, Mr Biden’s fiscal and legislative policy will depend on a defacto gridlocked Congress.  By keeping attention on Mr Putin and to a lesser extent Mr Trump, Mr Biden hopes Americans do not notice his inability to manage the political economy out of an inflationary mess.

All ears should stay open to what the Federal Reserve says and eyes open to what the consumer does.  While the Board lost credibility by continually repeating that inflation was transitory, it is in a position to take faster and more measurable action via monetary policy as opposed to Mr Biden’s fiscal and legislative agenda.

Alton Drew

10 May 2022

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Filing public comments does not mean you are setting the narrative….

Twenty years ago, while serving on the staff of a local government consumer service regulatory agency, the director at the time called me into his office to discuss a consumer survey the agency was crafting.  He said to me, “Alton, we are putting together a survey that will have an impact on our future careers.  The consumers do not know what to think. We are going to make them think what we think.”

He shared with me a regulatory reality that through his words he was able to yank forward from my mental backburner.  I was shocked at the brazenness but in no way shocked by its truth.  As a consumer or a trader for that matter, if you expect to have any impact on the decision making of a policy maker, you will have to be more aggressive in your actions.  Voting or writing comments on a proposed rulemaking won’t get you very far in terms of impact.

As a communications tool, public comments serve as a barometer or temperature gauge for an elected official.  They may at best incorporate into the announcements that accompany their rulings some of the energy they glean from public comments, but a policy maker’s decision on a rule has already been made before your shouting is heard. 

Regulatory agencies are mostly reactionary and a significant portion of the rules they make are in reaction to an event or to the needs of the industry they regulate.  Industry takes a 24/7 interest in the actions of government and participate in active narrative making through direct lobbying and comments in the media.  They leverage these tools and advantages every day.

But even industry’s influence has its limits.  Industry exists to do the bidding of government.  The government grants industry charters and licenses to serve a public convenience and necessity.  We tend to think “public convenience and necessity” as meaning doing beautiful things for society.  This is not necessarily the case.

Providing services that make society look and feel better are tactics that support government’s primary goal: the validation of its existence and expansion. This is the box that industry is in and its attempts to influence government via lobbying are merely ways of giving itself a little more elbow room. 

In the end, industry works for government, carrying out government’s philosophy, narrative, policies, and laws.

Allowing public comments is merely a tactic that nurtures the façade of democracy.  By allowing the public to file comments, government provides a release valve for the public through which to vent.  It is a small upfront price to head off the potential loss of political power. 

In my years serving on the staffs of two regulatory agencies and as a board member of another, I can say that public comments never swayed any recommendations or decisions that I made.  If you want to sway a decision maker’s thinking, you will have to learn the political pressure points and lobby to the decision maker’s interests.  

Alton Drew

9 May 2022

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For the trader, the draft abortion decision presents an important privacy narrative …

Our focus is primarily on the trader for trade or exchange of value.  Trade is the only reason humans bother with each other.  From the first engagement between one another we have come up with rules for settling our trades, for being transparent, for injecting trust into the markets.  An abortion decision would seem distant from this concept.  But is it?

The Constitution is a conservative document. The Constitution says nothing about abortion, nor does it provide for the federal government to involve itself in private decisions.  The irony is that those who allegedly want abortion to remain a private matter are asking the ultimate intruder to regulate in this area.  Abortion regulation is another mechanism for government expansion particularly where privacy is concerned. 

For example, I read Roe v. Wade before parsing through the U.S. Supreme Court’s draft opinion in Dobbs. I took this order in reading the opinions to avoid any taint from Justice Alito’s opinion.  My conclusion was that Roe is legal analytical trash.  After reading Roe and reading Alito’s opinion, I had to say that I was mostly in agreement with him.

The pains that the court in Roe went through to create a privacy doctrine that is not supported by the Constitution only to see the opinion sliced and diced by the legal reasoning in Dobbs and the analysis of the U.S. Constitution looked straight out of a horror movie. There is no explicit protection of privacy in the Constitution and in the narrower case it will be left up to state legislatures to guarantee it in their constitutions and/or define it in state law.

For the trader, especially the trader in crypto currencies where the concept of anonymity attracted her to that market, she has to ask, “Will this court’s attack on privacy provide more ammo for government’s attempts at looking at my trades?”

Government sees itself charged with managing all the resources in a country including human resources and maintaining that world view means piercing the veil of privacy.  I would not be surprised to see the courts take further action against privacy by reversing itself on a number of privacy cases that Roe was built on.  Traders should stay aware of this possibility that attacks on privacy could further cement threats to privacy in the markets.

 Alton Drew

6 May 2022

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