Are Democrats missing an opportunity to strengthen their inflation argument?

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (FRS), today testified before the U.S. Senate banking and finance committee on the state of the FRS’ monetary policy.  One of the main points of questioning by the senators was the issue of inflation. 

Republicans have been asserting that loose monetary policy, specifically the FRS’s delay in raising the federal funds rate, and expansion of its balance sheet of agency and mortgage-backed securities, combined with the Biden Administration’s spending are at the heart of U.S. inflation.

Democrats’ main assertion is that companies have been taking advantage of the American consumer by increasing prices and taking profits.

We understand that in a political environment each side of the aisle aims to tug at enough electorate heart strings in order to secure votes in the fall.  I don’t pretend to be a statistician, but a back of the napkin analysis of growth in the money supply and changes in the consumer price index tells me that Republicans should include other factors in their cause of inflation analysis, and that Democrats need to trust Americans more by sharing and explaining the numbers.

According to data from the FRS, between January 2021 and April 2021 M2 money supply increased an average of 1.3%, month-over-month while inflation increased an average of 0.5% month-over-month during that same time period.

But between January 2022 and April 2022, while M2 money supply increased an average of .003% month over month, inflation increased 0.7% month over month.  The money supply was at a dead crawl while consumers continued to see price increases at a faster rate versus the same period last year.

I admit the sample is small.  I am trying to be fair to the Biden administration by reconciling his time in office with available 2022 FRS data on money supply.  Hopefully my small exercise demonstrates that there is some room for the Democrats to strengthen their arguments on the cause of inflation and that pricing behavior on the part of firms needs to be taken into consideration.

Alton Drew

22 June 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

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The Framers eradicated democracy 246 years ago …

Mr Biden’s party has initiated a crucible, the January 6th hearings, putting the Republican Party, specifically Donald Trump and his cabal, on trial for attacking “democracy.”  It is an irony worth a brief digress.  Over the past twenty years, Democrats have taken issue with America’s “institutions of democracy.” 

Progressives took issue when the Electoral College gave George W. Bush a victory over Albert Gore in November 2000.  In 2016, the Electoral College handed Donald J. Trump a victory over Hillary Clinton.  Progressive Democrats have been calling for the dismantling of the Electoral College, referring to it as “archaic” and “anti-democratic” because it handed victories to candidates that did not earn the popular vote.

In 2020, Donald Trump challenged the results of the election and even asked his vice-president, Mike Pence, to decertify the electoral ballot count.  Mr Trump also went to court in a number of states to challenge and overturn election results.  A mob rush on the Capitol Building during the certification of Electoral College votes only buttressed the Democrats’ argument that Mr Trump was more interested in tyrannical rule than the protection of democracy.

The thing is, America is not a democracy.  One man, one vote was never the intent of the framers of the U.S. Constitution.  The framers never meant for direct election by electorate-taxpayers of the chief executive. Symbolic, in-direct participation in the process, okay.  Direct participation, hell no, and smartly so.

Why do I say, “smartly so”?  Direct democracy is tyrannical. I find nothing attractive in masses of people having sway over my personal, household decisions because of “majority rule.”  Also, why deceive voters into believing that their individual vote matters when campaigns financed by a numerical minority of wealthy donors and campaigns run by an educated and disconnected political class.

And besides, the majority of electorate-taxpayers hardly read and know little to nothing of America’s political history.  Subject to media persuasion and unread on their political environment, I would rather immigrants newly minted as US citizens be the sole entrants in a voting booth.  At least they would have a fresh understanding of their adopted political system.  

No portion of the process for electing a president outside of the Electoral College is democratic.  The masses choose a slate of electors and that is the extent of their participation.  This is not ancient Greece.  If there is anything those white boys from 1776 were right about is that you don’t want a bunch of rambunctious, over emotional, pain and suffering types having direct participation in the process.

There was no attack on democracy because the election process for president does not allow for democracy.  Democracy does not exist.  If anyone attacked democracy it was the Constitution’s framers.  They denied the masses democracy 246 years ago.  

Alton Drew

13 June 2022    

The Federal Reserve is signaling to Biden that 2024 could be rough …

Political odds makers don’t see the Democrats faring too well in this November’s midterm elections.  With 21 weeks to the elections, Democrats have work to do in convincing the American electorate that their party will be best at governing in a post-pandemic economy.

The doomsayers are out in full force expecting interest rates to climb as the Board of Governors of the Federal Reserve today begins selling off Treasurys and mortgage-backed securities from the portfolio it built up during the pandemic.  As securities hit the street, the issue of who wants these securities and at what price, I believe, will be the question in New York and Washington as interest rates are expected to inch up while the prices on these securities due to increased supply goes down. 

However, rising rates is what the Board of Governors wants.  Higher interest rates are expected to discourage the rise in inflated consumer prices which at the last Bureau of Labor Statistics print is 8.3%, year-over-year. The Board hopes to get this rate closer to two percent per year. 

The Board has its work cut out for it in its pursuit of a two percent inflation target. One of the monetary policy tools in its arsenal is the closely watched federal funds rate, the overnight rate that banks charge each other when lending and borrowing excess reserves overnight.  Raising the fed funds target rate signals an increase in lending rates which in turn makes doing business more expensive leading to a slow-down in national economic activity.

The current range for this rate is 0.75% to 1.00% with a reported effective fed funds rate of 0.83. On 30 May 2022, Federal Reserve System governor Christopher J. Waller shared in remarks that the he expects the federal funds rate to be around 2.65% by the end of the year.

If the Board of Governor’s monetary policy leads to a contraction in the economy, there is a chance that labor will suffer with the potential loss of jobs.  Job losses, while not boding well for most Americans, is particularly harrowing for low-income workers.  Inflation and job loss are a double tax on the poor. 

As Board of Governors vice-chairman Lael Brainard shared in remarks last April, lower income households spend 77% of their income on necessities, i.e., food, shelter, energy, versus 31% of income spent on necessities by high-income households. Vice-chairman Brainard also noted that the inflation index for low-income households increased faster than the overall consumer price index while the inflation index for higher income households increased at a rate lower than the CPI.

The economic tea leaves should tell President Biden that he will have to come up fast with a sales pitch to low-income voters.  His sinking poll numbers mean that he cannot afford to leave any votes on the table.  His sales pitch will have to contain a narrative that recognizes the pain in low-income households suffering the double-whammy of higher interest rates and contracting economic growth.

Mr Biden’s package will also have to tackle the apathy, particularly amongst the poor, that their votes don’t matter.  The poor are less likely to vote than the affluent.  Approximately 48% of households in lowest income category go to the polls versus 86% of families in the highest income categories.

The irony Mr Biden faces in putting together political packages for the poor is that the financing of his proposals will be hamstrung by rising interest rates going into the remainder of 2022.  A politically ineffective 2022 will in my opinion seep into 2024.

Alton Drew

1 June 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

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The Democrats strategic communications strategy on banning assault weapons designed to make the Republicans Darth Vader and nothing else …

The 24 May 2022 massacre of 21 school children and teachers in Uvalde, Texas has, as expected, brought out cries from the public for the banning of assault weapons given the level of carnage these weapons produce. Unsurprising, in my opinion, is the more cautious approach of US Senate and House Democratic leadership.

House speaker Nancy Pelosi, Democrat of California, and Senate majority leader Charles Schumer, Democrat of New York, both appear to walk a tightrope given the upcoming midterm elections in November and the outcry for more gun control.  A number of Democrats in both chambers are in competitive races with maintenance of a majority on the minds of both Mrs Pelosi and Mr Schumer.

The concept of “gun violence” legislation is being tossed around more so than the concept of “gun banning.”  It reflects the pressure on Democrats to meet the Republicans somewhere near a political middle on the issue of quelling the number of mass shootings in America, but a realization by Democrats that given the role of government ( to encourage and tax markets) and the problem with defining “assault weapon” (that term is political, in other words, does not exist), Democrats are forced to come close to looking like they are being effective versus not getting on the field to attempt to cross the finish line.

Take the firearm market issue.  The Democrats are not about to weaken the firearms market by reducing the number of firearms either manufactured in or imported into the United States.  26 USC 5821 allows a tax of $200 to be levied on each fire arm made in the United States.  In 2019, 7,011,945 firearms were produced in the United States which should have amounted to $1.4 billion in tax revenues.  Also in 2019, an additional 3,986,663 firearms were imported into the United States.  By 2020, that number had increased to 6,831,376 firearms imported into the US.  Reducing the market for firearms has a negative effect on US tax collections on market activity apparently covered by the US Constitution.

Democrats have tried to argue around the Second Amendment by asserting the amendment addressed the ownership of weapons for the purpose of arming a state militia.  Owning an assault weapon in 2022 is not necessary to meet state militia needs, Democrats may argue.

But this is where the Republicans and gun rights advocates could make a simple states rights rebuttal.  It is because the Second Amendment provides the States with a foundation for creating a militia that the States should have the benefit of its police powers to regulate gun ownership in their own states.  Granted, when firearms move through the conduits of interstate commerce for the purpose of sale, the sticky fingers of the Internal Revenue Service will stretch out and levy taxes, but as for ownership of firearms, specifically the semi-automatic weapons that were used in the Texas school shooting, Democrats may be wary of the Constitutional fight that may arise. 

Another hindrance may be the definition of “assault weapon.”  The Democrats may try to resurrect the definition from the now expired assault weapons ban legislation of 1994.  That legislation defined an assault weapon as:

“[A]ny semi-automatic rifle with a detachable magazine and at least two of the following five items: a folding or telescopic stock; a pistol grip that protrudes conspicuously beneath the action of the weapon; a bayonet mount; a flash suppressor or threaded barrel; or grenade launcher.”

Remove these factors and you can remove a firearm from at least the old definition of “assault weapon.”  In addition, I doubt the Democrats will get away with the vagueness of the term, “assault weapon.”  “Assault” is defined as a violent act.  “Weapon”, however, is defined as any instrument used to injure or kill.  That list of instruments goes a bit of a ways beyond just a firearm.  The Democrats will be forced to be a bit more definitive.

Politically, this may be just what the Democrats want.  They can be performative by looking like they are giving their constituents something substantive drafting a bill that strengthens background checks while making the Republicans the fall guy for not banning categories of firearms Democrats cannot or will not define.  All the while Democrats can protect the market for “assault weapons” and the taxes and imposts garnered from regulating that market.

Unfortunately, America will put the loss of life last week into the recesses of its consciousness, at least until the next shooting.

Alton Drew

29 May 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

We appreciate your readership and support.  Feel free to donate to us via PayPal or support our advertisers. We are also seeking sponsors for our blog.  Contact us at altondrew@altondrew.com.

When analyzing fiscal impact on exchange rates, traders should focus on government expenditure data not narrative …

Political analysis should follow this chain of events. First, there is the world view or philosophy of state leadership. The party or strong man in charge imposes his or her world view on his society. She takes the next step and creates a narrative, writes a story that is consumed by parts of society. There will be conflicting narratives promoted by factions, and via the political system, a winner will be determined. With political power in hand, the victorious faction will draft the policy or action plan that activates the narrative. And finally, to make sure that there is no confusion as to what is the prevailing narrative, it is codified in law for all to read or hear.

The Democratic and Republican parties have been vocal about their world views on inflation. The Republicans argue that Mr Biden’s spending under his American Rescue Plan is leading to high rates of inflation. The Republicans energize their argument by citing the last Consumer Price Index print which came in at 7% year-over-year for December 2021. This was up from the November 2021 print of 6.8%.

The Democrats rebut by arguing that spending under the American Rescue Plan will provide income supports that eventually lead to normal employment levels. Rather than increase consumer prices, the American Rescue Plan, along with the Build Back Better legislation sitting in the Senate, will ease long term prices. Americans have been facing high consumer prices in part due to clogged supply chains and Democrats have been arguing since last spring that this government investment will expand capacity and produce lower prices.

Traders should cut through the political banter and look at the data. Data from the U.S. Bureau of Economic Analysis shows that as a percentage of gross domestic product, federal government spending has held around 7% between 31 March 2021 and 31 December 2021. Actual dollar spending has declined during this period. First quarter 2021 spending was approximately $1,375.2 billion. Federal spending declined in the second quarter 2021 to $1,356.7 billion and fell further in the third quarter 2021 to $1,339.1 billion. During this period, the MarketWatch dollar index signaled dollar strength with the dollar going from 93.23 on 31March 2021 to 95.97 on 31 December 2021.

Along with the dollar strengthening over this period came inflation. Data for the U.S. Bureau of Labor Statistics shows that the Consumer Price Index went from 2.6% in March 2021 to 7.0% in December. Mr Biden could deflect Republican attacks by implying that inflationary pressures are a reflection of the growing money supply spurred on by asset purchases made by the central bank since March 2020. That would leave a few in Washington scratching their heads since the man who led the $120 billion a month purchase of Treasury and agency mortgage-backed securities, Jerome Powell, was nominated by Mr Biden for a second four-year term. In addition, Democratic leadership in the U.S. House and U.S. Senate have been singing Mr Powell’s praises for his interventionist policies.

Granted, the increase in M1 money supply has gone from $18,669.2 billion in March 2021 to $19,874.8 billion in November 2021 (latest figure available) making Mr Powell’s actions an easy target for the “too much money chasing too few goods” argument, but Mr Biden and in particular the progressives in the Congress will need Mr Powell’s cooperation to fund their Build Back Better agenda. The Fed is the Treasury’s underwriter and Progressives can ill afford politics that upset its banker.

The irony is that Mr Biden has showed no penchant to artfully deflect criticism from Republicans to the Fed for his handling of inflation. However, for the trader that is neither here or there. The question should be whether proposed fiscal policy will have an impact on the direction of foreign exchange rates and if so, in what direction.

Alton Drew

20.01.2022

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The impact of Build Back Better on the interbank market will be reduced by increasing likelihood Democrats failing to come together on its passage… And Jerome Powell may benefit

According to the Tax Foundation, a public policy think tank, President Biden’s proposed “Build Back Better” plan will generate government revenues of $2.1 trillion over the next ten years.  After accounting for approximately $1 trillion in tax credits for individuals and businesses, the Tax Foundation estimates the US government will net just over $1 trillion in revenues over the ten-year period.  This amount can be whittled down further by accounting for tax revenues recovered from increased compliance activity bringing the estimated bottom-line amount generated to $862 billion.

The economic price for the proposal, according to the Tax Foundation, would be a decrease in long-run gross domestic product by .98%; a reduction in capital stock of 1.84%; a wage rate reduction of .68%; and net loss of 303,000 jobs.

Meanwhile, the Committee for a Responsible Federal Budget, a public policy think tank, estimates that after accounting for offsets and expiration of a number of programs, Mr Biden’s “Build Back Better” plan will require financing of another $2.9 trillion of debt.  The Committee estimates that interest on new debt may be $1.1 trillion by 2031.

Today, the yield on the ten-year Treasury note closed at 1.48%, according to data by Bloomberg, after getting as high as 1.50%.  It is unclear whether the increase in rates accounts for passage tax increases and social welfare spending contained in the “Build Back Better” plan.

The future economic impact from this plan appears to be flat over the next ten years.  A .98 percent reduction in economic growth over ten years is negligible.  So is a loss of 303,000 jobs.  In addition, Speaker Nancy Pelosi is signaling to the progressive wing of the Democratic Party that they may have to settle for a plan that falls short of $3.5 trillion.  If the bill fails in the House, not only is impact a moot concern, but the Democrats and Mr Biden will see a further drop in their political capital where their constituents see them as incapable of delivering on big ideas.

If the package fails, I can see some upside for Jerome Powell, current chairman of the Board of Governors of the Federal Reserve.  Mr Powell’s tenure as chair ends in February 2022.  A failed Biden economic passage brought on by a fractured party may mean that Mr Biden will have to take any opportunity to infuse confidence in the American economy.  So far, the Federal Reserve has been that one constant.  Mr Biden may have no choice, especially going into the mid-term election campaign season, but to re-appoint Mr Powell to another term as head of the Fed.

Alton Drew

27 September 2021  

Interbank market, central banks, foreign exchange: Will Joe Biden, GOP meeting signal increased public capital spending?

The strategy takeaway …

Joe Biden positions himself as mediator as GOP presents a non-stimulative pandemic plan.

President Joe Biden is scheduled to meet with today at 5 pm EST with 10 centrist and conservative Republican senators to discuss a $619 billion pandemic relief program. Specifically, the GOP offering proposes the following:

$160 billion in direct pandemic response;

$132 billion in additional unemployment insurance;

$20 billion to fund childcare and a development block grant;

$20 billion to fund a “get back to school” initiative;

$50 billion to small businesses including another itineration of the Paycheck Protection Program;

$220 billion in direct payments to households;

$12 billion for nutritional support programs; and

$4 billion for behavioral support services.

The total GOP package is roughly one-third of the $1.9 trillion proposals favored by most Democrats. Mr Biden has been reportedly receiving pushback from the more progressive wing of his party regarding his willingness to sit down and listen to the GOP proposals. Progressive Democrats prefer that the Senate GOP negotiate directly with Senate Democrats versus conducting an end-around with the President.

The dollar likely climbs with growth in gross domestic product and positive growth in its commodities and equities markets. Infrastructure spends would also attract capital to the United States thus driving up demand for the dollar resulting in its appreciation. The GOP’s proposal does not, in my opinion, stimulate growth that can be expressed in currencies. The “stimulus” is more of a pandemic band-aid designed to keep the United States together until an economy that is more familiar comes along.

At best, traders should view the GOP’s strategy for stimulus as non-dynamic due to a lack of emphasis on non-capital driven items. Mr Biden’s American Rescue Plan does not appear to do more than be a bigger band-aid for households versus actual stimulation of economic growth.

Mr Biden’s American Rescue Plan touts a total of $1.9 trillion in funding. The Plan also focuses on extended unemployment insurance, direct pandemic payments to households, higher minimum wage, increased food aid, and expanded child tax credit, and continued foreclosure and eviction moratoriums. No emphasis on infrastructure or the other classic big ticket, shovel ready items that attracts capital expenditures.

Short of a significant lift on restrictions that limit travel and gatherings that would lead to reigniting economic activity, I don’t see much in either the GOP or Mr Biden’s plans that will bring back better.

The interbank market news scan …

President Joe Biden and Democratic congressional leaders must decide whether to break the administration’s $1.9 trillion Covid-19 relief proposal into pieces after a scaled-down Republican plan emerged. Republican Stimulus Offer Challenges Biden to Split Aid Bill (msn.com)

The group of 10 Republican senators seeking to negotiate with President Biden on a new round of COVID-19 relief unveiled details of their proposal on Monday, hours before the lawmakers are set to meet with the president at the White House. GOP senators detail $618 billion COVID relief counteroffer (msn.com)

GOP proposed sixth Covid-19 relief package. Proposed Sixth Covid Relief Package.pdf (senate.gov)

As President Joe Biden prepares to meet with Republican senators on Monday to discuss his proposed $1.9 trillion COVID-19 relief bill, progressives have urged the commander-in-chief to move ahead with his stimulus plan regardless of whether the GOP supports it. Progressives Dismiss Joe Biden’s Bipartisan Effort on COVID Relief, Demand Action Now (msn.com)

Ghana’s central bank on Monday kept its main interest rate unchanged at 14.5%, Governor Ernest Addison said in a statement. Ghana central bank holds key rate at 14.5% | Nasdaq

The Australian and New Zealand dollars were little changed on Monday ahead of a central bank meeting as cautious currency traders watched on while a wave of runaway retail investors unsettled equity markets. Australian dollar trades fractionally higher head of central bank meeting | Reuters

Cryptocurrency XRP tumbled into the red on Monday, after rising more than 50% in early trading, as a “pump and hold” scheme organized by day traders ran into trouble.https://www.consumersadvocate.org/widgets/text_list?pcuid=cf4d004eb5b1

Yet “meme” currency Dogecoin held on gains of around 34% as amateur investors zeroed in on new assets in the wake of the GameStop saga and Elon Musk boosted interest in cryptocurrencies. XRP falls sharply after soaring 50% but Dogecoin is holding on, with day traders looking for new targets and Elon Musk fanning interest (msn.com)

The head of Hong Kong Monetary Authority has rejected lawmakers’ call to dip into the HK$4.5 trillion (US$581 billion) Exchange Fund to finance the government’s rescue packages for companies and individuals hard hit by the Covid-19 pandemic, saying such a move would hurt the fund’s ability to defend the local currency. Hong Kong wants to keep its US$581 billion war chest for defending the currency instead of the economy, monetary chief says | South China Morning Post (scmp.com)

A quick thought: Quieted by a 50-50 Senate split …

“A 50-50 split in the Senate with a reduced Democratic majority in the House not only puts the GOP back into their familiar position as “obstructionist”, but gives Biden-Harris some cover to not present as progressive an agenda as the Far Left would like to see. Centrist and center-right senators like Angus King, Susan Collins, Rand Paul, and Joe Manchin will take more of the spotlight.

Mitch McConnell will still play the “parliamentarian” role, using Senate rules to delay floor debates, filibuster, or, if he is lucky, table certain items.

The last thing Kamala Harris will want, as president of the Senate, is the optics of having to do a yay or nay on any progressive legislation. She’d rather Collins, Paul, and Company head off any controversial bills before they hit the floor for a vote. She can’t afford to enter the 2024 presidential race inaccurately labeled a progressive.

Commodity, currency, and energy traders may get over their initial nervousness about the volatility a liberal Congress may introduce when they realize that the “adults” are finally in charge …