Federal Open Market Committee announces its tentative meeting schedule for 2023

The Federal Open Market Committee on Friday announced its tentative meeting schedule for 2023:

January 31-February 1 (Tuesday-Wednesday)

March 21-22 (Tuesday-Wednesday)

May 2-3 (Tuesday-Wednesday)

June 13-14 (Tuesday-Wednesday)

July 25-26 (Tuesday-Wednesday)

September 19-20 (Tuesday-Wednesday)

October 31-November 1 (Tuesday-Wednesday)

December 12-13 (Tuesday-Wednesday)

January 30-31, 2024 (Tuesday-Wednesday)

For media inquiries, e-mail media@frb.gov or call 202-452-2955.

Maxine Waters’ HR 2543 gives me the impression that Congress does not understand banking …

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (“Board” or “FRS”), today finished up his semi-annual tour of Capitol Hill when he presented to the U.S. House Committee on Financial Services the status of the Board’s monetary policy as it impacts the US economy.

I have watched hundreds of Congressional hearings over the past twelve years and quite frankly I never expect very much substance.  I would advise that if you can’t read Mr Powell’s entire report, then his written testimony should suffice.

The chairman of the committee, Maxine Waters, Democrat of California, announced early in the hearing that a bill she sponsored, the Federal Reserve Racial and Economic Equity Act (HR2543), had passed the House and is now sitting in the Senate.  The intent of the bill is to add additional demographic reporting requirements; to modify the goals of the Federal Reserve System, and for other purposes.”

Specifically, HR2543 would require the FRS to:

  1. Eliminate disparities across racial and ethnic groups regarding employment, income, wealth, access to credit;
  2. Conduct monetary policy and bank regulation in order to eliminate the aforementioned disparities;
  3. Conduct payment system operations in order to eliminate racial and ethnic disparities;
  4. Continue carrying out the Community Reinvestment Act of 1977; and
  5. Conduct comparisons across different demographic groups including race, ethnicity, gender, and educational attainment.

I have come to accept Congress’ authority to create a central bank system pursuant to Congress’ responsibility under the U.S. Constitution to regulate the value of money.  I can understand a constitutional argument that Congress used an implied or ancillary power to create the FRS.  Using the central bank as a social agency for diversity, equity, and inclusion I can’t fully embrace.

The Constitution does not provide for a central bank much less for a central bank that has as part of its mandate the mitigation of harm in the banking system to ethnic minorities. The boat has long left the harbor for any mitigation of banking harms to blacks.

Blacks were not a part of America’s capital and natural resources allocation plan dating back to the 1600s.  The exponential increase in capital holdings by whites are an expected result of human behavior and lineage maintenance.  Due to slavery and the Jim Crow era, Blacks were doomed to remain behind in the capital holdings race.  In order to participate in true banking activity, the entire population of blacks in America for its first 300 years would have to have owned land, waterways, access to minerals, and access to fair labor markets in order to trade for credit.

What Mrs Waters has proposed in her bill is about the best that the black political class can do in Washington.  Even if the measure passes in the Senate, the necessary reallocation of capital to blacks would not occur. 

HR 2543 serves no other purpose but to rile up Senate Republicans and make them the scape goat for failed policy.      

Alton Drew

23 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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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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Fed chair Jerome Powell addresses the US Senate on monetary policy …

“Chairman Brown, Ranking Member Toomey, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report.

I will begin with one overarching message. At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total PCE (personal consumption expenditures) prices rose 6.3 percent; excluding the volatile food and energy categories, core PCE prices rose 4.9 percent. The available data for May suggest the core measure likely held at that pace or eased slightly last month. Aggregate demand is strong, supply constraints have been larger and longer lasting than anticipated, and price pressures have spread to a broad range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation. And COVID-19-related lockdowns in China are likely to exacerbate ongoing supply chain disruptions. Over the past year, inflation also increased rapidly in many foreign economies, as discussed in a box in the June Monetary Policy Report.

Overall economic activity edged down in the first quarter, as unusually sharp swings in inventories and net exports more than offset continued strong underlying demand. Recent indicators suggest that real gross domestic product growth has picked up this quarter, with consumption spending remaining strong. In contrast, growth in business fixed investment appears to be slowing, and activity in the housing sector looks to be softening, in part reflecting higher mortgage rates. The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply.

The labor market has remained extremely tight, with the unemployment rate near a 50‑year low, job vacancies at historical highs, and wage growth elevated. Over the past three months, employment rose by an average of 408,000 jobs per month, down from the average pace seen earlier in the year but still robust. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. A box in the June Monetary Policy Report discusses developments in employment and earnings across all major demographic groups. Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January.

Monetary Policy
The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective.

Against the backdrop of the rapidly evolving economic environment, our policy has been adapting, and it will continue to do so. With inflation well above our longer-run goal of 2 percent and an extremely tight labor market, we raised the target range for the federal funds rate at each of our past three meetings, resulting in a 1-1/2 percentage point increase in the target range so far this year. The Committee reiterated that it anticipates that ongoing increases in the target range will be appropriate. In May, we announced plans for reducing the size of our balance sheet and, shortly thereafter, began the process of significantly reducing our securities holdings. Financial conditions have been tightening since last fall and have now tightened significantly, reflecting both policy actions that we have already taken and anticipated actions.

Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.

Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum-employment and price-stability goals.

Thank you. I am happy to take your questions.” — Jerome Powell

Georgia’s congressional Democratic representatives tout the political not economic narrative on inflation.

Congress has been passing the buck on the value of money since it created the Federal Reserve System in 1913.  Article I, Section 8 of the U.S. Constitution not only provides the Congress the authority to borrow money on the credit of the United States, but to coin money and regulate both its domestic and foreign value.  Today, the two agencies to whom primary responsibility for regulating the value of money has been passed down to are the U.S. Treasury and the Board of Governors of the Federal Reserve.  President Joe Biden appeared to emphasize the “buck passing” by meeting recently with Jerome Powell, chairman of the Board of Governors.  Reportedly, Mr Biden reiterated the Federal Reserve’s political independence and that the White House would not only do its part in combating inflation, but “get the Fed to do whatever it takes.”

Between U.S. Treasury Secretary Janet Yellen taking the hit for making the wrong call last year on the transitory nature of inflation, thinking that inflation would abate a lot sooner, and what some analysts deem as poor decision making on the part of Chairman Powell for not raising rates faster, Americans are seeing the political nature of the inflation narrative. 

Mr Biden is distancing himself from the inflation narrative, a politically prudent move, since Congress long abdicated its role on the matter.  But it is a move that is both too late and tentative.  Forget that Mr Biden selected as Treasury secretary a former chairman of the Board of Governors and that Mr Biden nominated Chairman Powell to another four-year term.  Mr Biden decided to keep the inflation arrows in his quiver probably unaware of the restraints his Executive Branch is under in terms of policymaking.

By coming out swinging on the one hand that he will be laser focused on inflation, but on the other hand is ready to throw his Treasury secretary under the bus for a bad inflation call while telling the world that inflation management is really all on the Fed makes Mr Biden look weak. 

Closer to home, the Georgia representatives to Congress seemingly prefer tout Mr Biden’s increasingly waning line on supply chain constraints.  For example, U.S. Representative Nikema Williams, a Democrat representing Georgia’s 5th district, and U.S. Representative David Scott, another Democrat representing Georgia’s 13th district, have emphasized Mr Biden’s infrastructure and Build Back Better plan as a way to expand economic capacity, relieve congestion, increase jobs, and stimulate the economy.

Sitting on the other side of the inflation argument is U.S. Representative Barry Loudermilk, Republican of Georgia’s 11th district.  Inflation, according to Mr Loudermilk, is a monetary phenomenon.  One need only look at increasing asset prices, according to Mr Loudermilk, to see that inflation is a monetary issue.

Sitting somewhat in the middle is U.S. Senator Jon Ossoff. While he agrees with the President that unraveling the supply chain is one way to combat inflation, he took issue with the Federal Reserve’s pursuit of massive quantitative easing when it was clear that inflation was not transitory.

The narrative has been disingenuous on the part of Mr Biden and on the part of Georgia Democrats.  Their lane is a political lane and over 100 years ago, Congress decided that the money vehicle would not be driven in the political lane. Saying that they can do something about inflation while acknowledging the money supply is the responsibility of the Federal Reserve only confuses voters.      

Alton Drew

6 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.

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.

Waller signals a “regulatory perimeter” for crypto-asset regulation

Yesterday, Christopher J Waller, a member of the Board of Governors of the Federal Reserve System, delivered remarks concerning regulation of the crypto-asset space.  Governor Waller described a “regulatory perimeter” within which traditional finance operates.  The “normal backstops and safety nets” that we see applied on traditional finance are not, at this moment, being applied to the market for crypto-assets.

Governor Waller shared data on the usage practices of crypto-asset holders.  Anywhere from 12% to as high as 20% of American adults held crypto-assets during the past year.  Approximately 90% of these adults held crypto-assets for investment purposes versus for use as a payments system.

Crypto-asset trade creates the opportunity for counter-party disputes and Governor Waller discussed briefly that in the aftermath of a market loss, disputes between intermediaries and traders over poor due diligence, poor financial advice, or poor management skills could arise. 

The irony Governor Waller points out is that it is usually the intermediary i.e., a bank, that seeks out protection.  This demand for protection on the part of the larger players in a financial market did not surprise me.  Think agency co-option for the sake of putting the negative externalities of a loss on society at large.  While Governor Waller did not cite the 2007-2008 Great Financial Crisis and the bank bailouts that ensued, I gathered from his remarks that the rest of American society wants regulations that both protect taxpayers from the socialization of losses while promoting confidence in the investment ecosystem’s safety.

I don’t see crypto-asset regulation as an issue that causes political realignment.  President Biden’s executive order on crypto-assets, notwithstanding, Governor Waller’s remarks at a minimum seemed designed to stay on topic at the SNB-CIF Conference on Cryptoassets and Financial Innovation, while tangential with the “let’s have a discussion” tone of Mr Biden’s executive order.

When we hear public discussions about expanding regulations, more than likely there is a very rough written draft laying around somewhere.  Anything at this point is speculation as to content, but traders should start their own discussions and analysis now.  Nothing wrong with exploring the legislative, political, and legal scenarios.    

Alton Drew

4 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 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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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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While Powell’s hawkishness is the move in the right direction, it doesn’t negate the need to get rid of the Federal Reserve

On 21 March 2022, Jerome Powell, chairman pro tempore of the Board of Governors of the Federal Reserve, made comments about labor markets, inflation, and reduction in the balance sheet of the Federal Reserve System. Mr Powell acknowledged that the labor market is tight and that nominal wages are rising, particularly at the lower end of the wage distribution.  Given what he noted as the severe imbalance of supply and demand in the labor market, Mr Powell wants to use the Federal Reserve System’s monetary policy tools to moderate the growth in demand for labor.

Analysts and investors have been raising concerns about the Federal Reserve’s balance sheet.  Mr Powell noted in his comments that reducing the Federal Reserve System’s balance sheet could bring inflation to near two percent over the next three years.

The economy, according to Mr Powell, is in a position to handle tighter monetary policy and he stated his willingness to see the interbank overnight (fed funds) rate increase by more than 25 basis points at the next Federal Open Market Committee meeting.

I appreciate the hawkishness for one reason.  It pushes back on the desire by political factions to weaponize the fed funds rate.  The effective fed funds rate, a volume-weighted median of transactions level data collected from banks, has increased over four times from its long-term rate of .08% to a current 0.33%.  The fed funds rate is the overnight rate that banks charge each other for lending and borrowing excess reserves.  The rate sits near the middle of the .25% to .50% range recommended by the FOMC.

On its face, the recent effective funds rate may incentivize banks to seek returns from the interbank market versus purchasing Treasurys.  For example, the yield per day on a one-year Treasury bill is .00442% versus an overnight fed funds rate of 0.33%.  Putting those excess reserves into the bond market would call for much higher yields which in turn would call for a fall in asset prices and clamping down on the rise in prices.

The Federal Reserve System has at its disposal a number of monetary policy tools to nudge banks to the overnight trading range including open market operations; the discount window and discount rate; reserve requirements; interest on reserves; reverse repurchase agreements; and liquidity swaps, to name a few.

Even with its tools and noble statutory mandate of pursuing stable prices and full employment, the Federal Reserve System still represents Congress’ abdication of its responsibility for coining money and regulating its value. Yes, Congress can authorize the mechanisms it deems necessary for meeting this statutory duty, but where the taxpayer/consumer/electorate is seeing an erosion of her spending and saving power, might it be time for Congress to reassert its statutory duty versus allowing the Federal Reserve System to act as a coordinator of bank cartel activity?

Alton Drew

23.03.2022

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The Federal Reserve System’s message to American society: Start investing in more productive economic activity

The implicit agreement between the United States government and American society is that the United States government will maintain a financial and resource management infrastructure that facilitates a taxpayer’s ability to find opportunities to create income.  As the underwriter for the United States government, the Board of Governors of the Federal Reserve System has a mandate to pursue stable prices for goods, services, and assets and full employment of labor.  The Board of Governors via its Federal Open Market Committee (FOMC) employs a number of monetary policy tools to achieve this mandate with a federal funds target rate serving as indicia for how well its tools are working.

Yesterday, the Board of Governors raised this target rate to a range of .25% to .50%; in other words, an overnight rate that the Board of Governors would like to see its member commercial depository institutions lend to reach other the excess reserves they hold at their district federal reserve banks. The problem here is that at this printing, the Board of Governors has reduced to zero the amount of reserves a depository institution is required to keep at its respective federal reserve district bank.  Traders would have to look at other indicia to determine how well Board of Governors policy is doing in pursuing the federal funds target rate.

For example, traders should be looking at changes in the discount window rates that the federal reserve district banks are charging to lend money to their commercial member banks.  Traders should also look at changes in central bank liquidity swaps or changes in rates for federal reserve district bank lending facilities such as the term deposit facility or overnight reverse repurchase agreement facilities.  These are some of the monetary policy tools that the Board of Governors and its 12 federal reserve banks use to move rates toward their federal funds target and thus control the money supply.

As rates increase, American society will be put on notice.  I expect an increase in market discipline as banks and other investors seek out opportunities to increase returns on capital.  Lots of capital has gone into non-productive endeavors such as the tools and platforms riding the internet.  Amazon may have made purchasing goods and services more efficient, but can we say that Twitter and Instagram have raised American productivity and provided any societal solutions that lead to greater employment?  As the Board of Governors tackles inflation with its monetary tools, interest rates will start ticking up and entrepreneurial gimmicks that provide nothing in terms of increased yield, employment, or solutions will be and should be shunned or abandoned. 

Alton Drew

17.03.2022  

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