Wrongly Badmouthing The Federal Reserve

While anyone who has read this blog before will quickly realize, I'm no fan of the Federal Reserve.  More specifically, I'm no fan of the unfettered powers granted to the world's central bankers, a group of men who, not unlike most of us, put their pants on one leg at a time but you'd never know it from the way that they have been granted powers that control the world's economy.

That said, I'm also no fan of falsely based criticism of said organizations.  A little-covered aspect of Mitt Romney's recent commentary to his $50,000 a plate comrades went like this:

“Yeah, it's interesting... the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it." It's just made up money, and this does not augur well for our economic future.” (my bold)

This caught my attention largely because I had just posted on this very issue a few short days ago and largely, because the part about the Fed buying three-quarters of the debt that America issues is dead wrong.  I must say, however, that I do agree with his “made up money” comment as well as his suggestion that eventually the world will stop buying Treasuries.

Here is a graph from FRED showing the Federal Reserve's holdings of all U.S. Treasury securities:

First, notice that the Fed has owned Treasuries for many years, it is not a new thing.  Just prior to the Great Recession, the Fed's holdings of Treasuries actually peaked at $790.8 billion in August 2007 when it began to liquidate its holdings as the economy looked increasingly shaky.  The Fed's first foray into QE really began at the beginning of April 2009.  The Fed's holdings of Treasuries had been steady in the months before that, dropping to a range of $475 to $480 billion once the Great Recession took hold.  By the end of their first round of purchases in November 2009, the Fed held $776 billion worth of Treasuries.  Their holdings remained at this level until August 2010 when their second round of Treasury purchases (QE2) kicked in.  Their holdings reached $1.65 trillion by the end of August 2011 and have remained in a range of $1.63 to $1.68 trillion for the past 12 months.  Looking back to the previous peak in 2007, you'll see that the Fed's holdings of Treasury securities has really only increased by $859 billion in the five year period.  As well, since Treasury purchases began in April 2009, the Fed has added roughly $1.173 trillion worth of Treasuries to its balance sheet.

Here is a chart by SIFMA showing the outstanding Treasury debt by type:

In total, there are $10,749.9 trillion worth of Treasury securities outstanding.

We can also use this data from the Treasury which shows very nearly the same number under Marketable Debt:

Let's now go back to the Treasury data from April 2009 when the Fed implemented QE1 and see what the outstanding balance of Marketable Debt:

At that time, there was $6.363 trillion in marketable Treasury securities outstanding.

Taking the current level of $10,749.9 trillion and subtracting the level of $6.363 trillion in April 2009 when QE first began, we come up with $4.387 trillion in new debt.  Please note that these figures do not including the re-issuing of older, maturing debt.  As I noted above, since QE began, the Fed has purchased $1.173 trillion worth of Treasuries or 26.7 percent of the total new debt.  That's not even close to Mr. Romney's "...three-quarters of the debt that America issues...".  It's even worse if you look at the Fed's holdings from the perspective prior to the Great Recession when the Fed held $790.8 billion worth of Treasuries, his logic is even more off kilter; from that data point, the Fed has purchased only $859 billion of the total $4.387 trillion of new debt or 19.6 percent of the total.  If you look even further along in time, the Fed has not purchased a significant volume of Treasuries over the past 12 months so there is absolutely no way that they are currently buying 75 percent of new debt.

Yes, it is quite likely that during certain short periods of time within each easing period, we would find that the Fed was purchasing the majority of new debt issued but that most certainly is not the case over the entire period and it is not the case now.

What's more than a bit scary is when an avowed capitalist and wannabe President uses faulty "facts" to badmouth the already unloved Federal Reserve, we should all be concerned about his ability to do the right thing for the right reasons when he gains political control.

The moral of the story?  Never let facts get in the way of a good, political campaign.  While I'm first in line (or nearly first) when it comes to criticizing the Fed, at least I try to be factual about it.

Zeroing In On Romney's Tax Deadbeats

Now that we all know that nearly half of Americans pay no taxes to Washington, where do all of these deadbeat, "duty shirking", Obama voters live?

Fortunately, researchers at the Tax Foundation have done the heavy lifting for us.

Here is a screen capture showing the top fifteen states with the greatest number of "no income tax liability" returns for the 2010 tax year noting that I am not adding up the total number, rather, I am using the percentage data:

Notice that most of the non-taxpayers are concentrated in the southern half of the United States?  Other than Idaho, the top ten states include Mississippi where a whopping 44.5 percent of filers owed no federal tax, Georgia (42.5 percent), Alabama (40.3 percent), Florida, Arkansas, South Carolina, New Mexico, Texas and Utah.

The states with the highest percentage of filers with federal taxes owing are Alaska where only 22 percent of filers owed no taxes, North Dakota (26.3 percent), New Hampshire (26.3 percent), Massachusetts (26.3 percent), Connecticut (26.6 percent) and Maryland (28.2 percent).  There's quite a strong leaning toward owing federal taxes if you live in a New England state, isn't there?

Here's a map showing the red and blue states from the 2008 Presidential election results:

Outside of Florida, North Carolina, Tennessee, California and New Mexico, it would appear that the of the top fifteen states where the highest number of Americans that don't owe federal taxes are living and voting in the Republican or red states.  Interestingly enough, of the top ten tax paying states, the majority are Democratic or blue states.  Please note again, that I have not added up the numbers, just using the raw state percentage data. 

One has to wonder.  What was Mr. Romney thinking?  Is this really how he feels or was he just playing to his audience?  It is possible that, in the excitement of the moment, he wandered off his talking points, thinking that he was just talking to a room full of like-minded uber-wealthy Americans who had $50,000 to spend on a fundraising dinner?  My suspicion is the latter.

Mitt Was Right....and Oh So Wrong

According an analysis by the Tax Policy Center at the Brookings Institute for the 2011 tax year, Mr. Romney was right.  Nearly 47 percent of American households don't pay taxes as shown here:

But, the 46.4 percent of American households that don't pay taxes can be divided into two parts; the 28.3 percent who pay payroll taxes and the 18.1 percent who pay neither income taxes nor payroll taxes as shown here:

Of the 18.1 percent of American households that don't pay either income or payroll taxes, 10.3 percent are elderly, 6.9 percent are non-elderly with household incomes under $20,000 and 0.1 percent are "Other" as shown here:

It has been government policy for decades to reduce the taxes on poorer Americans.  Here is a quote from President Ronald Reagan, a kinder and gentler Republican, on signing the Tax Reform Act of 1986:

"For all these reasons, this tax bill is less a freedom—or a reform, I should say, than a revolution. Millions of working poor will be dropped from the tax rolls altogether, and families will get a long-overdue break with lower rates and an almost doubled personal exemption. We're going to make it economical to raise children again. Flatter rates will mean more reward for that extra effort, and vanishing loopholes and a minimum tax will mean that everybody and every corporation pay their fair share. And that's why I'm certain that the bill I'm signing today is not only an historic overhaul of our tax code and a sweeping victory for fairness, it's also the best antipoverty bill, the best profamily measure, and the best job-creation program ever to come out of the Congress of the United States." (my bold)

Take that, Mr. Romney.  Perhaps the silver spoon that you were born with was being born in America but, then again, most of us don't have fathers that were Chief Executive Officers and Governors.  Maybe, just maybe, that's why you don't get the sweaty half of the population.

Romney's Tax Plan - Making the Wealthy Wealthier

The Tax Policy Centre of the Brookings Institute recently released a paper entitled "On the Distributional Effects of Base-Broadening Income Tax Reform", an examination of the tradeoffs among the goals that are part of revenue-neutral income tax reform.  The objectives of the reforms are to maintain tax revenues, ensure a progressive tax system and lower marginal tax rates, in other words, Republican Presidential candidate Mitt Romney's plan for overhauling the tax system.  Here is a summary of the research done by the authors, Samuel Brown, William Gale and Adam Looney.

Mitt Romney's tax proposals include lowering marginal tax rates substantially, eliminating the alternative minimum tax (AMT) and maintaining all tax breaks for both investments and savings.  More specifically, Mr. Romney proposes the following:

1.) An extension of the Bush-era tax cuts.

2.) A reduction of individual income tax rates by 20 percent.

3.) Elimination of taxation on investment income of most taxpayers including individuals earning less than $100,000 and couples earning less than $200,000

4.) Elimination of estate taxes.

5.) Reduction of the corporate tax rate.

6.) Repealing the alternative minimum tax and high-income taxes enacted in the health-reform legislation of 2010.

7.) Maintaining the provisions in the tax code that promote savings and investment.  These include preferential rates on capital gains and dividends, exemption of income accrued in qualified retirement and other similar accounts, exemption of interest on state and local bonds and the exclusion of capital gains on home sales.

The authors suggest that these changes would reduce federal tax revenues by $456 billion in 2015, although the Republicans claim that by broadening the tax base and collapsing the income tax rates into two brackets (10 and 25 percent, a 20 percent drop in the top marginal rate), revenue will remain neutral.

I bet that you can't guess who would benefit the most from Mr. Romney's plan?

The authors' calculations show that taxpayers with incomes over $1 million would see their after-tax income increased by 8.3 percent with an average tax cut of about $175,000.  Taxpayers with incomes between $75,000 and $100,000 would see their incomes increase by a paltry 2.4 percent with an average tax cut of only $1,800.  Taxpayers earning less than $30,000 annually, would actually see their incomes decrease by 0.9 percent or $130 as a result of the expiration of temporary tax cuts.

Here is a graph showing the effects of the tax cuts on various income groups without an accompanying broadening of the tax base:

If the Romney tax plan is enacted with an accompanying broadening of the tax base, here is the impact on the income level of various income groups:

In order to maintain tax neutrality, the authors calculate that a shift in the tax burden from high-income taxpayers to lower- and middle-income taxpayers totals at least $86 billion.

This analysis seems to once again prove that, despite what Americans are being led to believe, the elite among us certainly know how to look after themselves.  Unfortunately, the authors of this research show that Main Street America is paying the price.

Now They're After Granny's Birthday Money

We all know that the Obama and Romney campaigns have raised a massive amount of money so far during this election cycle.  According to the Federal Election Commission website, here's a look at how much money PACs have raised this cycle by organization and type:

Here's how much both the national Republicans and the Democrats have raised, spent and have on hand for this election cycle:

The Democrats have raised just under $356 million and spent $278 million.  The Republicans have raised nearly $321 million and spent $206 million.

As if hundreds of millions of dollars wasn't enough, the creative political minds in Washington, D.C. have come up with another scheme to help themselves to the contents of your wallet and/or purse.

Let's look at the incumbent first.  The Obama campaign is after the cash that you might haul in on those special life occasions like birthdays.  Here is a screen grab from the barakobama.com website:

If you are getting married, having a birthday, anniversary, wedding, bar or bat mitzvah or any other special occasion, you can register with Obama 2012 and ask for a donation rather than getting a gift. What a bonus!

Here's a quote:

"Instead of another gift card you’ll forget to use, ask your friends and family for something that will go a little further: a donation to Obama for America. Register your next celebration—whether it’s a birthday, bar or bat mitzvah, wedding, or anniversary—with the Obama campaign. It’s a great way to show your support for a cause that’s important to you on your big day."

In the interest of balance, here's a screen capture from the Romney campaign official website:

I hope that you noticed two things:

1.) The use of the word "ride" as in "upgrade your ride".  I'm certain that particular use of the word "ride" has never passed through Mr. Romney's lips.  In his case, I'm certain that the word "ride" is most closely affiliated with the words "chauffeur" or "limousine".  That said, it is always nice to see that a guy has a real grasp of society's colloquial use of the English language.  

2.) Notice that shipping on all items is free for a limited time only.  Better get it now while you don't have to pay for shipping!  After all, $321 million just doesn't go as far as it used to.

Yup, that's what both sides of the political equation are stooping to now.  Taking Granny's birthday money and charging you for shipping their bumper stickers.  On the other hand, I guess they suspect that we'd just waste our money on something that would be far less satisfying over the long term.