Charlie Kirk, RIP

Charlie Kirk’s assassination was another tragedy. I disagreed with many of the things Kirk said, but respected and admired his patient willingness to dialog with disagreeing members of his audience.  It was a behavior the country would greatly benefit from more of.  But liking or not liking Charlie Kirk should be totally irrelevant to strongly condemning his assassination.

A The Hill headline stated “A top State Department official on Thursday warned “foreigners” in the U.S. against praising the death of Charlie Kirk, the conservative influencer who was shot and killed at an event in Utah on Wednesday.”  “foreigners-warned-Charlie Kirk” I would like to unpack that statement a bit. No one should praise his death. If we are sharing with foreign visitors the behavior we would expect from them and that they should display if they want to get on well, that would be fine. But coming from our current State Department I suspect that the warning is a threat of deportation for anyone who would dare to be so rude, which would violate the fundamental free speech principles that have always been so important to our culture.

President Trump stated that the assassin was from the “radical left.”  As the assassin has not yet been apprehended, we don’t even need to wonder what information the President has that has not yet been shared with us. I very much want to know who the assassin was and what his motivation was. But that information will in no way absolve him of the evilness of his crime (we do know that it was a man/boy from FBI photographs). The President’s baseless claim is not contributing to a better atmosphere in America. It certainly did not reflect Charlie Kirk’s commitment to civil dialog.

Stable Coins

Digitizing our bank deposits (digital dollars—stable coins) would (will) represent another step forward in the ease and efficiency with which we can make payments and will enhance bank stability. Most of the US supply of money (US dollars) is in the form of our dollar deposits at our banks and most of our payments these days are already made by electronically transferring bank deposits from me to you via my bank to yours. I have discussed all of this in more detail earlier: “Econ 101-Money”

Developing the rails for paying with stable coins is a further improvement on our existing payment options. It is not revolutionary. The payment of cash (currency) requires no infrastructure (e.g. Merchant contract with credit card issuer and card reader, etc.). You just hand it over and anyone can accept it (hopefully the person you intended to receive it). The electronic transfer of a bank deposit balance (e.g., Zelle, Venmo, e-wire) requires the enrollment of the recipient in that particular payment vehicle.  It took decades for credit cards to be widely accepted. Hundreds of companies now issue Visa cards (mine is issued by United Airlines) and all are accepted wherever any of them are accepted. But it took a lot of work to build that system.

What do stable coins issued by banks add that might be useful? From the bank side issuing stable coins from deposit balances simplifies the bank’s management of the assets that back them. When its customers withdraw cash these days, the bank must purchase it from the Federal Reserve in order to pass it on to you. It pays the Fed for the cash from its reserve deposits at the Fed, which reduces its ability to extend credit to businesses and households. If its reserves at the Fed are not sufficient, it will need to borrow from another bank or sell another asset.

The withdrawal of cash from bank deposits tends to follow seasonal patters. Thus the squeeze on its reserves at the Fed would tend to create seasonal fluctuations in bank credit hence in the money supply.  Thus the Fed attempts to offset the impact of currency fluctuations on bank reserves and thus credit with offsetting purchases and sales of government securities (so called open market operations) or with temporary loans to banks in its “lender of last resort” function. If a bank can issue its own currency (as they did in the old days) when a customer withdraws cash from its deposits, its asset backing (and reserve deposits at the Fed) will not be affected. Banks will now be able to do this by issuing their own stable coins. While the customer’s deposit balance will fall when withdrawing cash (or stable coins), its total of stable coins “cash” plus deposit balance will not change thus the bank assets backing them do not need to change. Thus, such fluctuations in the currency/deposit ratio would not product a fluctuation in the money supply.

From the customers side the stable coins are as good as traditional cash only to the extent that the infrastructure to accept them (e.g. phone wallets) has been designed and widely acquired/accepted. Just as it took many years for credit cards (Visa, Mastercard and American Express) to be widely adopted, the same will be true with stable coins. Just as you might now swap addresses via your respective mobile phones, you will be able to make payments.

If everyone can issue their own money it degenerates to barter, i.e. it would not be money at all. The essence of a successful means of payment is the certainty of its ultimate claim on the central bank’s official monetary liability (the dollar). When central banks were limited to issuing currency redeemable for “something” such as gold or silver, the amount they issued was limited by their holding of gold or silver, etc.  Today the Fed’s supply of money is limited by Congress’s mandate for price stability and full employment. And ultimately the government must accept such dollars in payment for our tax obligations stated in the same currency.

Immigration

what is the problem and what should be done?

The United State—a nation of immigrants—is the most prosperous nation in the world because of the freedom of its residents to innovate, work hard, and seek out what the public wants to buy (i.e. to profit). Many of the founders of our most successful companies (e.g., Google, Tesla, Panda Express, Uber, WhatsApp, eBay, Stripe, PayPal) are first generation immigrants. Immigrants are drawn to America because it offers such opportunities, thus we tend to attract the best and brightest. “Immigrants from hell”

Along with the clear benefits of immigration, it poses challenges and some costs as well. The internal migration of people within a country as new jobs or tastes result in people moving into new homes and neighborhoods produces most all the same issues as immigration of foreigners from abroad. We live in communities and have rules (even laws) for our rights and those of our neighbors. What we do effects then and vice versa.

Before moving back to Crystal/Pentagon City in Arlington Virginia, we lived in a 64 home (two acres each) community in Bethesda Maryland with a convenient reflecting very ridged rules for what we could and could not do on our property in order to preserve its natural wooded environment. This is what we were buying. But over some decades more and more families with children moved in with different tastes and desires (e.g., basketball hoops visible from the road). Many community discussions were held, and some rules were adjusted but it required a lot of community discussion.

Our immigration laws are inadequate. We need more immigrant workers and entrepreneurs and better border control, i.e., we need more legal immigration and better control of the illegal sort.  Laws to give immigrants legal status are inadequate and not consistently enforced. “illegal aliens” In 2013 a bipartisan bill to address these problems (The Border Security, Economic Opportunity, and Immigration Modernization Act of 2013) passed the Senate by 68-32 in favor but sadly failed to pass the House. Quoting from Wikipedia:

“If enacted, the bill would have made it possible for many undocumented immigrants to gain legal status and eventually citizenship. It would have increased border security by adding up to 40,000 border patrol agents. It also would have advanced talent-based immigration through a points-based immigration system. New visas were proposed in this legislation, including a visa for entrepreneurs and a W visa for lower skilled workers.[6] It also proposed new restrictions on H1B visa program to prevent its abuse and additional visas/green-cards for students with science, technology, engineering, and mathematics (STEM) degrees from U.S. institutions. The bill also included a $1.5 billion youth jobs program and repealed the Diversity Visa Lottery in favor of prospective legal immigrants who are already in the United States.”

Refugees pose a special challenge (e.g. Afghans who worked for the US or international bodies and are thus suspect to the new Taliban government) as do the “guest” seasonal workers in California’s farmland. If Congress is up for serious work they should get to it.

Miracle of the grape

A few weeks ago I posted a note on Facebook  on the grapes I had for breakfast:

https://www.facebook.com/share/p/1TVFzjuche/

I called it a miracle but failed to mention a very important aspect of the miracle, namely the development of such delicious and resilient grapes in the first place.  Grok provides the missing information

Thompson Seedless grapes, also known as Sultana, were developed through a combination of natural selection, selective breeding, and modern agricultural practices that enhanced their sweetness and resilience. Here’s a breakdown of how they became what they are today:

Origins and Natural Selection

  • Historical Background: Thompson Seedless grapes trace back to an ancient variety called the Sultana, originating in the Mediterranean or Middle East. This grape, scientifically Vitis vinifera, was naturally seedless due to a genetic mutation called stenospermocarpy, where seeds fail to develop fully, resulting in small, seedless berries.
  • Introduction to the U.S.: In 1872, William Thompson, a California nurseryman, introduced this variety to the United States from Europe. He promoted it as a superior grape for table use and raisin production, naming it “Thompson Seedless” after himself. The grape’s natural seedlessness was a key trait that made it appealing, as it improved eating quality.

Selective Breeding and Cultivation

  • Selection for Sweetness: Over generations, farmers and breeders selected vines that produced sweeter, larger, and more uniform berries. This was done through:
    • Clonal Selection: Growers propagated cuttings from vines that exhibited desirable traits, such as higher sugar content (measured in Brix). Thompson Seedless grapes typically have a Brix of 18–22, indicating high sweetness.
    • Crossbreeding: While the original Thompson Seedless was not heavily hybridized, its cultivation alongside other grape varieties in California allowed for natural adaptations and minor genetic improvements over time.
  • Resilience Through Grafting: To enhance resilience, Thompson Seedless vines were often grafted onto rootstocks resistant to pests like phylloxera (a root-destroying aphid) and nematodes, as well as tolerant to various soil conditions. This practice, common in California’s vineyards by the late 19th century, improved the vines’ durability against environmental stresses.

Modern Agricultural Practices

  • Irrigation and Climate: California’s warm, dry climate, particularly in the San Joaquin Valley, is ideal for grape cultivation. Controlled irrigation ensures the vines get just enough water to thrive without diluting sugar concentration in the berries, enhancing sweetness.
  • Pruning and Canopy Management: Growers use precise pruning techniques to limit yield, concentrating sugars in fewer clusters. Canopy management (controlling leaf cover) maximizes sunlight exposure, boosting photosynthesis and sugar accumulation.
  • Soil and Fertilization: Nutrient management, particularly potassium and nitrogen applications, supports vine health and berry quality. Well-drained soils in key growing regions reduce disease risk, contributing to resilience.
  • Gibberellic Acid Application: Since the mid-20th century, growers have used gibberellic acid, a plant hormone, to increase berry size and improve uniformity. This treatment also enhances sweetness by allowing berries to stay on the vine longer, accumulating more sugars.
  • Pest and Disease Management: Integrated pest management and fungicides protect vines from threats like powdery mildew, ensuring healthy, resilient plants that can produce high-quality fruit.

Genetic and Environmental Balance

  • Genetic Foundation: The seedless trait is a natural mutation, but sweetness and resilience are enhanced by the grape’s genetic predisposition to high sugar accumulation and the careful selection of robust vines.
  • Environmental Optimization: California’s long growing season, with warm days and cool nights, promotes sugar development while maintaining acidity, creating a balanced, sweet flavor profile.

Cultural and Economic Impact

  • Adaptation for Raisins: Thompson Seedless grapes became the backbone of California’s raisin industry because their high sugar content and thin skins make them ideal for drying. The drying process further concentrates sugars, enhancing perceived sweetness.
  • Market-Driven Selection: Consumer demand for sweet, seedless table grapes drove growers to prioritize traits like flavor and shelf life, further refining cultivation techniques.

In summary, Thompson Seedless grapes became sweet and resilient through a combination of natural genetic traits (seedlessness, sugar accumulation), selective propagation by growers like William Thompson, and advanced viticultural practices like grafting, irrigation, and hormone treatments. These efforts, paired with California’s ideal growing conditions, transformed a humble ancient variety into one of the world’s most popular grapes for table use, raisins, and wine.

Econ 101: Interest Rates –Another Go

A month ago I reviewed the role of the Federal Reserve’s policy interest rate: https://wcoats.blog/2025/07/17/the-feds-policy-interest-rate/   The subject is so important and seemingly misunderstand by many that I am reviewing it again here.

Interest rates balance the supply and demand for financial assets. Households and firms that save some of their incomes demand financial assets. Households and firms that borrow to invest in productive capital or for whatever reason supply those assets (mortgages, bonds, etc.). Rates on longer term assets reflect the expected value of the short-term rates over that period. Thus the interest rate on a ten year bond reflects the expected value of one year bills over the ten year period plus a small risk premium because the string of short term loans are an alternative to the single fixed rate ten year loan.

The policy interest rate of the Federal Reserve is set by the Fed to pursue its objective of stable money (defined by the Fed as 2% inflation) and high employment (the Fed’s dual mandate imposed by Congress).

This note reviews the Fed’s policy rate. Since 2008 the Fed’s policy rate has been the rate it pays banks for the money they keep on deposit with a Federal Reserve Bank (of which there are twelve but that is unimportant for understanding the role of the policy rate), which on Aug 6 amounted to $3,332 billion. This rate is known as the Interest on Reserve Balances (IORB).

If the IORB matches comparable market rates for equally liquid funds (the so-called neutral rate), banks will maintain their existing Fed deposits. If it is set above that level, banks will have a financial incentive to place more money with the Fed, i.e. lend less in the market, thus creating fewer deposits and reducing the money supply. If the IORB is set lower than the neutral rate, banks will draw down their Fed deposits to lend more in the market thus increasing deposits and the money supply.

The IORB is currently (Aug 6) 4.5%, where it has remained since Dec 2024. At this rate broad money (M2=bank demand, time and savings deposits) has grown between 4% and 5% (from a year earlier) over the last three months. Given that inflation remains above the Fed’s target of 2% it would not seem wise to lower the policy rate and increase the rate of monetary growth especially as higher tariffs go into effect.

To repeat from earlier blogs (because it is so important), if markets anticipate higher inflation in the future (next few years), market interest rates on longer term debt will increase to preserve their real (inflation adjusted) value. Lowering the Fed’s policy rate prematurely would increase the market’s anticipation of higher inflation rates in the future. In other word, lowering the IORB now is likely to increase interest rates on longer term debt. Leave the Fed alone to do its job as best it can.

Econ 101: Trade deficits

A trade deficit is the difference between what we buy from the rest of the world and what it buys from us. To that extent rather than buying our goods and services, the rest of the world holds our dollars. These dollars are most often held in the form of US securities (Treasury bonds, etc.). Though trade deficits help finance Uncle Sam’s spending that is not financed with tax revenue, and thus reduce the crowding out of domestic investment by government deficit spending, President Trump doesn’t like them. Our trade deficit in 2024 was $918 billion.

Trade deficits can be reduced by reducing our imports (this is what tariffs tend to do) and/or by increasing our exports. We export many things including food and oil. Tourism and foreign students studying in the US generate about 9% of our export revenue. This has dropped sharply this year as the Trump administration has blocked or discouraged foreign students and badly treated other visitors, denying entry to some. It has suspended entry of new foreign students to Harvard and is threatening to revoke existing student visas at Harvard.

Trump has not only reached into the affairs of Harvard (and those of many other “enemies”), he is also demanding that the US dollar surpluses held by our trading partners be invested as dictated by the Trump administration. This was stated explicitly by US Treasury Secretary Bessent in an interview by Larry Kudlow on Fox Business. https://www.youtube.com/watch?v=IgcmRJpE1pc  

It is hard to see much free market here. Gregg Ip nails it in his recent WSJ article “The U.S. Marches Toward State Capitalism With American Characteristics”  https://x.com/greg_ip?lang=en

U.S. – Japanese trade agreement

Free trade of goods and services produced without government subsidies or restrictions would maximize the incomes of all involved. To promote this result, the World Trade Organization has led the effort to reduce or eliminate tariff and other trade restrictions and has authorized the use of tariffs carefully targeted to nullify the distorting effect of government subsidies or other interferences in the competitive market production of goods and services.

This is not how President Trump has used or threatened in his usual bully style to use tariffs. For Trump, tariffs are not established to improve a level playing field for world trade, and not even always to protect inefficient American manufacturers such as the 50% tariff on imported Steel. An outrageous example was his threat to impose a 50% tariff on all Brazilian imports, effective August 1, 2025, if Brazil went forward with the prosecution of his ally, former President Jair Bolsonaro, who is charged with attempting to stage a coup d’état to overturn the results of the 2022 presidential election in Brazil. Incidentally, the U.S. currently has a trade surplus with Brazil. Go figure.

On July 23, “President Donald J. Trump announced a landmark economic agreement with Japan…. [In exchange for a reduction of US tariffs on all Japanese imports from 25% to 15%, it] will invest $550 billion directed by the United States to rebuild and expand core American industries…. The United States will retain 90% of the profits from this investment…. In addition to raising billions in revenue, this new tariff framework, combined with expanded U.S. exports and investment-driven production, will help narrow the trade deficit with Japan and restore greater balance to the overall U.S. trade position.” “Whitehouse fact-sheets/2025/07/”  

As an aside, Trump has also threated to punish any country that stops using U.S. dollars as its reserve and trade vehicle currency. Somehow, he fails to understand that for a country to acquire these dollars (and for Japan to acquire the $550 billion it is to invest in the US) they must have a trade surplus (US trade deficit). Oh well.

“Japanese officials said there was no written agreement with Washington — and no legally binding one would be drawn up — after Trump administration officials claimed Tokyo would back investments in the US from which American taxpayers would reap nine-tenths of the profits.”  https://www.ft.com/content/c1183b13-9135-41f6-9206-7b52af66f0a5

In addition to the fact that Japanese officials are disputing that they have agreed to such a deal, I hope that you are surprised that the American government is proposing to create new state owned companies. The world’s experience with state own companies has not been good. Our private enterprise dominated economy has served us (our standard of living) very well.

If this all seems rather confusing, welcome to Trump land.

The Fed’s policy interest rate

Among the things our protectionist, isolationist President fails to understand correctly is the role of the Federal Reserve’s policy rate. He wants interest rates to be lower and thinks that the Fed can cause that by lowering its policy rate. That rate used to be the overnight money market rate. If the Fed lowered that target it would supply more money (bank deposits at one of the twelve Federal Reserve Banks) to banks and thus the interbank money market for managing bank liquidity by buying government securities from banks. If banks’ liquidity (“reserves”) is increased, their demand to borrow in the interbank money market will be reduced and thus the interest rate prevailing in that market will be reduced. Thus, raising or lowering the Fed’s policy rate (and the consequent change in base –Fed reserve—money) was the instrument by which the Fed controlled the money supply (its own base money and the more relevant boarder bank money—M1, M2, etc.)

If you are into this subject, you will already understand what money is and where it comes from. If you would like a refresher read this: https://wcoats.blog/2024/11/08/econ-101-money/  

The above description of the policy rate was applicable until 2008 when banks held minimal reserves (or excess reserves when there was still a minimum reserve requirement) at the Fed. But in response to the financial crisis in 2008 when the Fed purchased huge quantities of government debt (and mortgage-backed securities), the Fed began to pay banks interest on their now very large deposits at the Fed to keep them from lending them in the market and thus expanding the money supply excessively. So, the relevant Fed policy rate now is the rate it pays on banks’ reserves at the Fed, the so-called Interest on Reserve Balances (IORB).

As with the policy rate in the old regime, the IORB is the instrument by which the Fed now controls the growth in the money supply. When the IORB is reduced below prevailing overnight market rates banks will draw down their Fed deposits to lend at the higher market rate thus increasing money growth.

Interest rates in the market are determined in and by the supply and demand for credit in the market. If the Fed lowers its IORB it will increase the growth rate of dollars. The Fed will do so when it judges that appropriate for achieving its inflation rate target of 2.0 percent. The twelve-month inflation rate in May was 2.4% and rose to 2.7% in June. The Fed decided not to lower the rate further at this time. Doing so could well lead market participants to expect higher inflation in the future, which would raise (not lower) market rates for say 10 year Treasury bills.

Current Fed policy seems appropriate to me. It adheres to an inflation forecast targeting regime that has become popular in recent years in major central banks. But it reacted by raising rates too slowly in response to the surge in inflation in 2021-2 during the Covid pandemic. Inflation reached 9% in mid 2022. A better system is to return control of the money supply to the public that can buy and redeem dollars at a fixed price for a hard anchor (such as a gold standard). I laid this out in the following blog: https://wcoats.blog/2022/06/06/econ-101-the-value-of-money/

Retirement

For those who save for their retirement, what they save is what they get. For those who depend on Social Security income for their retirement (most people do both), the story is different. Social Security is a pay as you go system. While working, people (shared with their employer) pay a SS tax and once retired they receive a legally fixed income (defined benefit). The system works ok as long as there are enough workers paying the tax to finance the benefits received by those retired. “Saving Social Security”  “What to do about Social Security”

But American’s are living longer than they did when the SS system was designed. Without any change in their retirement age they will live in retirement longer. In 1975 there were 3.2 workers (paying the SS tax) per retirees receiving SS benefits. By last year this had fallen to 2.8. Over the next ten years this ratio is projected to fall to 2.3. The simplest solution to the shortfall of taxes paid into the Social Security Trust Fund for financing its benefit payments to the retired is to raise the retirement age. Most of us want to work longer anyway. A new extensive study of these issues and the experiences of some other countries will be available in a few weeks. “Reimagining Social Security”

Taxation norms

Taxes are levied to raise money but also to influence behavior. What is taxed and how much influences how much of it is demanded. To take an example of a tariff (tax) on steel imports, the resulting higher price of imported steel increases the relative attractiveness of domestically produced steel. Under the rules of the World Trade Organization, such a tariff would be justified if it offsets an artificial (and thus economic efficiency undermining) subsidy of the foreign produced steel.

President Trump has introduced a totally different way of using tariffs/taxes. He uses them as threats to pressure a country to take action totally unrelated to the item to be taxed. This follows his general bully approach to negotiations. To pressure a country or firm to agree to his requests, he threatens harm if they refuse. If a university or newsman behaves in ways he doesn’t like, he attacks them or threatens them with harm.

In the most recent example Trump is threatening a 50% tariff on all imports from Brazil primarily due to Brazil’s legal proceedings against former President Jair Bolsonaro, which Trump characterizes as a “witch hunt,” and to address what he claims is an “unfair” trade relationship between the two countries.

“Trump demands that the trial against former president Bolsanero, who had tried to instigate a military coup after he had lost the last election, should be immediately end.”  “First casualties from Trump’s increasing tariff craze”

 It’s not clear what Trump means by “unfair” trade relationship. His positions on trade, which he clearly does not understand at all, are contradictory. He has threatened to raise tariffs on imports from countries that avoid using US dollars in their FX reserves and foreign trade payments. For countries to use US dollars they must have a trade surplus with the US (a US trade deficit with such countries) in order to acquire them. “Why Does the World Need a Reserve Asset with a Hard Anchor?”  But Trump doesn’t seem to like or want such deficits. The US actually has a trade surplus with Brazil.

It may sound like this is all from the Onion, but sadly it is not. I don’t expect it to end well.