Wikinvest Wire

Wednesday, September 18, 2013

Federal Reserve Gone Wild (On Spring Break)

  • No taper
  • Only one dissenter
  • GDP estimates going down
  • Gold going up
  • Stocks going up
  • Yields going down
  • Emerging markets should go up
  • Fed is worried? (not clear at this point)

When the NFP came out on September 6th I tweeted that based on how bad the report was that if they went ahead and tapered it was about politics instead of fundamentals. I further noted that day that asset purchases are really a perversion of capitalism but they are doing it, have been doing it and so they need to remain committed to what they started.

Had they not done it then the crisis would have been worse but I believe we would have signs of recovery by now that are real.

One idea I brought up a couple of times in the past is that the worst financial crisis in 80 years would be with us for a while and that the Fed has no idea how this will end. I think today supports that idea.


Anonymous said...

"If the economy is so fragile the the government cannot allow failure, then we are indeed close to collapse." Roger, that's the quote you discussed a couple posts ago, and I believe it is true of the current US economy. Not to be political, but any objective observer must acknowledge that the anti-business, higher taxes, pro-big government, pro-big union policies of the current administration, now past midway through its 5th year in power, is largely responsible for the tepid recovery (though not the deep recession itself). I see QE forever, or at least 2017 and then only if the government at that time embraces more traditional American values. That's 1 traditional American's opinion, and I am sure some will disagree.

Roger Nusbaum said...

You might be right.

There is a little that is counter factual here. The President has made so little progress inplemmenting what he thought was his mandate I think there has been far less in the way of pro-union etc than I think many perceive.

The things you cite do seem to be his beliefs, I'm just saying he's made very little progress on what he intended and that I think the results you cite are more attributable to the entire political system as opposed to an ineffective president.

Justin said...

I think, if the FED hadn't done it, the crisis would've been deeper and lasted longer.

The reason is China; with a global Great Depression II China's infant economy would've stuttered badly, it wouldn't have had the dramatic growth (and, therefore, inflation) it has had over the last five years and would've kept a lid on wage inflation and, thus, its advantage over the western economies.

Without QE the momentum of emerging economies would've faltered. There wouldn't be the growth in the middle classes, urbanization, consumerism, usage of raw materials (Australia, Canada et al's economies must be adding to global demand) and there wouldn't have been any sight of the much fabled 'escape velocity' for decades.

But I am a Keynesian, through and through, so I may be guilty of seeing Bernanke's actions more favorably than others, I'll admit.

I think the FED is very worried (and rightly so) about Global growth and social turmoil, hence it's indecision about when to taper - too early and growth reverses, too late and we get uncontrollable inflation and savings and mortgage rates being severely affected.

The thing is this; looking at worst case scenarios if growth falters it might take even more stimulus and more time to get it back, but would be doable eventually (albeit with a much larger deficit). If inflation gets out of control interest rates will rise and the housing situation becomes untenable for some homeowners and businesses (those in the weakest positions). For many others they have no debt and assets that are sensitive to inflation. For 5 years those with high debts have been given help with historically low interest rates - at some point we will revert to the mean of the pendulum will swing the other way.

The very worst case scenario is hyperinflation and default. It's happened before in other economies, although they have never had a reserve status (AFAIK). In that case all debts are suddenly much smaller and lots of bondholders have their lunch money taken from them by the big, bad bully called the US. They'll not likely lend again but by that point it will be too late.

Roger Nusbaum said...


Hyperinflation has never been on the table. We do not owe anyone in their currency we owe them in our currency.

That distinction is the whole enchilada where hyperinflation is concerned.

High inflation would be another matter but obviously not there yet as reported on gov't stats.

Justin said...

But, Roger, what if bondholders demanded more interest and the FED had to monetize more of the debt? There'd be a greater supply of dollars and the (potential) resulting inflation will surely mean even more interest demanded by bondholders, and possibly there would be wage inflation added to the mix.

I might well be missing something obvious; I see interest rates and unemployment putting a strain on government finances which is being alleviated by QE. So far, so good. Yes, the FED can do QE 'to infinity' but it isn't buying all of the govt's debts. If other sovereign states decided not to buy anymore - because they were relatively losing too much over other assets - then dollars would, surely, be printed to pay off the debt (unless a $20 trillion coin was minted, of course).

With potentially trillions of extra dollars annually entering world markets we'd see an awful lot of inflation and, unless the debts were voided somehow, with the current deficit (which I think is almost unavoidable for the next few years) there could be a period of hyperinflation.

That's a 'could' and in no way something I'm predicting. Of course that 'could' happen to any economy and the US's debt/GDP is high but not historically dangerous.

As an aside, while I have your attention (I'm sure this would pique your interest) - an interesting clip on American healthcare costs;

I have no skin in the game on American health care costs but you've mentioned them before.

Roger Nusbaum said...

thanks for the video link I will check it out.

your comment makes the case for high inflation. the history of true hyperinflation like Weimar and Zimbabwe involved debt denominated in foreign currencies.

Edward Harrison was the first i saw to write about this several years ago.

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