The Fed’s strategy of targeting higher stock prices to boost economic growth has done the exact opposite. This strategy has pulled money away from effective macroeconomic investments and into ineffective macroeconomic albeit effective short term microeconomic investments. The end result is that we have all time high stock prices but no economic growth. We will be stuck in this economic lull until the Fed is ready to admit defeat and allow for a new more effective strategy to be implemented.
- Snow is coming: OECD Cuts Economic Growth Forecasts (WSJ)
- World waits for white smoke from U.S. Fed (Reuters) - Understandable error: they meant "green"
- Scots Breakaway at 45% Odds as Economists Warn of Capital Flight (BBG)
- Ukraine President Poroshenko Faces Backlash Over EU Trade Deal Delay (WSJ)
- German Anti-Euro Party Advances in Merkel Homeland Voting (BBG)
- Clinton Hints at 2016 Run as Super-PAC Packs Iowa Steak Fry (BBG)
- Air France, Lufthansa Hit by Strikes in Fight for Future (BBG)
- U.S. sees Middle East help fighting IS, Britain cautious after beheading (Reuters)
- Ex-Billionaire Charged by Brazil With Financial Crimes (BBG)
Getting out of a Liquidity Trap with monetary policy playing the lead role necessarily involves a Dornbuschian sequence of rational overshooting: The Fed must drive up Wall Street prices, which move quickly, so as to get to Main Street prices that move up slowly, most importantly, wages. This sequencing implies that Wall Street prices must become very rich relative to Main Street prices in order to achieve so-called escape velocity from the Liquidity Trap. At the transition point, Wall Street prices will be rationally “overvalued” relative to their long-term “fair value.” The dominant risk for Wall Street is not bursting bubbles, but rather a long slow grind down in profit’s share of GDP/national income. And you can stick that into a Gordon Model, too! Bonds and stocks may at present be rationally valued, but borrowing from the lyrics of Procol Harum’s Keith Reid: Expected long-term returns are turning a more ghostly whiter shade of pale.
This is why Capitalism is failing in the US: because not only is it now clear that the US economy is, for the most part, a rigged game… but that NO ONE involved in the rigging is punished.
If Japan’s results and programs hold any true difference, it is only that they are further down the same road than the rest of us. As Japanification continues in the US and Europe, we are gaining good observations about what lays ahead until the political will to use that same textbook time and time again is exhausted, or, more likely, removed.
Were this extreme policy to be implemented it would be a further and deliberate debasement of fiat currencies. Alan Greenspan’s warning of “fiat money in extremis” becomes more real by the day. Were this silly proposal ever to become policy, it would significantly increase the risk of inflation and stagflation. In a worst case scenario, it will lead to currency collapse and hyperinflation.
"Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.... Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy... The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them"...
In the rush to make QE’s taper and the follow-on “forward guidance” appear more data-related than of due concerns about the structural (and ultimately philosophical) flaws in the economy, the regressionists of the Federal Reserve have come up with more regressions - a 19-factor model to determine Yellen's 'labor market conditions'. What does this mathematical reconstruction of the labor market tell us about the labor market? If you believe the figures, this has been one of the best recoveries on record. No, seriously...
The popular view concerning the Fed is that it is apolitical. Anyone who considers the timing of the Fed’s actions knows this is false. However, for the vast majority of Americans, including financial professionals, the Fed is thought to be an apolitical entity focusing exclusively on economic and financial matters.
That 4% market correction was quick and virtually painless. Not missing a beat after the market briefly tested 1900, the dip buyers came roaring back - gunning for the 2000 marker on the S&P 500, confident that longs were not selling and that shorts had long ago been obliterated. Needless to say, bubblevision had its banners ready to crawl triumphantly across the screen. When the algos finally did print the magic 2000 number, it represented a 200% gain from the March 2009 lows. And to complete the symmetry, the S&P 500 thereby clocked in at exactly 20X LTM reported earnings based on consistent historical pension accounting. The bulls said not to worry because the market is still “cheap” - like it always is, until it isn’t. To be sure, the Fed is a serial bubble machine. But even it cannot defy economic gravity indefinitely.
Janet Yellen has essentially confirmed QE’s demise; good riddance. Unfortunately, I don’t think that is the final end of QE in America, just as it hasn’t been the end time after time in Japan (and perhaps now Europe treading down the same ill-received road). The secular stagnation theory, that we think has been fully absorbed in certainly Yellen’s FOMC, sees little gain from it because, as they assume, the lackluster economy is due to this mysterious decline in the “natural rate of interest.” Therefore QE in the fourth iteration accomplishes far less toward that goal, especially with diminishing impacts on expectations in the real economy, other than create bubbles of activity (“reach for yield”) that always end badly. What Krugman and Summers call for is a massive bubble of biblical proportions that “shocks” the economy out of this mysterious rut, to “push inflation substantially higher, and keep it there.” In other words, Abenomics in America. Japanification is becoming universal, and the more these appeals to generic activity and waste continue, the tighter its “mysterious” grip.
The Fed likes to claim that its policies are aimed at helping Main Street. Ben Bernanke began this argument when he was still Fed Chairman. Janet Yellen has since taken it a step further claiming that she comes from an “intellectual tradition” that it is important to use “public policy” to “make the world a better place.”
Would Salvador Dali make a better Federal Reserve Chairman than Janet Yellen or Ben Bernanke before her?
Even Hellicopter Ben would have balanced remarks. However, Janet Yellen has taken dovishness to an all-time high or low dpending on your perspective.
Good thing the Federal Reserve isn`t worried about inflation, another 2% rise is just noise. But when the Fed does start worrying about inflation, not only is it too late, it is 1970s too late!