Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

1% U.S. Economic Growth: QE Policy a Failure, Time for A Change

Economics / US Economy Jul 16, 2013 - 05:41 AM GMT

By: EconMatters

Economics

Fed Policy – Pushing on a string: Is far too Kind

Economists are now ratcheting down their forecasts for final 2nd quarter GDP to 1% which just further illustrates the ineffectiveness of fed policy measures. Ben Bernanke blames fiscal policies out of Washington, saying he can only do so much to counteract their lack of a healthy tax code, job creation plans, and inefficiencies.


However, it is starting to look more and more like Fed policy, a lack of creative fed policy, or even too much fed policy is equally to blame for the non-recovery five full years after the financial crisis.

Dallas Fed President Richard Fisher talked about pushing on a string, and it looks more and more that the fed is actually doing more harm than good to the economy with their programs.


Pushing on a string implies that they just aren`t getting the desired results from their programs, but that they definitely are not having negative effects on the economy. But the Fed is actually damaging the economy through policy measures in several ways.

Low Interest Rates Hurts many Segments of the Economy: Savers

For example, just in my limited sphere of contacts on a daily basis over the last four years I have met many people who rely on CDs for their income; this is their only major source of income. They are unemployed, their spouse has died, and the deceased husband left enough money in a CD program with a paid off mortgage for the wife to pay her monthly living expenses.

The Stock market is great for younger, more risk taking investors, but for many baby boomers and others not wanting to take chances on the market given its volatility CDs with higher interest rates serve a valuable need in the economy for protection of capital, with a slight return to supplement their income.

This entire market niche has been hurt and destroyed by the fed policy of keeping low rates for such an extended period of time.

A high saving`s rate has many benefits for the economy. For one, it means the health of people’s finances is in much better position to handle unexpected life events. Often the government has to fill in the gaps when citizens fall upon hard times because their savings rate was inadequate.

This is an inefficient model, which leads to higher governmental debt, higher costs, and higher taxes which provides a major economic headwind for future growth.

The Stock Market isn`t the Economy

Another way in which low rates hurt the economy is that companies are incentivized to buy back stock with these low interest rates instead of using the money to put towards business investment which will lead to more hiring.

This improves the economy because the derivative benefits of higher employment feeds on itself, and more add-on jobs are created to account for more spending in the economy by those members of society who now have disposable income to buy goods and services.

I worked in major fortune 500 companies, and I can tell you from firsthand experience, the executive team who are the ones who make all the business decisions, mainly care about hitting their earning`s expectations so they don`t get fired. Furthermore, making sure their stock price goes up so they don`t get fired and collect with all their executive peers the hefty stock options that become vested in their compensation plans.

The stock buybacks accomplish those two goals far better than growing the business through planned business development. Ergo, extremely low interest rates where borrowing money at exceptionally low rates serves as a major enabler of the status quo and proves as a dis-incentive for taking risks, growing the business through creative means, and hiring new employees. It is highly ironic because these are the desired outcomes that the Fed talks up in their policy philosophy.

This is a major reason why corporate earnings are so much better than the actual economy for the last 5 years. The fed might want to look a little deeper into the harm this has caused for economic growth the last five years. A major QE policy failure in my opinion.

Gasoline & Oil Prices much higher than Fundamentals = Major Tax on Growth

The price of oil and gasoline has been much higher than theyshould have for the last five years because of QE policies.

In fact, Oil and gasoline priced much closer to the fundamentals would have served as a major stimulus to consumers who would have much more disposable income to infuse into the economy over the last five years.

Instead all this money goes towards filling up the tank, and even limits mobility as high gas prices, limit travel, leisure opportunities, and even business profits which could be used for re-investment, and hiring additional workers.

It is obvious that Oil and thus gasoline would have beenmuch lower over the last five years without QE Liquidity used to artificially inflate many asset prices.

The amount of money that is wasted on higher energy prices, and the knock on effects that high energy prices have on business growth and investment models served as a major drag on the economy over the last five years and is a major policy failure.

America needs to Rethink the Makeup of the Federal Reserve: Too Much Group Think

This is much worse than merely pushing on a string Mr. Fisher, this is outright fed incompetence. The incompetence is that the fed continues the same policy initiatives even after it fails to get the desired results they were seeking at the outset of the programs. That is why they continue additional QE programs.

But what did Albert Einstein say regarding insanity and continuing to do the same thing over and over again, and expecting different results? You would think that after the policy didn`t meet their objectives, that they would try something different! I think this is where we need more diversity in the Fed governors.

We have too many members of the same ilk, same type of academics, no market experience, no business experience, no minorities, when was the last time an African American was on the Fed, or an Asian American, a Latin American, etc. How about cross-discipline smart people on the board of governors?

But the failure, and continued adherence to a limited scope of fed tools to try and invigorate this economy given substandard results screams out “Group Think” on the Board of Governors at the Federal Reserve.

Inaction is sometimes the best policy: Let the natural business cycle work

It is obvious that more diversity is needed on the Fed; we need more diverse points of view from an analysis standpoint. Sometimes no policy action is actually a policy tool, I know who would have thought?

It is the same notion behind a divided Congress; that they will become gridlocked, and thus cannot pass a bunch of costly legislation that will increase government spending, waste money through inefficient programs, and actually harm the economy.

Well, the same thing applies to Fed inaction; a Fed that did nothing might have actually produced a much better outcome over the last five years. Think of a world where we have low energy costs, higher interest rates, and businesses make decisions based on needing to grow a business by providing value towards consumer needs versus useless stock buybacks.

Fed Policy Needs to Dis-incentivize Stock Buybacks through Higher Interest Rates

Stocks buybacks have nothing to do with Business Development, and businesses investing and spending, and thus hiring is what is required to really grow the economy!

Maybe some middle ground might have even better results like low interest rates for six months, and then slowly start raising the Fed Funds Rate every four months by 25 basis points would have better overall results.

But it is hard to argue that a Fed that did absolutely nothing could have had less of an economic impact than producing a 1% GDP quarter 5 years out from the recession. It is time for a major Sea-Change in Federal Reserve Policy. Replace the entire team; we need some new minds with new ideas regarding monetary policy. Sometimes it is better to do nothing at all!

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2013 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules