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
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20
Global "Debt Mountain": Beware of This "New Peak" - 13th Nov 20
Overclocking Zen 3 Ryzen 5600x, 5800x, 5900x and 5950x to 4.7ghz All Cores Cinebench R20 Scores - 13th Nov 20
Is Silver Leading Bitcoin or is Bitcoin Leading Silver? - 13th Nov 20
How Elliott Waves Simplify Your Technical Analysis - 13th Nov 20
How to buy Bitcoins using debit/credit card? - 13th Nov 20
Will COVID Vaccine Kill Gold and Silver? - 12th Nov 20
Access to Critical Market Reports - 12th Nov 20
Stock Market Dow Futures Reach 30,000 on News of COVID-19 Vaccine Trials Success - 12th Nov 20
8 Terms & Conditions You Must Know Before Asking For Life Insurance Policy Quotes - 12th Nov 20
Gold Stocks Post 2020 US Election Outlook - 11th Nov 20
Champions’ League Group Stage Draw: All You Need To Know - 11th Nov 20
Stock Market Secular Trend - 11th Nov 20
Stock Market Correction Curtailed by US Election - 11th Nov 20
What Causes a Financial Bubble? - 11th Nov 20
Ryzen 9 5900X RTX 3080 - Scan.co.uk vs Overclockers.co.uk UK Custom PC System Builder Review - 10th Nov 20
Killing Driveway Weeds FAST with a Pressure Washer - Saving Block Paving from LOTS of WEEDs - 10th Nov 20
Trump Fired, Biden Hired, What Next?  - 10th Nov 20
Looking for a Personal Loan? Here Is What You Have To Know  - 10th Nov 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