Posted on 01/26/2012 7:06:00 PM PST by blam
The Fed Is Worried -- And You Should Be Too
Comstock Partners
January 26, 2012
The Fed is worried, and you should be too. That is the major take-away from yesterday's FOMC statement, combined with its release of updated projections and Bernanke's press conference. Despite the market's cheering of the promise of a near-zero fed funds rate until late 2014 and the prospect of QE3, the Fed is fighting a lonely battle against severe economic headwinds----and they know it. In answering a reporter's question, Bernanke made it crystal-clear that he does not believe that the recently optimistic economic releases are sustainable. He has good reason to think so.
The FOMC reduced its current central tendency 2012 GDP growth projection from 2.5%- 2.9% to 2.2%-2.7% and its 2013 number from 3.0%-3.5% to 2.8%-3.2%. The previous projections were made in November. Although they reduced their unemployment projection slightly, they are still projecting unemployment rates as high as 8.2% to 8.5% for 2012 and 7.4% to 8.1% in 2013.
It's significant that these reductions were made despite better than expected economic releases in the last few months in jobs, production and consumption. Although some may wonder what the Fed knows that others don't, the reasons for their caution are no mystery to anyone familiar with the numbers. Disposable income is growing very slowly, and even this tepid pace is a largely a result of temporary tax cuts and transfer payments, while real wages are flat. Consumer spending growth was supported mainly by a reduction in household savings rates from 5% in June to 3.5% in November. December retail sales have already weakened as holiday sales were disappointing.
Employment growth is still not enough to raise real wages or reduce unemployment by much. While initial unemployment claims have declined, new hiring is
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(Excerpt) Read more at businessinsider.com ...
Disposable income is growing very slowly, and even this tepid pace is a largely a result of temporary tax cuts and transfer payments, while real wages are flat. Consumer spending growth was supported mainly by a reduction in household savings rates from 5% in June to 3.5% in November. December retail sales have already weakened as holiday sales were disappointing.
That is what is behind the Zero interest rate policy. At its core, it is a tax on savers to ensure the ballooning deficit remains affordable for a few more years. Its just a desperate ploy to buy time and hope that something (anything) turns the economy around.
Fed is fighting a lonely battle against severe economic headwinds----Yeah, their method of fighting the headwinds is to try to slow them down by throwing hundreds of millions of hundred dollar bills into them.
Guess it's time for Bernanke to hand out a few more trillions to his European central bank pals. Can you imagine the sinecure this guy is going to get over there when he's finally kicked out of office?
Who knew? I kept hearing they were great ( except at Sears).
Barry’s toadies in the state controlled “media” are all over the place with great news about Barry’s economy. They’re pimpin’ hard for their messiah to be given a lame duck term where he can really crucify America. Shemp had his Barry Tingle going into overload bigtime today on FOX.
Here it is in simple context. The Fed has suspended the law of supply and demand until 2014. They buy all surplus Treasury bond/notes/bills depressing interest rates. Massive money supply goes into every market inflating values. How long can the Fed produce this QE funny money?
The Fed has removed risk from the bond market and replaced it with fantasy. This fiesta can not last long nor end well. Everybody has drunk the existential kool aide.
Any ideas where the economy, including unemployment, will be this Sept.-Oct.?
Bingo ! Spot On !!
Otherwise known as “The Tune Up On The Titanic”
anyone that believes the Fed gives a shit about anything except their own paychecks, I have some swamp land in Arizona I’ll sell real cheap. With waterrights...
Naw. Bill OReilly said tonight the economy will improve to the point it will be a plus for 0bummer by the election.
So everything is hunky dorrie. </s>
The economy in the fall will be just like now. If we go QEIII, the economy will be the same but the stock market will be rocking, and maybe real estate will pick up. The Fed’s easy credit scheme isn’t working because all the new money remains parked on the sidelines — entrepreneurs, who would otherwise drive a recovery, are paralyzed with fear over the anti-business lunacy in Washington. So they’re not willing to take on any risk — even at the miniscule interest rates today.
By the way, we should be thankful that money’s parked idle in the banks; if all those trillions of new money ever get circulating, we’ll be in for a big-time inflation.
Perceptions on elections and results major factor. Obama will simply take us down his slippery Marxist bannister. Anticipation of his defeat will be enormously stimulative. The economy will continue its’ death-throes until further notice.
Thanks, kevao. Good point about inflation.
And perhaps Penny’s
Penny’s has a new guy. It is announcing this week a transformation....... no sales, no 40% off. The prices will be low all the time. No $.99 any more. The $.99 as in $4.99 will be dropped,
The eons of retail lessons apparently will be dropped for a new way.
It seems to me a desperation ploy. Perhaps JCP is in trouble
By the way, we may still get inflation even without producers taking loans to create/expand their activities. Like with the last couple of QEs, a lot of that money will go into the stock market, seeking higher returns there than it can get in fixed income vehicles. If the market goes up enough, the “wealth effect” might kick in — people start feeling flush and thus start spending more. And *then*, if producers misinterpret that new spending as a real increase in demand, they will start expanding their activities, and we’ll be off into yet another unsustainable boom....
Unsustainable boom...I don't thinks so. To many unemployed.
Yes, unsustainable. You cannot have sustainable growth without real savings. Lowering the cost of borrowing by flooding the market with fiat money is not savings, it’s just an artificial increase in the supply of money, which creates an artificially low interest rate.
The interest rate is what tells the entrepreneur whether his project will be profitable or not. Some projects that would be profitable at a 3% rate would not be profitable at a 5% rate.
When the cost of borrowing is pushed down, not by real consumer savings out of the existing money supply, but by an increase in the money supply, then once economic activity picks up, all those new firms and the newly rehired workers begin consuming, and the increased demand leads to higher prices, which signal producers to expand production further. To expand production, they return to the loan market, and as many producers begin bidding for additional loans, the interest rate increases.
And here is the problem. As interest rates and wage rates (remember, people are back to work again, so there’s no longer a large pool of unemployed) rise, many of the projects that looked profitable before can no longer be carried out to completion, so they shut down.
Had the interest rates been low because of real consumer savings, then the new investments would be sustainable because consumers really are reducing current consumption in favor of future consumption. You therefore don’t get that artificial increase in current consumption demand that causes the prices of consumer goods to increase. The producers then are not misled into expanding production to meet a current demand that does not really exist.
Sure, the Fed can inject another huge amount of “new” money into the system, artificially driving down rates again, thereby delaying the bust. But there is a limit to how long the Fed can do that. At some point, the currency becomes so debased that the population looses faith in it and a panic ensues.
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