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Federal Reserve Pledges More Stupidity

The Washington Post Writes: Federal Reserve considers explicit pledge: Low rates if inflation stays down

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The Federal Reserve is leaning toward an explicit commitment to keep interest rates at rock-bottom levels, as long as inflation remains low.

The pledge would be an attempt to strengthen assurance that the central bank will not tap the brakes on the recovery until it is certain that the momentum can be sustained. The Fed already has vowed not to raise rates — a move that would slow economic growth — at least until the unemployment rate falls to 6.5 percent or inflation rises above 2.5 percent.

Read The Rest Of The Article Here

There are a couple of things in this article that drive me up the wall.

  • We are not in an inflationary environment,  we are in a deflationary environment. The only reason you we are seeing inflation in certain parts of the economy is due to the FED printing a massive amounts of money ($85 Billion/monthly) and dumping it into the financial system by keeping interest rates artificially low. If that wasn’t happening we would already see clear signs of deflation.
  • The FED is punishing savers and true economic growth by keeping interest rates too low for far too long. All while developing significant economic imbalances that will have to be deflated at a later date.  The situation is made worse by creating an environment where only people with access to cheap financing benefit. At the same time the US poverty rate is at all time high or close to 50 Million people. 
  • The article assumes that the FED is in complete control of interest rates. At least for now everyone believes that. Yet, nothing could be further from the truth. While the FED can influence the rates, it cannot control it. The market controls the rates. 

This in return presents a trading opportunity for those who think otherwise. Eventually the interest rates will move independent of the FED and destroy the whole scheme in the process.

When will it happen?

Actually, it might be already happening as interest rates already up 100% over the last 12 months. Is the FED finally losing control? I hope so. In the long run it would be great for the US Economy. 

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Derailed Recovery

Forbes Writes: Mixed Messages For Bernanke Shouldn’t Derail QE Taper, Despite Lower Inflation

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As investors intensify their scrutiny of the Federal Reserve, economic indicators continue to send out mixed messages.  Inflation, as measured by the CPI, eased once again in August, according to theBureau of Labor Statistics, but remains relatively anchored, indicating Chairman Ben Bernankeand the FOMC could be closer to tapering quantitative easing, possibly on Thursday.

Mixed economic indicators continue to baffle a market that seems to have prepared for a reduction in the Fed’s supportive asset purchases, or QE.  Inflation, one of the main monetary factors observed by Fed officials, has been consistently low, yet not alarmingly so.  Over the past 12-months, CPI is up a meager 1.5%, down from 2% in July.

While the U.S. economy has remained relatively resilient, with GDP growing 2.5% in the second quarter, it is by no means out of the woods, as the labor market remains weak and financial conditions have tightened, particularly in mortgage markets which are closely scrutinized by the Fed, Goldman Sachs’ economics research team said.

The Federal Reserve, which is in the midst of a transitional period as Chairman Bernanke’s term expires early in 2014, is looking to reduce its level of asset purchases to avoid inflating asset bubbles and creating further imbalances.  Investors are looking for the FOMC to cut down on QE on Thursday, possibly reducing asset purchases by $5 to $10 billion to $75 to $80 billion a month.

In order to continue with the plan laid out by Bernanke in his previous conference, in which the Fed expects QE to end by mid-2014, Fed officials will want to see a pickup in inflation that strengthens their view that deflation is not a looming problem.  “While the stabilization in core [CPI] is likely sufficient for Fed officials to start the tapering process [Thursday], officials are counting on some acceleration in coming quarters,” explained Jim O’Sullivan, chief economist at High Frequency Economics, who added, “such acceleration will likely be needed for a full wind-down of QE and will almost certainly be needed before the tightening cycle begins.”

Read The Rest Of The Article Here

A very good overall summary of the existing US Economic and Financial Market state that comes to a wrong conclusion.  It somehow assumes that the Fed and US Government are in control of the US Economy and will direct it into whatever direction they wish to improve existing metrics and to maintain the course.

However, that is a fools assumption.  They are not in control of anything. The 2007-2009 meltdown was a clear example of that. No matter what they have tried,  the market kept going down until it hit its March 2009 technical bottom and reversed itself. If that doesn’t convince you of the fact that they have no control, nothing will.

Now, the article states that the policies the Fed has instituted are design to avoid future financial asset bubbles and volatility associated with it. What it fails to mention is that we are ALREADY in the largest financial credit bubble of all time. Bigger than 2007.  And guess what, it was done on purpose by the Fed to avoid a deeper recession.

As Fed cut back on QE, interest rates will go up and in doing so will collapse the real estate market, the stock market and the overall economy.  Oh, I forgot to mention something. It will not be fast and will most likely take years. However, the process itself has already started. Get your affairs in order.  

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Economic Lunacy

The Daily Ticker Writes: Krugman Overboard! Says Economic Policy a ‘Horrifying Failure’

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Nobel Prize-winning economist and New York Times columnist Paul Krugman argues in his new editorial that U.S. economic policy over the last five years has been “an astonishing, horrifying failure.” Krugman, a long-time critic of the Obama Administration’s stimulus efforts, writes that the U.S. government should have spent three times the amount of money it did to get the economy back on its feet:

“…if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done — namely, make a big enough push for job creation to offset the effects of the financial crunch and the housing bust, postponing fiscal austerity and tax increases until the private sector was ready to take up the slack…we would be a richer nation, with a brighter future — not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force, where millions of young Americans have probably seen their lifetime career prospects permanently damaged, where cuts in public investment have inflicted long-term damage on our infrastructure and our educational system.”

There you go. These are the idiots at the top of the US Economic Policy food chain.

“An astonishing, horrifying failure, the US Government should have spent 3 times the amount of money it did to get the economy back on track”

They are talking about an additional $3 Trillion in stimulus. WOW!!!. I am beyond speechless. I am not a big fan of either Bush or Obama administrations and what they did during the 2007-2009 meltdown.  In fact, I am a big proponent that they should have left the market alone and let a lot of those companies fail instead. That would have removed economic excesses out of the system a lot faster and we would now be in true economic recovery instead of this artificial credit induced one.

So, these Keynesian clowns believe that throwing more money at the problem would have fixed everything and brought prosperity to the US Economy?  I am starting to think that they don’t even understand basic math. Providing more stimulus here is equivalent to giving Lamar Odom a kilo of coke and saying “Go and shoot it all up at once. It will fix you right up.”   

With economic leadership like this, America has no chance of improving any time soon. A lot of economic pain is just around the corner. 

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