Press Release by US Fed - 18th September 2013

Alchemist

Administrator
Staff member
#1
Press release issued by the US Federal Reserve on 18th September 2013:

FRB: Press Release--Federal Reserve issues FOMC statement--September 18, 2013

The press released has placed equal emphasis on employment and inflation.

From the press release:

In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.
I am not really sure whether Fed's asset purchases will lead to any kind of improvement in the US labor market.

I do agree that deflation can destroy jobs in a market by slowing down consumption and investment, but I am not sure whether the reverse is true beyond a point.

If inflation created jobs, India (with double digit inflation) would have 100% employment by now.

The Fed has indicated that it will not slow down asset purchases till it sees some more improvement in the labor market and slightly higher inflation.

I feel it will be inflation and not labor market improvement, that will force the Fed to slow down its asset purchases.

US is printing a lot of money to keep asset prices stable. This large scale money printing cannot go on forever without creating inflation. Sooner or later, prices will start increasing at a pace greater than the Fed's target of 2%. At that point of time, Fed will be forced to taper.

Till then traders worldwide can continue to party with Fed's newly printed dollars. :D.
 

Alchemist

Administrator
Staff member
#2
Out of the 10 members who voted, only 1 voted against the action - Esther George.

Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
As seen from the voting pattern, it is obvious there is hardly any support for hawks in the US Fed.

That could be one reason why Lawrence Summers refused the top job at the Fed.

There is minimal concern in the Fed about creating assets bubbles, something that reminds me of Greenspan era.
 
#3
That could be one reason why Lawrence Summers refused the top job at the Fed.
The reason Summers withdrew his name was because there was no way in hell his nomination would have been approved. Summers was the architect of the repeal of Glass Steagall. Obama's own party would have opposed his nomination heavily had Obama nominated him. There was very less chance his nomination would have gone through - that's the reason Summers withdrew.
 

Alchemist

Administrator
Staff member
#5
Well, I don't fully agree with what Koo has written:

Had the Fed not implemented QE, long-term rates would not have risen so early in the rebound, and the economic recovery would have proceeded smoothly.
The question is whether there would have been an economic recovery in the absence of QE?

My answer is "no".

In this kind of world the economy never fully recovers because businesses and households live in constant fear of a sharp rise in long-term rates."
Again, I disagree.

I have not verified it, but I think most businesses in US mostly borrow at fixed rates and not floating rates. If the businesses are anticipating that rates will rise sharply in the future, they should be preponing investments and not delaying them. US businesses are holding back investments because they feel fresh investments won't generate any significant returns for them.

From the consumer point of view, Koo's analysis may be correct as a large number of consumer loans are floating rate loans. Again, I don't have any data to verify that.
 
#6
Printing money doesn't solve the underlying problem. It just causes the foundation for the next problem.

In 1930 when the market crashed in the US, the central bank did not supported the economy. Businesses who were weak and even many that were relatively strong perished, unemployement was north of 20% and the economy was dead for a decade.

But it paved way for a true bull market which started in 1940's lasted for 27 years and was based on sound fundamentals.



Printing money doesn't change the fundamentals, it just delays the inevitable.
 
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Alchemist

Administrator
Staff member
#7
Printing money doesn't solve the underlying problem.
It depends on what problem one is looking at.

The initial goal of QE in US was to stabilize the financial system and prevent a systemic collapse. I think that goal was successfully achieved.

Today, even if QE is completely withdrawn, it is unlikely that the financial markets in the US will face the same turmoil that they did in 2008.

The Fed's goals have now changed and it is concentrating more on inflation and unemployment.

As far as economic growth and employment is concerned, I feel QE is totally ineffective and the Fed should ignore both these variables.

The Fed can only control the amount of money in the system. It cannot control the speed and direction of the money.

In my opinion, the sole variable that the Fed should concentrate on is inflation.

But it paved way for a true bull market which started in 1940's lasted for 27 years and was based on sound fundamentals.
Yes, but from the peak hardly any progress was made.

Destroying a lot of value and then recreating it is not real progress.

That's what the Chinese do to manipulate their economic data. They first destroy things that they shouldn't and then rebuild them.

I have no objection to money printing as long as it is done to stabilize the economy and prices of assets.

At the same time, I don't feel money printing can solve growth and employment problems in an economy.

Please note: just because I support money printing in certain circumstances doesn't mean that I also support huge government debt and deficits in the same circumstances.

Money printing should not be made a source to finance government spending.

As far as the US economy is concerned, I think it has reached its full potential and no amount of fiscal stimulus is going to generate further growth and employment. The US government should now concentrate on fiscal consolidation.

QE should be allowed to continue with a primary goal of stabilizing prices in the economy and keeping rates low, but not for financing the government's fiscal deficit.

Even though QE decreases yields of government bonds and takes away bonds from the market, the government shouldn't misuse it as license to borrow endlessly.
 
#8
The initial goal of QE in US was to stabilize the financial system and prevent a systemic collapse. I think that goal was successfully achieved.
Yes, it has stabilized the system, but at what cost?

It's like trying to save a broken building by patching a little here and there. The best thing to do, in my opinion, is to let it fall and construct it again (maybe like what happened in the 30's).

In any case, even if there was no QE, the economy would have stabilized albeit slowly but firmly.

Today, even if QE is completely withdrawn, it is unlikely that the financial markets in the US will face the same turmoil that they did in 2008.
We have no idea what removing QE would do. QE has never been done before so the short term and long term implications are unknown. There are 3 times more dollars in circulation than what was a few years back.

The only guys who have managed to do something like a QE is Japan. Nothing much has changed for them anyway.

Yes, but from the peak hardly any progress was made.
Trying to measure progress from the peak is like trying to learn about the economy from a maniac.

The P/E at the top was over 30, its neither rational nor fair to measure progress from there.

Destroying a lot of value and then recreating it is not real progress. That's what the Chinese do to manipulate their economic data. They first destroy things that they shouldn't and then rebuild them.
Not sure what you meant here.

Are you implying they are fudging their GDP data?

Sure they screw around by showing less inflation, manipulate their currency and all that. But they have grown enormously. I don't think there is anything to question over there.

http://en.wikipedia.org/wiki/File:China_india_gdp.jpg

 
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Alchemist

Administrator
Staff member
#9
Yes, it has stabilized the system, but at what cost?
Our opinions differ, but I feel the benefits of QE far outweigh its costs.

QE is taking away benefits of deflation from some, but deflation itself has more drawbacks than benefits.

Before the crisis, the leverage and money multiplier in US were at high levels. Both have shrunk now. To counter this, more base money is needed and that's exactly what QE is providing.

In any case, even if there was no QE, the economy would have stabilized albeit slowly but firmly.
Sometimes things are too messed up and need an external intervention.

Take the example of Satyam. After Raju's shocking revelations, there was total panic in Satyam. There was vacuum at the top and clients, employees, investors, lenders were all in panic mode. At that time the government intervened and provided much needed support to Satyam.

The government asked PSU banks to lend to Satyam so it could continue with its operations.

Without this financial and non-financial intervention, the company would have collapsed.

Neither the government nor the PSU banks lost any money, but they saved a lot - a company, jobs of employees, investments and above all India's reputation as an IT hub.

The situation in US in 2008 was very similar, but much greater in size. There was panic everywhere and without government intervention everything would have collapsed just like it did at the start of great depression.

The only guys who have managed to do something like a QE is Japan. Nothing much has changed for them anyway.
Japan became a fully developed economy long back. Progress from those levels was always going to be difficult.

Today, Japan is still one of the richest nations of the world. Most countries in the world would love to switch places with Japan.

What more could Japan have achieved without a QE?

The P/E at the top was over 30, its neither rational nor fair to measure progress from there.
The US stock market crossed its 2007 high in less than 6 years.

Not sure what you meant here.

Are you implying they are fudging their GDP data?
China may be fudging its GDP data, but I am referring to the bogus investments that happen in China.

GDP measures the amount of work that is done in an economy.

If a road is built, it is considered an investment and included in the GDP data.

If the same road is destroyed and built again, it is again added to the GDP.

If the same road is destroyed 20 times and built again, its contribution to GDP is 20 times.

Such destruction and rebuilding can make the GDP growth look strong, but in reality it's meaningless.

The same applies to economies as a whole too.

Why allow an economy to collapse and then rebuild it to show growth, when the collapse can be averted in the first place?
 
#10
Take the example of Satyam. After Raju's shocking revelations, there was total panic in Satyam. There was vacuum at the top and clients, employees, investors, lenders were all in panic mode. At that time the government intervened and provided much needed support to Satyam.

The government asked PSU banks to lend to Satyam so it could continue with its operations.

Without this financial and non-financial intervention, the company would have collapsed.

Neither the government nor the PSU banks lost any money, but they saved a lot - a company, jobs of employees, investments and above all India's reputation as an IT hub.
Not sure I agree with this. If Govt had not bailed out Satyam, may be the company would have been bought out by Mahindra much cheaper than what they bought it for. Maybe Satyam would have collapsed but the contracts would have been taken over by someone else. It's never easy to predict with any certainty what would have happened if a bailout or a govt action didn't take place. At best, it's speculation.

The situation in US in 2008 was very similar, but much greater in size. There was panic everywhere and without government intervention everything would have collapsed just like it did at the start of great depression.
The bailout of companies by the Govt in the US was absolutely wrong. Unless there is a penalty, behaviour will repeat.

There is a study comparing forest fires (one in a forest in the US and the other a forest in Mexico). In the US, there is a lot of care taken about forest fires and Mexico there is none. In the US, small forest fires are fought immediately and stopped. In Mexico, nobody cares & small fires burn through. The end result is that huge, destructive fires happen in the US forest but not in Mexico. Because in Mexico, all the flammable material is already taken out by the smaller fires, so any fire doesn't have enough flammable material to make it big.

Weaker or failing companies have to be taken out by market forces - this makes the market stronger over all. Bailing out of weaker companies reduces the strength of the market.

Another thing is risk taking. If risk taking never results in a penalty in the form of total collapse of a company, more companies will be taking risks. If more companies in a market are taking big risks, overall the market becomes weak and risky. Risk taking has to be "risky"! Otherwise there will be too much risk taking.
Such destruction and rebuilding can make the GDP growth look strong, but in reality it's meaningless.
Yes - http://en.wikipedia.org/wiki/Parable_of_the_broken_window

However, collapse of private companies by not intervening by the Govt is not really the same thing as willful destruction.
 
#11
At best, it's speculation.
Exactly. That's why they chose not to speculate and take action to ensure that the company is saved.

The bailout of companies by the Govt in the US was absolutely wrong. Unless there is a penalty, behaviour will repeat.

Weaker or failing companies have to be taken out by market forces - this makes the market stronger over all. Bailing out of weaker companies reduces the strength of the market.

However, collapse of private companies by not intervening by the Govt is not really the same thing as willful destruction.
When the problem gets as big as it did, it is not just about those companies, but about the collateral damage. For some reason you seem to think that the assets these people speculated on existed in a vacuum. These assets were held by real people and real businesses. It is impossible that they would not have got affected.

Like Alchemist said, the earlier QE which did the job of stabilization of asset prices was abolutely necessary. What appears less clear is the effectiveness of continued QE. It seems like many is the US are so overleveraged that no amount of liquidity can induce them to borrow more and they money is instead spreading far and wide across the world and inflating assets elsewhere. It has also enabled our useless government to borrow and spend excessively on useless things. Let's see how it all plays out.
 
#12
When the problem gets as big as it did, it is not just about those companies, but about the collateral damage. For some reason you seem to think that the assets these people speculated on existed in a vacuum.
Why do you think that I think so?

These assets were held by real people and real businesses. It is impossible that they would not have got affected.
So what?

Like Alchemist said, the earlier QE which did the job of stabilization of asset prices was abolutely necessary.
Well, I don't think it was necessary.

It has also enabled our useless government to borrow and spend excessively on useless things. Let's see how it all plays out.
May be someone should bail them out so that real people and real businesses are not affected by their uselessness.
 
#13
In any case, even if there was no QE, the economy would have stabilized albeit slowly but firmly.
It would have taken a long long time, and there would have been large scale collapses of companies and losses of jobs. Why let things which people might have spent decades of hard work building and rebuild it again.

Also in the 30s it enventually required a war for the US to get the economy really moving again. Surely QE is better than war :)

Trying to measure progress from the peak is like trying to learn about the economy from a maniac.

The P/E at the top was over 30, its neither rational nor fair to measure progress from there.
It's not about the stock market. A whole lot of productivity capacity of the economy would have been destroyed and it would have take ages to rebuild.

Not sure what you meant here.

Are you implying they are fudging their GDP data?
Building a road for example will count towards the GDP of the year in which is built. But if it increases the productivity of the people and the businesses by lowering travel and transport time, it will help in increasing the GDP of the subsequent years also.

But if you construct things which no one uses in the middle of nowhere like the Chinese do, they it will only have a one time effect on GDP and would be useless and wasteful like our government's NREGA, etc. Since they have a lot of firepower, the Chinese can keep this game going for a long long time by destroying and rebuilding like Alchemist said. But someday it has to run out and it wouldn't constitute any real progress in any way.
 
#14
Why do you think that I think so?
Because you keep saying that there is no way to know twhat he effect on the rest of the economy would have been.

Ok

Well, I don't think it was necessary.
Ok

May be someone should bail them out so that real people and real businesses are not affected by their uselessness.
a) The situation is not so dire.
b) Nobody gives a damn about us.

I give up. If your position on these things is that there is no way for anybody to know, it is impossible to convince you about anything.
 
#15
Dropping it. We could continue this way for decades. It's not going to make me any money nor is it going to change anything. A waste of my time.
 
#16
Because you keep saying that there is no way to know twhat he effect on the rest of the economy would have been.
<snip>
If your position on these things is that there is no way for anybody to know, it is impossible to convince you about anything.

You are mixing up 2 things.

- I think economic stuff and markets are too complex to predict.
- Even if a collapse is sure, I don't think the Govt should bailout companies or pump money into the system.
 
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