Fed Will Boost Balance Sheet by $500 Billion: Survey

[washunut]

Why would the velocity of money increase when the country is lumbering under so much debt, incomes are stagnant, unemployment is (conservatively) at almost 10%, and confidence is in the dumps? Households are not spending. They can't. I could also mention all of the crummy real estate that banks refuse to write down, government budgets under pressure, pension promises that will not be kept due to overinflated expectations on rates of return.... At this point, I'd say the country is on a precipice. It's not that we have rampant deflation, but where is the inflation? The CPI is trending DOWN, standing over the last twelve months at just over 1%, under 1% if food and energy are excluded. (Consumer Price Index Summary). This is below the minimal 1.5% level the Fed feels is necessary to ensure that we don't slip into a Japanese-style deflationary funk. Real estate is a large part of this, because a home represents the greatest single asset held by many families and, consequently, drives many spending decisions.

I have heard all the dogma about deflation, just don't buy it. I am not even confortable that the inflation statistics as calculated are revelant to the average family. Food costs are up, health care is up, real estate taxes are up. college tuition is up. What that the average person buys is down. Even rents are starting to trend up in some places as people do not find the housing market a very attractive investment.

In the short term what you are saying is true about the economy. I feel that is a bit myoptic thinking. The economy will turn around and then you will have the velocity problem I mentioned. I am not sure we are already starting to see it in commodity prices such and currency rates.

 

[Ahlevah]

In the short term what you are saying is true about the economy. I feel that is a bit myoptic thinking. The economy will turn around and then you will have the velocity problem I mentioned. I am not sure we are already starting to see it in commodity prices such and currency rates.

We've just come off of the implosion of the largest asset bubble in history fueled by the largest debt bubble in history. We spent decades building up to this, and it's no run-of-the-mill recession. This is not ending anytime soon (notwithstanding the good people at the NBER who declared it over), and the longer it drags out the more confidence will wane and reality will set in.

 

[washunut]

We've just come off of the implosion of the largest asset bubble in history fueled by the largest debt bubble in history. We spent decades building up to this, and it's no run-of-the-mill recession. This is not ending anytime soon (notwithstanding the good people at the NBER who declared it over), and the longer it drags out the more confidence will wane and reality will set in.

Granted this will take a long time to be fixed. It also takes a while for a bubble to build up and then burst. People were dissed who called the tech bubble early. The same for the housing bubble.

What is the saying.

A market can stay irrational longer than you can stay solvent.

 

[oldreliable67]

We've just come off of the implosion of the largest asset bubble in history fueled by the largest debt bubble in history. We spent decades building up to this, and it's no run-of-the-mill recession. This is not ending anytime soon (notwithstanding the good people at the NBER who declared it over), and the longer it drags out the more confidence will wane and reality will set in.

We shouldn't be too hard on the NBER dating committee. By their long-established guidlines, the recession ended and a new expansion started. We have, after all, experienced a positive GDP growth rate since then -

2009 Q3 1.6%
2009 Q4 5.0%
2010 Q1 3.7%
2010 Q2 1.7%

The economy is growing, though recently at a pace insufficient to put a dent in unemployment. Four quarters of positive GDP growth suggest the NBER was correct in its dating decision, the continued stagnation in unemployment notwithstanding. But that is the view in the rear-view mirror. The question is, what is ahead of us?

 

[washunut]

We shouldn't be too hard on the NBER dating committee. By their long-established guidlines, the recession ended and a new expansion started. We have, after all, experienced a positive GDP growth rate since then -

2009 Q3 1.6%
2009 Q4 5.0%
2010 Q1 3.7%
2010 Q2 1.7%

The economy is growing, though recently at a pace insufficient to put a dent in unemployment. Four quarters of positive GDP growth suggest the NBER was correct in its dating decision, the continued stagnation in unemployment notwithstanding. But that is the view in the rear-view mirror. The question is, what is ahead of us?

Well unemployment due to a lack of housing starts won't change for years. Same goes for anyone expecting to see a bounceback for industries that relied a consomer big ticket spending.

So the question is can we wind up in a position call stagflation. Slow moving economy with rising inflation.

 

[oldreliable67]

Well unemployment due to a lack of housing starts won't change for years. Same goes for anyone expecting to see a bounceback for industries that relied a consomer big ticket spending.

So the question is can we wind up in a position call stagflation. Slow moving economy with rising inflation.

What some (notably, the Pimco folks) have been calling the "new normal:" low GDP growth rates, persistent higher than historically acceptable unemployment, budget deficits at both fed and state levels that improve only gradually if at all, all resulting in an end to double digit returns in the equities markets.

That is, unless we bash the dollar down to levels that make the labor content of our manufactured goods competitive once again, resulting in a resurgence of our manufacturing sector.

Trade war, anyone? Bueller? Bueller?

 

[washunut]

What some (notably, the Pimco folks) have been calling the "new normal:" low GDP growth rates, persistent higher than historically acceptable unemployment, budget deficits at both fed and state levels that improve only gradually if at all, all resulting in an end to double digit returns in the equities markets.

That is, unless we bash the dollar down to levels that make the labor content of our manufactured goods competitive once again, resulting in a resurgence of our manufacturing sector.

Trade war, anyone? Bueller? Bueller?

It seems like there is a stealth attack on savings. First lower the interest rates so that if you saved your life to retire you are hosed. Next, since most of the country has little or no savings, make saving worthless thru inflation. This has the effect of lessening our public and private debt in real terms. It also inflates hard assets like housing so that the banks will have less under water mortgages.

 

[oldreliable67]

It seems like there is a stealth attack on savings. First lower the interest rates so that if you saved your life to retire you are hosed. Next, since most of the country has little or no savings, make saving worthless thru inflation. This has the effect of lessening our public and private debt in real terms. It also inflates hard assets like housing so that the banks will have less under water mortgages.

Old market adage: The market will always do whatever it takes to inflict the maximum amount of damage to the maximum number of participants. In this case, it applies to the rapid "graying of America" and, as you correctly point out, just as interest on savings are becoming more and more useless as a vehicle on which to rely on for retirement income. We will soon be retiring in record numbers, at a time when interest rates are at or near record lows.

Perhaps a sharp decline in general price levels would be good for something after all. At least, for this large and (about to) rapidly grow group. This group tends to have smaller mortgages, and many don't have a mortgage at all, so that a decline in the market value of their residence has an impact only if they wish to sell. Their spending needs have diminished with the now empty nest. Their medical expenses are largely taken care of (or so Obama/Pelosi/Reid tell us). How much of a drop in the general price level will it take until a 1% return on a savings account becomes useful?

Cash is always king, but never more so than during a deflationary period.

 

[washunut]

Old market adage: The market will always do whatever it takes to inflict the maximum amount of damage to the maximum number of participants. In this case, it applies to the rapid "graying of America" and, as you correctly point out, just as interest on savings are becoming more and more useless as a vehicle on which to rely on for retirement income. We will soon be retiring in record numbers, at a time when interest rates are at or near record lows.

Perhaps a sharp decline in general price levels would be good for something after all. At least, for this large and (about to) rapidly grow group. This group tends to have smaller mortgages, and many don't have a mortgage at all, so that a decline in the market value of their residence has an impact only if they wish to sell. Their spending needs have diminished with the now empty nest. Their medical expenses are largely taken care of (or so Obama/Pelosi/Reid tell us). How much of a drop in the general price level will it take until a 1% return on a savings account becomes useful?

Cash is always king, but never more so than during a deflationary period.

At a 1% interest rate you would need to have $5 million in the bank to retire with a $50K income. In the northeast, you probably need at least $75K or $7.5 million. Since most people will not have that type of savings, the Fed is making you reach for yield. Thus pushing people into the stock market, junk or emerging market debt etc.

 

[oldreliable67]

At a 1% interest rate you would need to have $5 million in the bank to retire with a $50K income. In the northeast, you probably need at least $75K or $7.5 million. Since most people will not have that type of savings, the Fed is making you reach for yield. Thus pushing people into the stock market, junk or emerging market debt etc.

But suppose deflation cuts the general price level to such the basket of goods and services one could previously buy with $50k could now be bought with only $35k, or even $25k? How much did the general price level drop during the Drepression? Without looking it up, I'm guessing about 50%, from max to min. A sudden drop in the price level of that magnitude would be utter chaos; a slow drop over say, 5 years, perhaps not so much.

Think about all the other adjustments such a drop would entail. Think of the protest from SS beneficiearies when, instead of upward-only COLA's, legislation of downward adjusting COLA's for SS recipients would necessarily be proposed! Could it be enough to make projections of the system's solvency in the out years look rosy instead of foreboding?

Nah, probably not going to happen. Just saying, "What if....?"

 

[washunut]

But suppose deflation cuts the general price level to such the basket of goods and services one could previously buy with $50k could now be bought with only $35k, or even $25k? How much did the general price level drop during the Drepression? Without looking it up, I'm guessing about 50%, from max to min. A sudden drop in the price level of that magnitude would be utter chaos; a slow drop over say, 5 years, perhaps not so much.

Think about all the other adjustments such a drop would entail. Think of the protest from SS beneficiearies when, instead of upward-only COLA's, legislation of downward adjusting COLA's for SS recipients would necessarily be proposed! Could it be enough to make projections of the system's solvency in the out years look rosy instead of foreboding?

Nah, probably not going to happen. Just saying, "What if....?"

The problem is we are getting the worst of both worlds. Right now we do not have deflation. For items that retired people purchase prices are going up and not at a very slow pace. Food, utilities, real estate taxes, state income taxes, medical are all rising. I do not know of any category is going down. At the same time the government is keeping interest rates at a very low rate.

Unless the retired are also senile they will see what this administration is doing to people. Most people have little understanding of economics so Obama will probably get away with it.

 

[oldreliable67]

Unless the retired are also senile they will see what this administration is doing to people. Most people have little understanding of economics so Obama will probably get away with it.

There is a reason that Congressional approval ratings are at all-time lows; they have been trending ever-lower since the Bush administration disappointed with its lack of fiscal conservativism (and others), and have continued with the Obama administration. What it means for the mid-term elections, we will have to wait and see, but there does seem to be an opportunity for change. Whether the GOP or Tea Party can seize it, we'll find out soon enouugh.