One of the most interesting ideas that came out of the last Federal Reserve meeting at the end of October is a serious issue for everyone, including the Federal Reserve and the eventual impact of monetary policy. And that idea is that slow productivity growth might actually be the new norm. (Source: “Minutes of the Federal Open Market Committee,” FederalReserve.gov, November 20, 2013.)
Since the Great Recession, worker productivity has been running at roughly half the rate that the U.S. experienced over the 25 years prior. The problem is that potential gross domestic product (GDP) growth comes from a combination of productivity and the labor force.
If productivity stalls and the Federal Reserve continues with its monetary policy, at some point, this excess cash will begin to seep into the economy and cause inflation.
The reason we aren’t seeing inflation in the official data despite record levels of monetary policy is that the velocity of money has been low. This basically means that money is sitting in bank reserves or is being funneled into assets, such as stocks, instead of being channeled into the actual U.S. economy. There is asset inflation, but the official measures don’t track items like the stock market.
However, at some point, this begins to shift, especially when worker productivity remains low. The last time productivity hit such low levels was during the 1970s, and we all know what happened to the U.S. economy during that time.
Clearly, the monetary policy program run by the Federal Reserve is not having a positive impact on the real economy, as unemployment remains stubbornly high.
While the Federal Reserve … Read More
Last week’s testimony by Janet Yellen, President Obama’s choice for the next head of the Federal Reserve, was quite interesting. What I also found fascinating was the reaction in various markets.
Yellen was testifying in front of the Senate Banking Committee, and when asked about the possible formation of bubbles as a result of the Federal Reserve’s quantitative easing program, she stated point-blank, “By and large, I would say that I don’t see evidence at this point in major sectors of asset price misalignments.” (Source: Bloomberg, November 15, 2013.)
I certainly don’t have any experience working at the Federal Reserve, but I find this hard to believe.
Is the new Federal Reserve chairwoman trying to convince us that with a weak economy, it makes perfect sense for the stock market to be at all-time highs, margin debt to be soaring to record levels, the housing market to be experiencing bidding wars in certain areas of the country, and for vehicle sales to be soaring—all while incomes remain flat?
What do these factors tell me? All of these different sectors of assets are being fueled by cheap money produced from quantitative easing by the Federal Reserve.
Look at it this way: how many sectors of the economy are booming where there is no financing available, but cash purchases only? Very few. We keep hearing about retailers that cater to the average American having difficulty, since their consumers lack the cash to increase their spending. People are only buying goods if they can get credit, using cheap money.
Is this a bubble?
Well, I ask you to consider this: if the Federal … Read More
Over the last few days, gold bullion in U.S. dollars has been under selling pressure yet again. With the price of gold bullion pulling back, one obvious question arises: what’s the appropriate investment strategy at this point?
Many are pointing to talk that the Federal Reserve is about to reduce its monetary stimulus, and this has led some investors to adjust their investment strategy by reducing their gold bullion holdings.
There are several interesting points to make about the argument for this investment strategy. Firstly, members of the Federal Reserve, along with other central bankers around the world, have explicitly stated that inflation is far too low—the opposite of what these investors who are bearish on gold believe.
Considering that the Federal Reserve has all the control in terms of money supply and it is adamant in its goal of increasing inflation, I certainly wouldn’t want to fight the Fed.
So, the media is stating that the reason people are shifting their investment strategy on gold bullion is because the Federal Reserve is about to begin reducing money printing due to the increase in inflation…
Since when does higher inflation lead to lower gold bullion prices? It just doesn’t. If inflation gets out of control, I would rather already own gold bullion than join the crowd scrambling to jump on board again.
If anything, having the Federal Reserve and global central bankers pushing their foot on the money printing accelerator just means a greater increase in the probability of inflation.
Inflation, of course, means higher asset prices. As an investment strategy, when an economy is encountering inflation, the one place … Read More
Why is the average American falling behind in our economy?
Millions of Americans feel as though they are being left behind while the disparity between themselves and the rich continues to grow.
Over the last few years, the Federal Reserve has enacted the most aggressive monetary stimulus program in the central bank’s history. But even with the Fed’s trillions of new dollars thrown into the economy, most Americans do not feel any more financially secure or wealthier than before.
Now, when we look at the stock market, one could easily assume that the monetary stimulus brought on by our central bank is having a positive impact.
Let’s take a look at another country whose central bank has also been pushing a very easy monetary stimulus program for years; of course, I’m talking about the Japanese central bank.
We all know the Japanese economy has been in a slump for multiple decades. If monetary stimulus were the answer to all ills, why is Japan’s economy still weak? Let’s take a closer look at the average Japanese citizen for the answer.
According to a report by Japan’s central bank, 31% of Japanese households have no financial assets—a new record-high. This survey has been conducted since 1963. (Source: Bank of Japan web site, last accessed November 12, 2013.)
How could this be? The central bank in Japan has been pushing a very aggressive monetary stimulus program, which has led to a drop in the value of the country’s currency and an increase in the stock market in Japan of approximately 60% this year.
While monetary stimulus by the central bank did help push … Read More
Of all the central banks around the world, the European Central Bank (ECB) has rarely surprised markets by making monetary policy adjustments without some hints to the market first.
But this is exactly what happened last week when the ECB lowered its benchmark interest rate to a record-low 0.25% in hopes to spur economic growth. (Source: European Central Bank, November 7, 2013.)
This monetary policy change is a much bigger deal than many people realize.
First of all, as I just discussed last week, many investors have been expecting economic growth to finally emerge within the eurozone. This change in monetary policy by the ECB just validates what I’ve been saying for some time: that economic growth is nowhere in sight.
This is not news. How many years has it been since the Great Recession, and where can you find true, fundamentally strong economic growth?
All I see are central banks trying to outdo each other with easier and easier monetary policy (money printing).
With the ECB benchmark interest rate now at 0.25%, how much more ammunition does the bank have left? Does anyone really believe that a quarter-point drop in interest rates will revive economic growth for the region? I certainly don’t.
But this goes beyond just the eurozone. What the ECB is doing with monetary policy is more than simply printing money; it’s trying to lower the euro currency. And while the central bank isn’t explicitly stating that this is its plan, in my opinion, it is still a significant consideration.
Look at what the Japanese central bank has done. Japan has enacted one of the largest monetary … Read More