A big bad day on Friday.
And after all that stimulus too! We put in nearly $3trn of QE, $700bn of TARP (troubled asset relief programme), $23trn of credit guarantees, $5trn of fiscal deficits, and this is all we get. What a disappointment.
The net loss of jobs over the summer months has been entirely among men, mostly aged 25 to 54 and university educated. The cohort aged over 55 has been growing, so this is not happening because baby boomers are retiring early and happy to grow cantaloupes in Arkansas, or to play golf at Torrey Pines.
The labour “participation rate” dropped to 63.2% in July, the lowest level since the late 1970s. The rate for men is at an all-time low. The unemployment rate has been falling, but chiefly because so many people are giving up hope and dropping off the rolls.
But the… most important restraint on the Fed was the unexpected effect on financial markets of a prospective change in monetary stance. The central bank had always emphasised that tapering did not mean tightening. Provided asset purchases remained above zero, the Fed’s balance-sheet would keep growing and monetary policy would still be loosening. Separately, the Fed never wavered from its pledge to keep the federal-funds rate near zero at least until unemployment had fallen to 6.5%.
Nonetheless, investors radically repriced their expectations of Fed policy and fled positions predicated on a policy of QE ever after. Bond yields and mortgage rates have shot up about a percentage point since May; the housing market has cooled. Mr Bernanke fretted this “rapid tightening of financial conditions in recent months could have the effect of slowing growth”, a problem that would be “exacerbated if conditions tighten further”
As we expected, the Fed made its announcement on Wednesday: No tapering. The next day, gold and stocks shot up.
It looked like it was going to be clear sailing, from here to eternity – or at least to 25,000 on the Dow. Heck, the Fed puts in $85bn of cash every month. That money has to go somewhere.
But, boo hoo, look what happened on Friday. Dow minus 185. Gold down $36.
Let’s not read too much into this. It could have been profit-taking by the gamblers who bet on a ‘no taper’ announcement. Still, the lack of follow-through raised questions: How is it, again, that the Fed’s money printing makes US companies more valuable?
Autumn arrived over the weekend. This is a dangerous season. The chilly winds begin to blow, and people begin to wonder: what next?
We have no ready answer. But we have plenty of ready questions.
First, a question for all of those who are betting on higher stock prices: don’t any of you know anything about investing? The idea is to buy low and sell high. If you buy high you have already screwed up. Yes, they might go higher. But who will you sell them to? And a bonus question: when the market has already priced in ‘QE forever’, what’s left to make prices go up more?
Second, we have a question for Janet Yellen: What’s a nice lady like you doing in a place like this?
Our main rival for the Fed post (not to mention the other 50,000 standing in line ahead of us; every one of them with better credentials, a better attitude, and a more winning personality) is Janet Yellen. The press says she is “cheery” and “motherly” and “sensitive”. In fact, from all we have read, she seems to be a nice ol’ gal. How then, did she end up at the Fed, slated to run the organisation? Doesn’t she know what they do there?
Perhaps not. So, as a public service, we will spend a few words explaining.
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The Fed, Janet, is supposed to bend the economy in a direction that is agreeable and profitable for the people who own it. It is the head bank of a vast cartel, owned by the major banks, and charged with making sure its members, clients and masters make money. Since banking is not a business that creates real wealth, it can only enrich its owners by taking money from other people. It does that 1) by printing money – buying the banks’ deadbeat ‘assets,’ 2) by fixing short term rates at artificially low levels (taking money that should rightfully belong to savers), and 3) by generally encouraging inflation to rob everyone. It says it is boosting employment; what it is really doing is stealing some of the working classes’ wages through inflation, coincidentally making labour cheaper.
Janet, you should know this by now, there is nothing the Fed does – except perhaps its cocktail receptions – that is not criminal, immoral, and from a public prosperity point of view, counterproductive. Get out while you can. Leave the job to us.
Now, for our third question. This one to colleague Justice Litle: when you have decided to end it all by jumping out of a tall building, does it help to move to a higher floor?
We both agree. The US is a great empire. All great empires come to an end. The question before us is, when? Your rogue economist believes the top is already in. Justice believes it is still ahead.
His reason for thinking so is that recent figures show a boom in US energy production. Energy – and the ability to transform it into stuff – is the secret of America’s success. Without cheap, abundant oil from Texas the story might have been very different. Then, when the US wells dried up, prices shot up, and the US had to fight wars in the Middle East to assure its access to oil. It looked like America’s days as the world’s leading superpower were numbered. But then, says Justice, along came fracking, and the numbers grew larger. Now, he believes, the US is on its way to another ‘50s-style boom.
In response to our argument – that it’s too late, because the US economy has been zombified – he answers that the “Zombie America is no match for Dynamic America.”
But Justice, it’s not a competition. It’s not one against the other. The nature of the whole US economy has changed. Energy (investment, resources, capital) now serves the interest of the zombies. The pay-off from all our major industries is now negative. Health, education, defence, finance – all have been zombified. Together they already claim more resources than America can produce. That is the implication of a federal budget with a hole of some $200-plus trillion in it. That’s the difference between what the feds have committed and what they’ve got. So, any additional resources, from fracking or wherever, have already been claimed by the zombie economy.
Boom in the US? Maybe – but it is like the arrival of a liquor store delivery at a wild frat party. More dangerous than helpful.
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