The FOMC remains very dovish and the free money will continue to
The two key things I was looking at for possible change was left alone. Th=
e FOMC will leave rates “exceptionally low…for an extended period” and=
their one sentence reference to inflation was exactly the same as the ver=
y dovish comment in Nov that said the “substantial” output gap and “stable=
inflation expectations” will lead to inflation remaining subdued for some=
time.” The FOMC acknowledged the slow down in the pace of job losses by=
saying “the deterioration in the labor market is abating.” They referred=
to consumer spending as “expanding at a moderate rate” whereas they said=
it was “expanding” only in Nov. Bottom line, the Fed remains insistent on=
staying very easy for much longer irrespective of the modest economic bou=
nce, rising commodity prices and inflation expectations, falling US$ and=
lack of emergency conditions that got us zero rates in the 1st place one=
year ago.
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December 16th, 2009 at 3:29 pm
Hooray! =)
December 17th, 2009 at 2:04 am
“Bottom line, the Fed remains insistent on staying very easy for much longer irrespective of… lack of emergency conditions…”
Well, I was trying to track you for a while, there.
Here are some world-class-depression conditions, tho I wonder how anybody who’s paying attention could overlook them…
*10% of our workforce unable to find a job although looking. Another maybe 7% given up looking. One in six of our potential workforce who needs to eat, as do his/her children, retired parents, etc., but has no means to produce income.
*Factories running at around 3/4 of capacity, generating no profit on the idle machinery and plants, and not likely to be upgraded to more efficient without a vastly increased end-user demand — domestic or export.
*One quarter of owned homes are mortgaged for more than they’re worth. As long as owners have enough income, they CAN elect to keep paying the mortgage, for the option value that the price may turn up. But take an income hit and/or continued depression of local prices, and the economic incentive is to walk, pulling our banks back under water, too.
*Commercial properties at very high vacancy rates, leading owners to put the properties back to banks or investors. (Just beginning.)
*The Fed is the primary support for the ICU-bound mortgage bond market. Take away their Quantitative Easing and mortgage investments sag.
*Most state governments slashing spending in response to weak tax collections, further contracting the economy. Federal aid to states a small fraction of the reductions are at best a rear-guard effort to slow cuts.
If today’s conditions are not a classic liquidity trap, demanding sub-zero interest rates (or fiscal stimulus, which is somewhat more possible), what is the definition of a liquidity trap?
People holding fixed income assets have reason to be concerned about inflation eroding the value of their bonds. Today, they may have MORE reason to be concerned about defaults canceling the value of their bonds. If you’re holding AAA-rated or government bonds and feel you have only to be concerned about the former, I suggest you hire a new risk consultant. And if you still feel that way, diversify into gold, TIPs and rubles since they gleam so brightly in your eyes, after you stock up on canned food and ammo. [Not investment advice, as it runs counter to my assumptions.]
Personally, though, I’d give long odds that we will not have a durable recovery UNTIL we start seeing inflation above 3%, and you’ll also want to be stocked up on TUMS and heart palpitation pills.