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The Fed Tapers into a Recession

By smaulgld   2014 Apr 22, 1:50am   1 link   3,451 views   29 comments   watch (1)   quote      

http://smaulgld.com/fed-tapers-into-recession/

Here is a summary of what the Fed Presidents and Janet Yellen are thinking. Do you think they understand the economy? the weather?

#investing

Comments 1-29 of 29     Last »

1   smaulgld   2014 Apr 22, 2:14am     ↑ like (1)   ↓ dislike (1)   quote    

The Fed has enormous power in three respects:

1. it sets the price of money by setting interest rates
2. it can print money to buy government debt or just about anything else it wants -and it does it in the trillions!
3. it is unaudited.

A central bank that did nothing other than act as a bank of last resort wouldn't be that bad. It becomes all powerful when it engages in trying to direct the economy

2   clambo   2014 Apr 22, 2:56am     ↑ like (2)   ↓ dislike   quote    

No Yellen doesn't have any clue. But there are other adults in the room with her.

The Federal reserve can throw cold water on the economy, cool it down by raising interst rates.

But, the converse is obviously not true, the Fed cannot stimulate the economy in a real way. The proof is that the USA economy has grown an anemic 2% since Obama took office, despite the efforts of the Federal reserve.

Wealth comes from 1. production 2. innovation

Growth of 1&2 grows our economy. So, as one would expect, the increased production of oil and gas in Texas and North Dakota has grown their economies, while innovation in N. California has grown the economy locally.

Some interest rates will become out of the Federal reserves control after they stop buying all of the USA debt; since this is sold at an auction, the marketplace will determine how much to discount the IOU, and this determines the interest rate of that IOU.

Sometimes I watch these TV shows with the talking heads mention "Fed stimulus" and I want to throw a rock at the TV, the Fed is not stimulating our economy, it never could.

What does it mean for you and me? Stocks are good to have when interest rates are low.

3   smaulgld   2014 Apr 22, 3:05am     ↑ like (3)   ↓ dislike (1)   quote    

The GDP growth has been lower in dollar terms than the amount of QE "stimulus"

4   smaulgld   2014 Apr 22, 5:26am     ↑ like (1)   ↓ dislike (1)   quote    

We're just two to three years away from a normal economy according to Janet Yellen
http://www.moneynews.com/robert-feinberg/yellen-cohen-fed-feldstein/2014/04/21/id/566705/

5   Analyzer   2014 Apr 22, 5:57am     ↑ like (2)   ↓ dislike   quote    

clambo says

Sometimes I watch these TV shows with the talking heads mention "Fed
stimulus" and I want to throw a rock at the TV, the Fed is not stimulating our
economy, it never could.


What does it mean for you and me? Stocks are good to have when interest rates
are low.

Excellent post. The only thing the FED is stimulating is Wall Street bank accounts.

6   Analyzer   2014 Apr 22, 5:57am     ↑ like (2)   ↓ dislike   quote    

smaulgld says

We're just two to three years away from a normal economy according to Janet Yellen
http://www.moneynews.com/robert-feinberg/yellen-cohen-fed-feldstein/2014/04/21/id/566705/

Are you kidding me, 5+ years and trillions of dollars printed.

7   David9   2014 Apr 22, 6:07am     ↑ like (3)   ↓ dislike   quote    

According to Zillow, the recession "Is in the Rearview Mirror"

https://homes.yahoo.com/news/putting-recession-rearview-home-values-near-peak-levels-040442182.html

This is of course because:

"Homes in more than 1,000 cities and towns nationwide either already are, or soon will be, more expensive than ever"

That is all an economy is?

Again, someone needs to put these new economic principles in print.

8   smaulgld   2014 Apr 22, 6:45am     ↑ like (2)   ↓ dislike (1)   quote    

David9 says

According to Zillow, the recession "Is in the Rearview Mirror"

https://homes.yahoo.com/news/putting-recession-rearview-home-values-near-peak-levels-040442182.html

This is of course because:

"Homes in more than 1,000 cities and towns nationwide either already are, or soon will be, more expensive than ever"

That is all an economy is?

Again, someone needs to put these new economic principles in print.

Sounds like Zillow is vying to be the new NAR

9   bubblesitter   2014 Apr 22, 6:53am     ↑ like (1)   ↓ dislike   quote    

smaulgld says

Sounds like Zillow is vying to be the new NAR

NAR reaches DC and beyond. I think they infiltrated zillow for good.

10   smaulgld   2014 Apr 22, 7:11am     ↑ like (3)   ↓ dislike (1)   quote    

Zillow is worth $4.1 billion!!! and it lost $12.5 million last year
on revenue of $197 million

http://finance.yahoo.com/q/is?s=Z+Income+Statement&annual

analysts are predicting it to go higher. Why?

It's a farce, just like the housing "recovery"

http://smaulgld.com/why-the-housing-recovery-is-a-farce-illustrated-by-two-charts/

11   smaulgld   2014 Apr 22, 9:41pm     ↑ like (2)   ↓ dislike (1)   quote    

The fed beloved housing recovery is in jeopardy
Is the stock market next?
http://smaulgld.com/how-a-stock-market-crash-will-end-the-economic-recovery/

12   Blurtman   2014 Apr 22, 11:28pm     ↑ like (1)   ↓ dislike   quote    

The Fed now holds more US Treasuries than either China or Japan.

13   smaulgld   2014 Apr 22, 11:32pm     ↑ like (3)   ↓ dislike (1)   quote    

Blurtman says

The Fed now holds more US Treasuries than either China or Japan.

Crazy! and to achieve that feat they bought 70-90% of the newly issued treasured over the past two year.
So when they stop who will buy them?

Looks like Belgium!,

14   smaulgld   2014 Apr 23, 3:21am     ↑ like (2)   ↓ dislike (1)   quote    

Another poor month of housing and job numbers and the Fed might reconsider their taper

15   myob   2014 Apr 23, 3:31am     ↑ like (3)   ↓ dislike   quote    

Are the people at the Fed idiots or malicious?

They can't keep printing at this rate without repercussions.

Wealth comes from productivity, not from money. Money is the most fluid way in trading your productivity for that of others.

QE is spent into existence via banks, and given the way it works, it allows some people with access to this money to speculate into housing and equities, and makes credit cheaper. The closer you are to the top, and the more assets you have, the better you do when asset prices are bid up.

Money printing hurts productivity because it causes some people to chase the easy, speculative gains instead of being productive and working hard in an alternate way. If you can make money flipping houses with cheap credit, why bother running a factory, or a restaurant? That's how stimulus harms productivity, by creating financial incentives to speculate into assets. This creates bubbles, which inevitably pop, and the end result is that so much economic activity has been centered around those bubbles that other sectors of the economy are neglected.

16   clambo   2014 Apr 23, 3:40am     ↑ like (3)   ↓ dislike   quote    

The Fed has keeps interest rates *artificiallly low* at zero which is evil. Why is it so bad?

1. Savers are punished. A guy who is retired with $100,000 can only make $166/month if he owns Vanguard Total Bond market index fund. He'll make 1/2 that in a bank.

2. Debtors are rewarded.

3. Investors are forced into stocks and other types of investments they may be afraid of since (Lehman collapse( 2008 stock dive.

4. Asset bubbles are reblown. Houses are an example of course.

Someday all of us are going to retire and need some sources of income that pay better than 2% even if we are taxed to death to support the giant welfare/military/govt. complex.

It's depressing but funny thing is people are worried about stuff that's irrelevant, when was the last time you visited Ukraine or Syria?

17   smaulgld   2014 Apr 23, 3:44am     ↑ like (1)   ↓ dislike (1)   quote    

clambo says

The Fed has keeps interest rates *artificiallly low* at zero which is evil. Why is it so bad?

1. Savers are punished. A guy who is retired with $100,000 can only make $166/month if he owns Vanguard Total Bond market index fund. He'll make 1/2 that in a bank.

2. Debtors are rewarded.

3. Investors are forced into stocks and other types of investments they may be afraid of since (Lehman collapse( 2008 stock dive.

4. Asset bubbles are reblown. Houses are an example of course.

Someday all of us are going to retire and need some sources of income that pay better than 2% even if we are taxed to death to support the giant welfare/military/govt. complex.

It's depressing but funny thing is people are worried about stuff that's irrelevant, when was the last time you visited Ukraine or Syria?

Well put here is another way of saying it
http://smaulgld.com/the-dark-side-of-artificially-low-interest-rates/

18   clambo   2014 Apr 23, 4:05am     ↑ like   ↓ dislike   quote    

Consumption being a large part of our economy was a result of the bubble asset "wealth effect" from real estate which is now gone from the economy.

Rich people of course continue to shop as always so fancy stores and Apple do fine.

Some people/economists thought that the American consumer spending his dough was an essential part of our economy. Not exactly; production and innovation and capital saving are essential to our economy.

I tell everyone that the economy today in California is the real economy, with the house bubble money taken away.

What's a shame is that under California and off the coast there is so much gas and oil that we could all get royalties like people in Alaska do, and pay $2/gallon to drive around (natural gas works fine in cars).

The delta smelt is preventing farmers getting water to grow and produce, nobody I know has ever eaten one of these crummy fish.

19   hanera   2014 Apr 23, 4:07am     ↑ like   ↓ dislike   quote    

Modern economy and political circles are dominated by financial guys. Low interest rate is to keep the financial industry and Wall Street afloat. All other considerations are secondary. Since the invention of stocks and stock exchange, we are endeared to Wall Street. I don't like this system since the productive guys are seconded to the finance guys. Until we can come up with a better system, this is the world we have to navigate.

20   myob   2014 Apr 23, 4:10am     ↑ like (2)   ↓ dislike   quote    

What the Fed does with devaluing the dollar and meddling in the interest rate is really harmful, on many levels.

Let's imagine what happens in an economy with a market based interest rate and a relatively stable amount of money.

When the net savings rate increases, it means that more money is available in banks for lending, which drives down the interest rate paid and interest rate of credit, discouraging savings and encouraging borrowing, both of which encourage spending. When people borrow too much or spend too much, the interest rate both for deposits and credit increases, encouraging savings and discouraging borrowing. This is pretty basic so far, but here comes the important bit.

The mainstream political economists have no understanding of capital goods in their models. This is a fundamental shortcoming which, in my opinion, pretty much invalidates any derivatives of Keynesian and monetarist economics. Let's go back to the case where net savings are increasing. What does this mean in terms of capital goods? It means that people are producing more than they consume, so, on average, the amount of goods available for use is also increasing. It means that a time of low interest rates corresponds with a time of plentiful capital goods supply, so it's a great time to borrow money or spend money to buy those plentiful things and build houses, factories, whatever.

Furthermore, when everyone is saving, they are deferring consumption to the future. So, the low interest rate also signals to us that there is more potential for future consumption. If we take on capital intensive projects today, the low interest rate also means that people will have money to spend on our endeavor!

See how all these incentives align to balance present savings against future consumption, present investment against future returns? When the economy heats up, the feedback slows it down, when it slows down, the feedback speeds it up. It's a wonderful thing.

Now, introduce the Fed and remove any meaning from the interest rate. It no longer signals the availability of goods. It no longer signals anything about future demand. We have much more uncertainty. If we take on our capital intensive project today, because credit is cheap, we could run out of goods (say, bricks, shingles or machinery) and have to pay much more for it, making our costs go up more than anticipated. If we succeed in finishing our project, there may be no money available for people to spend on it. We're basically shooting in the dark and guessing.

Manipulation of a small thing, like the interest rate, has dire economic consequences. I'm actually amazed that given government interference at all levels, sometimes greater than interest rate manipulation, that we still enjoy the relatively high standard of living that we have. Sadly, I think it will continue to decline for most people who don't have access to the cheap money or political means of succeeding, since old fashioned capital investment no longer works.

21   hanera   2014 Apr 23, 4:15am     ↑ like   ↓ dislike (1)   quote    

clambo says

Rich people of course continue to shop as always so fancy stores and Apple do fine.

Apple products are more reliable and durable than other products. In fact, the total cost of ownership over an extended period for Apple product is much lower than other products which tend to have shorter useful lifespan and need to changed often. For example, I'm still using an early 2009 iMac running the latest Mac OS X, Mavericks. Can a 2009 WinTel runs the latest Windows Surface/8?

22   zzyzzx   2014 Apr 23, 4:24am     ↑ like (2)   ↓ dislike   quote    

smaulgld says

We're just two to three years away from a normal economy according to Janet Yellen

http://www.moneynews.com/robert-feinberg/yellen-cohen-fed-feldstein/2014/04/21/id/566705/

23   zzyzzx   2014 Apr 23, 4:25am     ↑ like   ↓ dislike   quote    

hanera says

Apple products are more reliable and durable than other products. In fact, the total cost of ownership over an extended period for Apple product is much lower than other products which tend to have shorter useful lifespan and need to changed often. For example, I'm still using an early 2009 iMac running the latest Mac OS X, Mavericks. Can a 2009 WinTel runs the latest Windows Surface/8?

No, but it can still run Windows XP just fine and far into the future.

24   hanera   2014 Apr 23, 4:33am     ↑ like   ↓ dislike   quote    

zzyzzx says

No, but it can still run Windows XP just fine and far into the future.

You would need to visit Microsoft.com for help, http://windows.microsoft.com/en-US/windows/end-support-help

25   bob2356   2014 Apr 23, 4:58am     ↑ like   ↓ dislike   quote    

hanera says

For example, I'm still using an early 2009 iMac running the latest Mac OS X, Mavericks. Can a 2009 WinTel runs the latest Windows Surface/8?

I don't know but my no name made around 2000 bought a garage sale 10 years ago for 200 bucks pentium box runs the latest linux just fine. I think that TCO beats apple hands down.

What does any of this have to do with the fed tapering.

26   smaulgld   2014 Apr 23, 5:07am     ↑ like (1)   ↓ dislike (1)   quote    

myob says

Sadly, I think it will continue to decline for most people who don't have access to the cheap money or political means of succeeding, since old fashioned capital investment no longer works

Mises would claim that the entrepreneur is tricked into making malinvestments when rates are artificially low.
I say he rather knows precisely what is going on and invests in speculative junk knowing that his return on investment will be better if he creates a company without profits and sells it to wall street than if he built a profitable business.

27   myob   2014 Apr 24, 2:20am     ↑ like (1)   ↓ dislike   quote    

You are well read, Smaulgld :)

I think both Mises and you are right. Some people want to consciously cash in on the bubble, while others are fooled by the higher, easier gain. It doesn't matter which way the malinvestment happens, the economy suffers for it.

28   smaulgld   2014 Apr 24, 2:28am     ↑ like (1)   ↓ dislike (1)   quote    

myob says

It doesn't matter which way the malinvestment happens, the economy suffers for it

True
I think the entrepreneur is not tricked but the retail consumer like the home buyer is

29   corntrollio   2014 Apr 24, 7:36am     ↑ like   ↓ dislike   quote    

hanera says

Apple products are more reliable and durable than other products.

Except when their batteries die, and you have to pay an exorbitant price to get a new one, because they're not easily user-serviceable.

hanera says

For example, I'm still using an early 2009 iMac running the latest Mac OS X, Mavericks. Can a 2009 WinTel runs the latest Windows Surface/8?

I ran an old Windows XP machine for ages. I suspect I could run a Win7 machine for a similar number of years. No idea about 8/8.1.

That said, it's possible total cost of ownership can be low (but not necessarily lower) for a Mac if you don't run them for a long time. If you buy a Mac every year and sell your old one every year, you might not do too badly because they tend to have high resale value.

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