The Impact Of Tuesday's Fed Policy Actions
This week we are reminded by the largest consumer price declines since the onset of the Great Depression. Demand around the globe is imploding. As we remarked in the last post the Fed is now attempting to push banks to lend through policy action. The Fed's announcement also includes provisions to force money out of risk-free assets by offering essentially no measurable return on these instruments.
There doesn't seem to be many clear explanations of the Fed's actions recently. This is most likely because the Fed has never instituted these policies before. So, we hear comments like "If the Fed could buy a Picasso painting to save the economy, it would." Now exactly how would that help the economy? Even though the Fed is very mysterious and monetary policy often seems like voodoo this is all really quite simple. Tuesday's two announced policies of forcing banks to lend and offering no return on risk-free assets go hand-in-hand. The Fed is attempting to impact both supply and demand for credit. Force the banks to lend and force business and individuals to spend. Force may be too harsh of a word but the Fed wants the participants in the economy to believe cash is trash. They do that by removing the yield on risk-free assets and by offering credit in return. The ultimate goal is to re-ignite inflation so we don't drown in a mountain of debt. They intend to do this by encouraging risk-taking in the economy. Hopefully that's a lot easier to understand than TARP, repos, quantitative easing and the sinister notion that the Fed is dropping money from helicopters. (These positions are either based on lies or lack of understanding of Fed policy.) The real question is if it will work and what are the unintended consequences to such policies. One unintended consequence is that grandma's FDIC insured certificates of deposit yields are imploding. So, grandma now needs to invest her life savings in a hedge fund to pay her heating bill.
Here's something to think about. Interest rates were already the lowest in the last fifty years this past cycle and yet, as we noted numerous times while the world was partying hard, it did not positively impact the demand for capital. Should we anticipate something has magically changed? Do you now want to be greedy when others are fearful? Especially after those who advocated such a position, like Buffet, were crushed. It's quite easy to be nonchalant when you have $40 billion in cash. Not so easy when you don't know if you will have a job tomorrow or where your next check is going to come from.
In closing, let's look at what we can conclude from Tuesday's Fed policy announcements aside from Wall Street's attempted emotional manipulation of the post announcement rally. (More on that in the next post.) $8 trillion in Fed actions, a $300 billion stimulus package, $150 billion in pork on the back of the $700 billion in TARP funding, rate cuts to one half of one percent and similar actions by bankers and governments around the globe that took place before Tuesday have not stemmed the global economic crisis.
Therefore, what Tuesday's Fed policy actions really tell us is that the world is falling off of a cliff and desperate times call for desperate measures. In other words the Fed is desperate. The massive price declines and collapse in demand we are seeing around the globe has the Fed worried about deflation and depression regardless of the public remarks to the contrary. Remember, a cornered animal is extremely dangerous. Even though it appears the world is coming to an end, with significantly declining prices (increased purchasing power), an enormous energy tax removed from the economy, a planned trillion dollar stimulus package and the Fed's recent actions, for the time being I don't think it's a good time to play chicken with markets.
There doesn't seem to be many clear explanations of the Fed's actions recently. This is most likely because the Fed has never instituted these policies before. So, we hear comments like "If the Fed could buy a Picasso painting to save the economy, it would." Now exactly how would that help the economy? Even though the Fed is very mysterious and monetary policy often seems like voodoo this is all really quite simple. Tuesday's two announced policies of forcing banks to lend and offering no return on risk-free assets go hand-in-hand. The Fed is attempting to impact both supply and demand for credit. Force the banks to lend and force business and individuals to spend. Force may be too harsh of a word but the Fed wants the participants in the economy to believe cash is trash. They do that by removing the yield on risk-free assets and by offering credit in return. The ultimate goal is to re-ignite inflation so we don't drown in a mountain of debt. They intend to do this by encouraging risk-taking in the economy. Hopefully that's a lot easier to understand than TARP, repos, quantitative easing and the sinister notion that the Fed is dropping money from helicopters. (These positions are either based on lies or lack of understanding of Fed policy.) The real question is if it will work and what are the unintended consequences to such policies. One unintended consequence is that grandma's FDIC insured certificates of deposit yields are imploding. So, grandma now needs to invest her life savings in a hedge fund to pay her heating bill.
Here's something to think about. Interest rates were already the lowest in the last fifty years this past cycle and yet, as we noted numerous times while the world was partying hard, it did not positively impact the demand for capital. Should we anticipate something has magically changed? Do you now want to be greedy when others are fearful? Especially after those who advocated such a position, like Buffet, were crushed. It's quite easy to be nonchalant when you have $40 billion in cash. Not so easy when you don't know if you will have a job tomorrow or where your next check is going to come from.
In closing, let's look at what we can conclude from Tuesday's Fed policy announcements aside from Wall Street's attempted emotional manipulation of the post announcement rally. (More on that in the next post.) $8 trillion in Fed actions, a $300 billion stimulus package, $150 billion in pork on the back of the $700 billion in TARP funding, rate cuts to one half of one percent and similar actions by bankers and governments around the globe that took place before Tuesday have not stemmed the global economic crisis.
Therefore, what Tuesday's Fed policy actions really tell us is that the world is falling off of a cliff and desperate times call for desperate measures. In other words the Fed is desperate. The massive price declines and collapse in demand we are seeing around the globe has the Fed worried about deflation and depression regardless of the public remarks to the contrary. Remember, a cornered animal is extremely dangerous. Even though it appears the world is coming to an end, with significantly declining prices (increased purchasing power), an enormous energy tax removed from the economy, a planned trillion dollar stimulus package and the Fed's recent actions, for the time being I don't think it's a good time to play chicken with markets.
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