Life After ZIRP

Posted on December 18, 2015 by MN Gordon

Federal Reserve Chair Janet Yellen finally made good on her promise.  On Wednesday she raised the federal funds rate to a target range of 0.25 to 0.5 percent.  Can you believe it?

After nearly a decade since the last rate hike, and seven years of zero interest rate policy (ZIRP), Yellen stiffened up her spine and did the dirty deed.  But, of course, she also placed a hedge.  She assured Wall Street she was in no hurry to cut off their liquidity.  Here’s a brief excerpt from the FOMC statement…

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.  However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Indeed, Wall Street gushed over the word “gradual” and promptly bid up stock prices.  The DOW ran up 224 points. Continue reading →

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The Fed’s Stars Never Aligned

Posted on December 15, 2015 by MN Gordon

On Wednesday, following the two day Federal Open Market Committee meeting, Fed Chair Janet Yellen will likely announce that the Fed will do something they haven’t done in nearly a decade.  They will raise the federal funds rate.

Obviously, a lot has happened since June 29, 2006.  For example, on June 29, 2007, precisely one year after the Fed’s last rate increase, the first generation Apple iPhone was released.  What this has to do with Fed, we really don’t know.  But it does offer perspective on just how doggone long it has been since the world has known a rising federal funds rate.

As far as the economy goes, the last 10-years haven’t all been peaches and cream.  Several notable disfigurements include the Great Recession, the ignoble disappearance of Lehman Brothers, TARP, trillion dollar budget deficits, the addition of over $3 trillion to the Fed’s balance sheet, seven years of zero interest rate policy, and the addition of over $10 trillion to the national debt.

Yet finally, after much dithering and prevarication, the navel gazers at the Fed have found the power within themselves to ever so slightly ease up on the gas pedal of monetary policy. Continue reading →

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Fighting the Suck in China

Posted on December 11, 2015 by MN Gordon

Old records are being broken.  New records are being notched.  On Monday, for example, the People’s Bank of China reported a record liquidation of foreign exchange reserves occurred in November.

Specifically, China’s foreign exchange reserves declined $87.22 billion in November to $3.438 trillion.  This amounts to a monthly sell off of 2.5 percent.  What could possibly be prompting the massive sales?

For starters, China’s economy is slowing down.  Chinese exports, the major growth engine for China’s economy, fell 6.9 percent on an annual basis through October.  What’s more, China’s on target to report its slowest growth in the last 25 years.

This means a number of different things.  But, at the moment, it means people with money in China are trying to get it offshore and out of Chinese assets.  Popular destinations include U.S. real estate and stocks and bonds.

U.S. Treasury data estimates over $500 billion have exited China between January and August of this year.  These, no doubt, are massive capital outflows.  But, despite increasingly stringent capital controls, forecasters believe the wealth exodus increased in November. Continue reading →

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Money Velocity Lethargy

Posted on December 8, 2015 by MN Gordon

Logic, common sense, and rational deduction are useful means for comprehending the world.  But they are merely tools.  The user will always be limited by the quality and quantity of the information available and their ability to properly interpret it.

Data and knowledge gaps can lead to false conclusions.  A wrong turn in the thought process can lead down a dead end street.  Where the economy’s concerned, people must make decisions with incomplete information.  That’s why things are often not what they seem.

For example, as night follows day and day follows night, should not price inflation follow the massive $3 trillion Fed balance sheet expansion that’s happened over the last 7-years?  Simply connecting the dots quickly leads one to a ‘yes’ conclusion.  More money chasing a static number of goods and services should result in price inflation.  For prices must rise to balance out all the new money.

This, of course, makes good practical sense.  In fact, it might even lead someone to sell dollars and buy gold.  They’d have a bullet proof rationale guiding their decision, wouldn’t they? Continue reading →

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