Posts Tagged ‘economy’

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Ben Bernanke and The Federal Reserve Money Factory

Thursday, December 3rd, 2009

golden-ticketOver the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.

Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.

Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.

For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.

Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.

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Is an Economic Asteroid Coming?

Tuesday, December 1st, 2009

asteriod-impactThe question really is not whether one is coming but would they tell us if it were? In the movies when an asteroid is headed towards Earth, the government decides to keep the impending doom from its citizens to protect them from the horrible truth. Then typically about 3 days from impact, the secret of the approaching fate is revealed along with a plan to save the day. Is it possible that the US government is sugar coating the truth to protect us, shelter us?

The Chinese government is notorious for embellishing their economic numbers. Is the US government taking a page out of their red book on crowd control.

One possible sign of the potential sugar coat could be in economic data revisions. When data is released the markets react based on whether they meet, miss or exceed expectations. If a market rallies on exceeded expectations, shouldn’t that same market give back those gains if that data is revised down the following month? Most of the time the market ignores these revisions and may actually rally again if the data shows another exceeded expectation even though the data may have actually been negative.

For example; if monthly retail sales went up month over month 1.4%* then the next month they revise this number to -.4%*, but the current month over month sales went up 1.8%. Has retail sales really gone up that much? The markets probably would have rallied the 1.4%* and the 1.8%* if they exceeded expectations. But the data is misleading. Lets simplify this information by using small numbers:

Month 1: $100.00 in retail sales
Month 2: $104.00 in retail sales (1.4% improvement over the previous month)
Month 3: $107.57 in retail sales (-.4 revision plus 1.8% improvement)

*The numbers from the above example are made up and are not real.

So on the surface retail sales going up 1.8% looks good, but retail sale really only went up 1.757% over 2 months. This data becomes even more confusing if it is revised the following month.

Economic data did not predict the beginning of this financial crisis, what makes you think that it will predict the end?

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GDP First Look – Robbing Peter to Pay Paul?

Thursday, October 29th, 2009

The 3rd quarter showed a 3.5% increase over the 2nd quarter GDP (Gross Domestic Product). According to the preliminary look at 3rd quarter GDP report the primary contributors where (as quoted by the report):

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

Let’s take a better look at the above quote from this widely viewed report.

The first primary contributor according to the report was Personal Consumption Expenditures. The report specifically cited that auto sales accounted for a large part of this upturn. Cash for clunkers is actually quoted by the report as a major contributor to these sales.

Exports are the second contributor named in this report as a large contributor. When the Dollar is cheap so are good that are priced in the Dollar. The news is filled with headlines on how the US Dollar is under significant pressure.

Private Inventory Investment is the next contributor on the list. Over the past year retailers have been shedding inventory to attempt to match supply with current demand. The shelves are empty and they need to be restocked if retailers want to sell products to consumers.

Residential Fixed Investment is named as another large contributor. First time home buyers have been scrambling to purchase homes to take advantage of the $8000 tax credit. In September alone nearly 50% of existing home sales where to first time home buyers. Nearly 70% of existing homes sales in September where under $250,000.

So last on the list is Federal Government Spending. It should be no surprise that Federal Government spending contributed a large portion of 3rd quarter GDP. Looking at what the report cited as the primary contributors to real GDP, I would argue that almost all of the GDP growth was from the government intervention.

The report also sighted the following:

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

From the above statement I would gather that consumers made less but spent more. Interestingly this current outcome is what the Federal Government wants to happen, spend our way out. With tight credit and rising unemployment, where does the money come from? Credit is what caused this problem, is it really the cure as well. Drug addicts don’t take more drugs to get off drugs do they.

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Federal Reserve Statement

Wednesday, May 20th, 2009

Judge for yourself, but it looks like according to the US Federal Reserve the outlook has not improved. The economy has continued to “contract” and their hope is resting on the stimulus and the Federal Reserve’s steps it has already taken. They cite household spending has seen signs of stabilizing, “but” with continued job loss, declining housing wealth and tight credit, it still is “constrained. There has never been a time in history where fighting a credit crisis with credit has ever won. Maybe it isn’t a lack of credit, but too much credit in the system.

Here is a copy of their statement released today at 2:00 PM EST:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.

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Bank Stress Test – Possible Train Wreck?

Friday, May 8th, 2009

File:Train wreck at Montparnasse 1895.jpgSince the announcement of the Bank Stress Test the US Government has been promising a level of transparency that was suppose to shed light on the real condition of the largest banks in the USA. The official results were announced at 5:00 PM EST but the actual results had been leaked to the press over that past two weeks.

With the test scores in, Wall Street seems unsurprised by the results. The US Government seems to have spent more effort on releasing the information so as not to disrupt the markets, than realistically testing the banks. This test was supposed to see if banks could handle another future financial earthquake. Instead it seems to have tested if they could handle what may be a best case scenario.

The US government used both a worst case scenario and a more “probable case” to test the possible financial needs of Americas 19 largest banks. The “probable case” unemployment for this year has already been met. The Federal Reserve Chairman during his last testimony to congress stressed the increasingly concerning commercial real estate industry, but the test puts little weight to it. The Bank Stress test seemed to be more political propaganda to spur optimism than a true test of structural integrity.

Consumer credit was released today showing consumers paid down debt $11.1 billion in April instead of the forecasted reduction of $4.2 billion. The consumer still appears to be concerned about debt reduction than expansion. The backbone of the US governments recovery plan is to expand lending and spur consumer spending.

United States Railroad freight traffic was down 23 percent in April and 18.2% year to date. Railroads move raw goods around America. The Association of American Railroads Senior Vice President John T. Gray was quoted in a released statement “Unfortunately, it’s hard to find much in rail traffic data in April to support the idea that the economy is starting to see ‘green shoots’ … it may still just be weeds”. How can manufacturing be recovering without the raw goods to make products?

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Who Leads the Economy?

Tuesday, April 28th, 2009

The US economy is made up of two fundamental events which are expanding and contracting credit. While an economy is expanding credit typically it is a time of prosperity. When an economy is contracting usually it is a labeled a recession. The economic cycle of expansion and contraction describes an economy as a whole.

To best visualize this cycle you should imagine a wave. As you go up the wave credit is expanding which typically means more spending; when you go down the wave credit is contracting which leads to less spending. Since US consumer makes up about 70% of GDP, it is logical to imagine the consumer is the water that makes up the wave. As the old saying goes, “Life is full of ups and downs”. People are typically either going up or down the wave.


The world is made up of cycles. The sun comes up and then is goes down and seasons change. Peoples clothing and surroundings may change but history usually repeats itself.
Individuals have short and long cycles. Groups of people also share cycles. These groups could include 2 individuals to millions or even the entire world’s population.

Gustav Le Bon in his book “The Crowd” cited that individuals are smarter than the crowd. With this assumption one could argue that the larger the group included in a cycle the slower the cycles is to repeat itself since it will take the crowd longer to move to the next part of the cycle than an individual.

Individual’s private finances most of the time go through periods of expansion and contraction just like the economy as a whole. Actually if you believe that individuals are smarter than the crowd, then you should also believe that individual’s finances lead the broader economy, since they are more efficient at moving to the next part of the cycle.

With the current economic crisis the price of real estate skyrocketed to a point where more and more individuals no longer saw value and stopped buying. With less buyer and more sellers, real estate prices started to plummet. Once the first domino falls, the rest eventually do. Since the housing bubble was so widespread and included so many people, both in the USA and abroad, the cycle should take that much longer to progress.

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What Happens if the Economy Gets the Flu?

Monday, April 27th, 2009

Every couple of years the term “Flu Pandemic” makes headlines. The term refers to a global medical disaster where a large part of the world population gets the fast spreading flu. Every year the flu kills thousands; during a flu pandemic it could kill millions. A side effect of this type of crisis is felt in the world economies. Fear of illness keeps people in their homes and out of the malls. Sick people miss work that leads to less productivity.

Several agencies have done research for the USA into the potential economic impact of a flu pandemic. Their research has estimated that the US GDP could contract from 4% to 6% in a severe flu pandemic. They also estimated that if there is a mild flu pandemic it could shrink GDP by 1%. The report also noted that the effect in other countries could be much worse. The real impact is the loss of life the side effect is the contraction of economic growth. The report does indicate that economies should snap back after the crisis from pent up consumer demand.


A global flu pandemic would make a time of prosperity difficult let alone its effect during a time of crisis, as we are in right now. The economy is at such a fragile point that even a pandemic scare could have a measureable effect.

With Wall Street and Washington citing glimmers of hope, a flu pandemic, or even a scare, could sidetrack their hopes for the near future. At this point, the health of the people who make up the world economies should be the concern then worry about the economic side effects.

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Banks Profitable – That was Easy

Thursday, April 16th, 2009

Okay so here we are again, it is earning season and to the market’s surprise banks are showing some profits. When I make the above statement I can’t help to picture a older man in a suit riding a bike with training wheels saying “Mom look, I can ride a bike”.


All it took was nearly a trillion dollars to suppress mortgage rates; billions of dollars of direct aid, small change to Market to Market accounting and a commitment from the US government indicating they will not them fail.

Meanwhile earnings of companies who do not have the favor of the government are falling rapidly. Housing starts again appear to be retrenching (remember this was a pillar which Wall Street put such angst on citing recovery). A large commercial real estate firm (holds over 200 malls across America) filed for bankruptcy protection today with a disclosed $29.6 billion in assets and $27 billion in liabilities. What banks are on the hook for that?

The US economy cycles through expansion and contraction of credit. This process has occurred for centuries. Since the Federal Reserve started to maintain control of the overnight bank rate the cycles have become somewhat more predictable. This predictability occurs because as the Federal Reserve identifies where the US economy is in a cycle it responds with a rather predictable action. This action has a somewhat predictable response.

When the economy approaches over expansion of credit the Federal Reserve raises the overnight bank rate to raise the cost of lending, which theoretically should slow growth. When the economy starts to contract credit, the Federal Reserve lowers the overnight bank rate to lower the cost of lending, which theoretically should spur growth.

The actions to save banks over the past year are meant to contribute to the above mentioned goal. The US Government and Federal Reserve are attempting to reduce the cost of lending to spur growth. The dilemma that is facing the United States is that currently its citizens are contracting out of fear. The average US citizens’ mindset has changed from over consumption to conservation. Since US consumers makes up about 70% of GDP, growth cannot occur without them.

To stabilize the US consumer you most likely need to improve unemployment to reduce this fear. This week showed an improvement in claims (attributed to the holiday week) but continued claims are still rising (over 6 million). This indicates that finding a job is still a challenge. For job growth to resume, someone needs to start hiring. The US government is attempting to take this role artificially with their behemoth stimulus they passed.

It appears the US government is attempting to put training wheels on its economy by trying to shoulder the weight on their own. These banks that have already had the training wheels attached are profitable off the actions of the US government, at the expense of the US taxpayer. I was under the impression that companies went out of business because not enough business to support them. What happens when (if?) the US government takes off the training wheels? Will the economy ride on its own or break a leg?

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The Fortune Telling Stock Market

Wednesday, April 8th, 2009

The stock market is typically 5 or 6 months ahead of the economy. That is what we are led to believe; actually many bear market rallies are predicated on this theory. Does it really?

We heard the declared bottom ring in November 2008 when the Dow Industrial Average hit 7552. So according to the Stock Market fortune teller the Dow Industrial Average should not have broken the 7552 level in February and economy should be on the rise by now. Unfortunately this prediction has been proved wrong this time.

One thing is for sure; eventually it will be right (assuming you believe the World’s economies will recover at one point, I do). One of the eventual lows will be preceded by growth.

Sounds kind of like a convenient statistic, where they fail to disclose the accuracy. Over the past year, how many times have you heard “bottom”, how many times has this fortune telling ability been right?

Lately the fortune telling ability of the stock market has been the reason “you can’t afford not to be in this market” according to the mass populous on Wall Street. It may eventually be true, but can you afford its accuracy?

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Stop Fighting the Dollar

Tuesday, April 7th, 2009

The US Government in one breathe attempts to sink the Dollar in the next speaks of a commitment to a strong Dollar. Even with all of their “innovative” methods of sinking the Dollar, it just keeps getting back up. The Dollar of recent has the resilience of a “Rocky” opponent.

So what keeps the Dollar moving up even in the face of such dramatic attempts to keep it down? Probably the most obvious is that the rest of the world is in worse shape than the USA. The old saying goes “if the USA gets a cold, typically the rest of the world gets pneumonia”.


With the US Government printing money at a feverish pace, other countries that are dependent on exports to the USA must do the same to keep their currency in pace. This process seems to extend the financial pain and fuel social unrest.

The Dollar is the Ocean eroding the cost of goods and services in the US, the solutions so far are looking like poor conceived Jetties, which typically cause more harm than good.

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