Zero effective policy and stalling QE3 – Why QE3 will have little financial impact if implemented. Deposits at US commercial banks quickly approaches $9 trillion.
The markets eagerly await the words of central bankers over the next few days. The markets are on the fence waiting to see if Ben Bernanke gives the green light for QE3. What many fail to realize is the Fed already has other mechanisms to force banks to lend in the current marketplace. First, there is no need to pay interest excess reserves. Even the European Central Bank has dropped interest paid on excess reserves down to zero. So the Fed already has some alternatives to what QE3 would provide. It is also the case that deposits at US commercial banks are already nearing $9 trillion. Banks have the means and ability to lend if they only had the desire to do so. In spite of the US public bailing out the entire banking edifice, they have little faith in the American public.
China enters unfamiliar economic territory with rising inventory – Contraction in China’s manufacturing sector now inching closer to one year. What does this say about the global recovery?
China is feeling the deep impact of the global slowdown. The country has seen unprecedented growth for the last few decades and is now entering into a very unfamiliar territory. Slowing demand. Data is reflecting that the slowdown on exports from places like the US and especially Europe is having an impact in their very important manufacturing sector. China also has hundreds of thousands of empty apartment units as the country has been heavily reliant on real estate building to support growth. This economic contraction is not a surprise as global demand has fallen largely because of the massive levels of debt in a variety of countries and the process of deleveraging that is occurring. We rarely see the word “decouple” from the economic corners of the world because that is largely a myth. The global economy is more interconnected than many would want to think. The slowdown in China will have an impact in many places including the US.
Do not be lulled by the siren call of inflation – The slow decline in living standards. Gas is up 100 percent over last 8 years while income has fallen.
Inflation has a slow methodical way of eroding the purchasing power of what sits in your bank account. The Federal Reserve is doing all it can to create asset inflation to allow banks to offload inflated assets onto the market so they can repent for the financial sins created during the credit bubble. Unfortunately there are unintended consequences for this. The first consequence is the fact that most Americans have seen their income drop in the last decade. So even if prices stayed the same, their purchasing power has fallen. Yet prices in many key items have actually gone up. By going into full debt mode, the Fed is trying to weaken the US dollar and because of this, the price of goods sold on global markets has gone up. The end result is that many working and middle class Americans find that they are purchasing less for more.
Debt bubble amnesia – 40 percent increase of Americans with accounts in collection in the last decade. System still heavily reliant on extreme consumption.
The debt hangover is still giving the nation a deep headache. For example, in 2003 10 percent of Americans had an account in collections. Today, it is more than 14 percent. The addiction to debt is both troubling but what is more surprising is how little was learned from the financial crisis. The stock market is pretending as if the European debt crisis was solved, that emerging markets had no growth challenges ahead, and that somehow we have solved the fiscal cliff with no actual work. Or can it be that those on the economic margins are simply not able to articulate their voice in a media that is largely controlled by those who can afford the largest microphone? In the last year, you would have been lucky to hear about the 1 out of 7 Americans on food stamps to count on one hand on network television. The bill is coming due and it is going to get harder to simply ignore.
Healthcare jobs expand servicing many older Americans with little to no savings – Since the recession started top employment fields related to healthcare. Over 10 million Americans no longer in the labor force.
Get used to sluggish growth. Although the political season is in full force and every candidate is promising you unicorns and roads to utopia if you vote for them, the reality is we have some built in challenges that neither party can easily fix. The unemployment rate has trickled lower thanks to lower wage jobs being added but also, a gain in the number of those not counted as part of the labor force. The number of Americans deemed “not in the labor force” has surged by 10,000,000+ since the recession started. As a consumption based system, what happens when the middle class begins to thin out? At the core you need a good number of people with disposable income to fuel industry. The ultra-rich are not going to buy 1,000 Ford’s just because they can and the 46 million on food stamps are not going to add any hidden boosters. The stock market’s lack of volatility is basically betting on the Fed and European Central Bank bringing out a monetary bazooka. The problem of course is that they’ve been throwing monetary RPGs at the system for years now and look at the results.
The extremes in the US have gotten more pronounced in this economic crisis. It is hard to imagine a country where 46 million people are living with the assistance of food stamps while 6 of the 400 top income earners pay no federal tax. I’m sure that just like most Americans you pay your fair share of taxes. Of course the real burden has fallen on the middle class since the recession hit in 2007. Most of the ultra-wealthy have their money vested in the stock market and since the lows in 2009, the market is up well over 100 percent. The number one asset of the middle class in housing is still down over 30 percent from the peak and is trying to squeeze out a gain in 2012. So you ask who in reality is paying for all these bailouts and transfer payments? A massive amount of the burden is falling on the middle class and debt.
Long live the debt ceiling – approaching the fiscal cliff by spending $1 trillion more than is being taken in. A breakdown of government spending and revenues.
History does love to repeat itself especially when it comes to debt bubbles. At the rate the US government is burning through money, we are likely to breach the debt ceiling limit even before we enter 2013. We’re about $400 billion away from the $16.39 trillion limit but considering we’ve already spent $700+ billion that we don’t have this year, that lofty goal is likely to be met. We’ve talked about the fiscal cliff and how the US dollar has essentially fallen off this position decades ago. Yet the political talk is simply ignoring one of the most important items that will face this nation and we’ve known this scenario was coming for well over a decade. Things appear better than they are because we are spending money we don’t have. Does this sound familiar? In the 2000s you had people buying massive homes they couldn’t afford and leasing cars that cost more than annual salaries of most individuals. That didn’t exactly end well. Yet today, we continue to spend money that is simply not there. To think this will carry no consequences is simply naïve.