The Fed is trying to ease financial conditions without taking the more controversial step of increasing the amount of money that it’s pumping into the financial system, since it will be using money already generated from other programs. A bond buying program the Fed completed in June was widely criticized internally and externally because it pumped $600 billion of newly printed money into the financial system, sparking fears of inflation……..
The more potent step of launching a new round of bond purchases that would further expand the Fed’s $2.867 trillion balance sheet remains a possibility, but inflation likely would need to slow much further to spur Fed officials to take that step……..
Economists aren’t so sure that the Fed’s latest gambit will do much to spur growth.
“The odds are ‘Operation Twist’ won’t work,” Anthony Sanders, a real-estate finance professor at George Mason University, said before the Fed action. The housing market has shown no reaction to interest rates that are already at record-low levels, he said. Freddie Mac’s latest survey finds the average rate on 30-year, fixed-rate mortgages at 4.09%, the lowest level in more than 50 years.
China’s Lessons From Mexico and Japan – WSJ.com
China might have more to worry about. Wages in the low-skill manufacturing sector are rising fast. On their current trajectory, they will double in the next five years. Low-skill jobs have already started to migrate elsewhere and will continue to do so. Public spending on education, at 3% of GDP in 2009, compares unfavorably to an average of 5% in the grouping of upper-middle-income countries to which China aspires. Reform of the financial system has fallen by the wayside as banks continue to funnel savings to low-yielding state-sponsored projects.
via Heard on the Street: China’s Lessons From Mexico and Japan – WSJ.com.
China Says Fighting Inflation Is Priority – WSJ.com
Chinese Premier Wen Jiabao Wednesday said stabilizing prices is still the government’s top priority, signaling that concerns over a global slowdown still don’t outweigh inflation risks.
What we need and what we actually get may be vastly different
This is in response to a question raised by Thomas Franklin:
Hi Colin,
….. My question is not just about the bond market although it is part of it but a reflection of the bigger picture globally with what is unfolding. With many governments facing rising debt levels and the Feds policy of financial stimulus, surely this is just delaying the inevitable of “Global Financial Meltdown” The USA and the dollar is a sinking ship, with the Fed losing the battle of bailing the ship out. So what do you think will replace the system we currently have?
Hi Thomas,
What we need and what we actually get may be vastly different.
Firstly, what we need:
- A consensus Swiss-style democracy instead of the winner-takes-all system we have at present, where incumbent politicians run up fiscal debt in order to boost their chances of re-election.
- Restrict the Fed to a single mandate, to protect the currency, rather than targeting inflation to help the politicians.
- Restrict capital flows between countries, like China/Japan’s purchase of >$2 trillion of US Treasurys, used to manipulate exchange rates and create a massive advantage for their export industries.
- Austerity to cut unnecessary spending and public works programs to improve national infrastructure and create employment — but the programs must deliver real returns on investment so they can later be sold off to repay debt.
- Europe needs a eurobond system, with central borrowing and restrictions on individual member deficits.
What we will probably get is:
- More of the same: government controlled by special interests and dominated by fear of the next election.
- The Fed going nuclear and buying more Treasurys — creating inflation to bail out the banks and save Treasury from default.
- Inflation as a soft form of default to give bondholders (read China/Japan) a haircut and deter them from buying more Treasurys.
- More profligate spending and ill-chosen, bridge-to-nowhere infrastructure projects.
- A breakup of the Euro?
Hope that doesn’t sound to optimistic 🙂
Regards, Colin