Despite its image as an overbearing ogre, the federal government may be largely powerless these days. The President has managed to undercut himself with an astonishingly bad non-launch of the federal health insurance exchange. Is there anyone in his administration with executive or management ability? Could anyone in his administration succeed as evening shift supervisor at the local McDonald's?
On the foreign policy front, the President managed to set his foot downrange and pull the trigger over Syria's use of poison gas. Only an embarrassing intervention by Russia prevented the President from a real morass of a morass. Now, the administration touts a deal with Iran to freeze its nuclear program, even though it can continue to enrich uranium to the 5% level. Not very frozen, but perhaps global warming is having an impact. One wonders whether this deal with Iran is a sign of strength or weakness on the part of the President.
Meanwhile, over on Capitol Hill, Congress remains essentially non-functional. The Democratically controlled Senate was able to approve the appointment of a few judges by changing its rules, although scowling Republicans made many dire and threatening predictions that the Dems would be sorry for doing this. Nothing like a love fest to make folks feel collegial. As for the federal budget and the debt ceiling, they aren't likely to trigger new crises, but will be resolved by kicking the can down the road.
The only institution that seems to be doing anything is the Federal Reserve. And even it may be losing some of its mojo. The most recently released minutes of the Open Market Committee meeting in October have been interpreted to mean that the Fed may be thinking about pulling back soon on quantitative easing. Antacid sales on Wall Street have jumped. If the efficacy of Fed money printing is diminishing, we may find ourselves in a public policy Sahara with very few water holes.
A powerful government can be scary. A powerless one can be scarier. The problem is this isn't a horror movie and we can't get up and leave the theater if we don't like the show.
Tuesday, November 26, 2013
Thursday, November 14, 2013
How the Federal Reserve Defies the Laws of Economics
For an agency run by economists, the Fed seems non-economic. Its quantitative easing program--now snarfing up bonds at the rate of $85 billion a month--defies one of the basic premises of economics: the concept of scarcity. Scarcity is crucial to establishing price. If something is available in infinite amounts, it has to be priced for free because there's no limit to supply. Scarcity acts as a constraint, forcing prices up as demand increases. Price increases in turn compel actors in the market to think and rethink the utility of the thing that's getting costlier, and adjust their use of it.
The problem with the Fed's QE program is that it's paid for with printed money. In other words, to get the $85 billion it needs each month, the Fed simply makes a few electronic entries into its computer system and, voila, money blossoms. There is no scarcity. The Fed doesn't have to get the money from anywhere. Unlike taxes or borrowings, no one else has less money when the Fed prints some.
In times past, when central banks pulled such financial alchemy, inflation would flare. By reducing the value of the currency, buying power would become scarcer and discipline would be imposed.
But today, there is very little inflation--and, indeed, central banks seem to want more. Thus, there are no constraints on money printing. And, by all indications, the Fed governors whose voices count intend to keep the printing presses rolling.
Numerous skeptical observers haven't been able to complete the journey to Wonderland and believe that there will be no cost to all this. And the truth may be that there has been and will be costs. At the first hints of tapering earlier this year, a number of emerging markets began tanking and some have tanked hard. Real estate sales have slowed dramatically as longer term interest rates have risen and the real estate recovery may have stalled out. Gold and silver have fallen sharply, and other commodities prices have eased back.
The Fed seems to have not really noticed that monetary policy now affects asset values more than consumer prices. The tech stock boom and bust, the real estate and mortgage boom and bust, and the 2008 financial crisis can all be traced in part back to very generous Fed easy credit policies. Central banks may be unable to foster inflation, perhaps for reasons that aren't fully understood yet. But they can foster asset bubbles, and that's a strong reason for easing out of the QE business. The last thing we need is to again have more government sponsored asset bubbles.
The problem with the Fed's QE program is that it's paid for with printed money. In other words, to get the $85 billion it needs each month, the Fed simply makes a few electronic entries into its computer system and, voila, money blossoms. There is no scarcity. The Fed doesn't have to get the money from anywhere. Unlike taxes or borrowings, no one else has less money when the Fed prints some.
In times past, when central banks pulled such financial alchemy, inflation would flare. By reducing the value of the currency, buying power would become scarcer and discipline would be imposed.
But today, there is very little inflation--and, indeed, central banks seem to want more. Thus, there are no constraints on money printing. And, by all indications, the Fed governors whose voices count intend to keep the printing presses rolling.
Numerous skeptical observers haven't been able to complete the journey to Wonderland and believe that there will be no cost to all this. And the truth may be that there has been and will be costs. At the first hints of tapering earlier this year, a number of emerging markets began tanking and some have tanked hard. Real estate sales have slowed dramatically as longer term interest rates have risen and the real estate recovery may have stalled out. Gold and silver have fallen sharply, and other commodities prices have eased back.
The Fed seems to have not really noticed that monetary policy now affects asset values more than consumer prices. The tech stock boom and bust, the real estate and mortgage boom and bust, and the 2008 financial crisis can all be traced in part back to very generous Fed easy credit policies. Central banks may be unable to foster inflation, perhaps for reasons that aren't fully understood yet. But they can foster asset bubbles, and that's a strong reason for easing out of the QE business. The last thing we need is to again have more government sponsored asset bubbles.
Monday, November 11, 2013
How Do You Invest in a Market That's Fearful and Greedy?
To paraphrase Warren Buffett's aphorism about investing, be greedy when others are fearful and fearful when others are greedy. In other words, buy low and sell high.
But what do you do when the market is beset by fear and greed? Market indexes rise to new heights almost every day. But many investors are increasingly stepping back and hoarding cash. Indeed, the greedier some get, the more fearful others get.
There's no established strategy for a pishmi-pullyu market like this. The fearful, greedy market's bipolar movements defy logic and rationality.
Much of the market's wackiness comes down to the fact that asset values today are determined as much by government policy as anything else. We live in the era of the Great Central Bank Accommodation, spiced up with bailouts of one sort or another as ad hoc government policies are slapped together in response to the crisis du jour. Even though the central banks mutter disquietingly about withdrawing accommodation, they don't really get around to it, because they remain the only show in town when it comes to economic stimulus. Investors know that government intervention is likely to continue indefinitely, so some invest. They are also fearful because they know that government support cannot continue forever. So some hoard cash.
You can't rationally invest on the political process or government policy. You can diversify. That's simply another way of admitting you don't know what's happening or what's going to happen. Then again, no one does.
But what do you do when the market is beset by fear and greed? Market indexes rise to new heights almost every day. But many investors are increasingly stepping back and hoarding cash. Indeed, the greedier some get, the more fearful others get.
There's no established strategy for a pishmi-pullyu market like this. The fearful, greedy market's bipolar movements defy logic and rationality.
Much of the market's wackiness comes down to the fact that asset values today are determined as much by government policy as anything else. We live in the era of the Great Central Bank Accommodation, spiced up with bailouts of one sort or another as ad hoc government policies are slapped together in response to the crisis du jour. Even though the central banks mutter disquietingly about withdrawing accommodation, they don't really get around to it, because they remain the only show in town when it comes to economic stimulus. Investors know that government intervention is likely to continue indefinitely, so some invest. They are also fearful because they know that government support cannot continue forever. So some hoard cash.
You can't rationally invest on the political process or government policy. You can diversify. That's simply another way of admitting you don't know what's happening or what's going to happen. Then again, no one does.
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