More Federal Stimulus Expected Soon

Posted by Jeff Carter
on July 12th, 2012

Reports are that the Federal Reserve is considering more stimulus. Can’t we get out of the market manipulation business and just let the darned thing settle? The WSJ writes,

The minutes portray an institution in a state of high alert over the economic outlook. Fed officials expressed worry at the meeting about risks to the American economy stemming from the euro-zone debt crisis, the possibility of a “significant slowdown” in China’s economy and the prospect of deep U.S. government-spending cuts and tax increases scheduled to go into effect at year-end.

The minutes also suggested officials are starting to wonder whether they have already pushed the Treasury securities market to its limits. On Wednesday, the government auctioned off benchmark 10-year Treasury notes at a record low yield of 1.459%.

Since 2007, the Federal Reserve and government have fiddled endlessly with the marketplace. First it was TALF, then TARP, then QE1+2, Operation Twist, buying back bonds, knowing that the LIBOR rate was being under-reported and not alerting the market to it, billions in useless economic stimulus, bailing out banks, bailing out automotive companies, cash for clunkers, subsidies to clean energy, sending money to Europe to help them bail out their banks, and on and on.

All this time and effort along with money spent hasn’t created anything. In fact, it has solidified the competitive landscape and made it harder for upstarts to knock off entrenched competitors.

Maybe it’s time to admit that the Fed is really out of bullets and the best solution is to let the markets clear. The marketplace is not a puppet where one can pull a string and make it jump for an extended period of time. Strings can be pulled and for a short instant, the puppet might move. But eventually all market forces assert themselves and you are back to where you started.

There are things we can do fiscally to get the market to clear faster, however there isn’t a will to do them on the Democratic side. They consistently block any useful idea, and fill the void with bad ideas from the past. On the Republican side, there are some that are coming up with ideas, and then there are some that can’t see the forest because of the trees.

The Fed is rosy in their forecast. They looked into their crystal ball and see 1.9% to 2.4% GDP growth this year and 2.2% to 2.8% GDP growth next year. They think unemployment might come down to 8% by the end of next year.

US ten year notes are on their way to 1%. That’s a terrible sign for the US. It means that no one can figure out a good use for all the money that’s being printed. There is no money velocity in the economy. When you look at the potential yield on a 1% bond, and add in inflation and taxes you get a negative return. When people are bidding for negative returns on government instruments, that just shows how bad the business environment really is.

I got news for the Fed. They are way too aggressive. Assuming Obamacare stands, and assuming the tax increases scheduled for January of 2013 stand, I would say we would be lucky to see 1.5% GDP growth next year. We aren’t going to get a lift from either Europe or China.

Is there anyone bidding over 2% GDP? I want to sell that, unless we change fiscal policy quick. Only way to do that is change control of the Senate and White House.

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