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Federal Reserve Quandary: Stagflation

Posted by Larry Doyle on June 18, 2014 9:44 AM |

The Federal Reserve will wrap up its regularly scheduled meeting and release its highly anticipated statement this afternoon at 2pm. The markets always eagerly await this statement so as to read the tea leaves and see what they say about our economy and the impact on interest rates.

Do we really need to wait for 2pm, though, to determine what is really going on in our economy? I think not. What do we know? Plenty, although the financial media, government officials, and the bankers themselves are not always fully forthcoming in promoting the truth. Let’s navigate.

1. Labor markets: the structural level of unemployment remains at elevated levels as reflected in the fact that labor participation rates remain at 35 year lows. This slack is not only a drag on our economy but keeps overall level of wages in check for the economy as a whole. I do not believe that monetary policy has a meaningful impact on alleviating this enormous problem in our nation. Labor markets are presented as being healthier than the reality.

2. Inflation: under reported given the lack of meaningful wage inflation. While wages for many in our nation are largely fixed, the basic costs of living (food, fuel, healthcare, housing) are moving higher at an appreciable rate. Is there any surprise that spending on discretionary items remains largely in check for so many in our nation? Monetary policy, both here and abroad, is a primary driver of the increased costs of food, fuel, and housing. Can the Federal Reserve think about tightening so as to mitigate these price increases when the EU and Japan are doing all they can to stave off underlying deflationary pressures?

3. Economy: with the housing industry clearly slowing — this is what happens when cost of housing in terms of both rents and prices outpaces incomes — the economy overall is hard pressed to grow at better than the 2% GDP level that we have averaged over the last decade. Although many pundits and political hacks are wont to talk the economy up, talk is cheap. Sluggish growth is exacerbated by the increased costs highlighted above. If we were to extrapolate this further, we might define the real challenge facing our economy as stagflation, that is, “a condition of slow economic growth and relatively high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation.”

What does Janet Yellen have in her bag of tricks to deal with that?

Nothing more than double talk along with a whole lot of hope. While hope is a virtue, it is not a central bank policy nor an economic program. Washington needs to address the structural issues impeding our economy by engaging in the following:

1. tax reform

2. entitlement reforms

3. preeminence of the rule of law . . . that humanitarian disaster on our southern border is running roughshod over the laws we have in place to protect our borders. We are supposed to be a nation of laws not men. When laws are not upheld it has a negative impact on the economy.

4. protecting the rights of property holders and investors. Capital flows and formation are predicated on real protections.

5. rooting out cronyism that has grown more deeply embedded in our nation. This reality goes hand in hand with the topic referenced in point 3 above.

Has Washington shown itself capable of taking on these issues? Regrettably not, due to a screaming lack of real leadership on both sides of the aisle.

As a result, all the pressure is placed on the Federal Reserve to continue the charade that erodes the value of our currency and the accompanying quality of life in America for so many. What is the result? The American dream slips further and further away over the horizon.

Navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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  • John

    The establishment has convinced a vast swath of the public to actually believe 0% interest rates for the last 5 years, adding $1 trillion per year to the already Himalayan national debt, allowing the Federal Reserve buy $3 trillion of toxic debt from their Wall Street banking cabal owners, while creating a high rate of inflation in energy, food, healthcare and tuition costs, and negative growth in real wages, is somehow beneficial to them and reflects a return to normalcy.

    The current state of our economic, financial, political and judicial systems, along with the fraying social fabric of society reflects EXTREME dysfunction and in no way exhibits anything resembling a normal state of affairs. The government apparatchiks, corporate media talking heads, Wall Street captured economists, and lackeys for billionaire oligarchs are highly paid liars using every Bernaysian trick to manipulate the beliefs, desires, and prejudices of the willfully ignorant masses.

    They capitalize on the cognitive dissonance and normalcy bias being practiced by the majority of people in the country. Like a dog chasing its tail, they have the public up in arms about meaningless social issues and ignoring the looting of the country by sociopathic bankers.

    Fourth Turn Accelerating:

  • The Federal Reserve’s Statement June 18, 2014 :

  • From Bloomberg, Is The Fed Complacent?

    Federal Reserve Chair Janet Yellen says she’s aware of the dangers of complacency in financial markets. Complacency at the Fed can be dangerous, too.

    In a news conference today, Yellen explained that monetary policy will stay on the course previously announced. That’s fine: Macroeconomic conditions haven’t changed. But she also addressed the calm that’s descended on the markets — a mood reflecting investors’ belief that interest rates will stay low through next year. Although she stopped short of saying that investors have become overconfident, she noted the possibility that docile markets can encourage excessive risk-taking. This risk “is very much on my radar screen,” she said.

    It needs to be. The VIX index, which tracks expectations of stock-market volatility, is hovering near its lowest-ever levels. At such times, investors tend to get overextended. Markets don’t look bubbly on the whole, but there are notable pockets of excess. For instance, firms are issuing risky corporate debt at unusually low yields. As surely as the Earth circles the sun, the cycle will eventually turn from boom back to bust.

    So what are the Fed and other regulators doing to prepare for the next surge of financial instability? Not enough.

    Regulators are building a financial early-warning system, but it’s far from complete. Yellen says Fed officials are watching indicators of risk-taking — such as the amount of borrowed money, or leverage, investors are using. If they have good measures, they should share them with the public: The ones they’ve published to date are far fromcomprehensive.

    On a global level, reporting of derivatives and asset holdings is so fragmented that U.S. regulators can’t say which banks, hedge funds or other institutions are most at risk if, say, emerging markets crash or a European government defaults. The Fed’s periodic stress tests, though better than before, offer only a snapshot of banks’ constantly evolving risks.

    Beyond that, regulators need to be sure that when financial turmoil does strike, big institutions are strong enough to survive without relying on government support. The crucial thing is equity capital — the money financial institutions get from investors willing to risk losses in return for a share of profits.

    Earlier this year, the Fed issued a new rule requiring large bank holding companies to have $5 in capital for each $100 in assets. That’s more than the $3 international minimum, and the change wasconsidered a great achievement. But that much capital still means that a mere 5 percent drop in the value of a bank’s investments could render it insolvent. Experience and research suggest that safety requires much more.

    And that’s just traditional banking. In other areas of finance, the Fed and other regulators also have a lot more work to do. When markets are calm is a good time to press on. Next time they aren’t calm, it will be too late.

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