Category Archives: Monetary Policy
Business 2 Community: U.S. Dollar to Become the Next Yen?
In its latest meeting minutes, the Federal Reserve said it will continue with quantitative easing, creating $85.0 billion in new money monthly, in order to bring economic growth to the U.S. economy. (Source: Federal Reserve, May 1, 2013.)
The Federal Reserve, once again, didn’t provide any clear indication as to when it will end the quantitative easing; rather, the central bank stated it will continue to do the same “until the outlook for the labor market has improved substantially in context of price stability.” (Source: Ibid.)
The Federal Reserve has already increased its balance sheet to over $3.0 trillion, and if it continues its quantitative easing at this pace, its balance sheet will balloon even more, possibly even reaching $4.0 trillion—or even $5.0 trillion—in a very short period of time.
This is troublesome news, dear reader. The more money created out of thin air via quantitative easing, the more the fundamentals of the reserve currency, the U.S. dollar, deteriorate.
As I have mentioned in these pages before, we only need to look at the Japanese economy to see quantitative easing is not a viable option for us.
The Japanese currency has plummeted since the Bank of Japan revved up its quantitative easing. Just look at the chart below of the Japanese yen compared to other major currencies in the global economy; it seems as if the currency has fallen off a cliff. If we keep up with all this money printing, the U.S. dollar may eventually look the same!
Chart courtesy of www.StockCharts.com
A falling U.S. dollar will drag down the buying power of Americans even further, as they are already struggling to keep up with their expenses. What we could purchase for $1.00 in the year 2000 now costs us $1.35. (Source: Bureau of Labor Statistics, last accessed May 3, 2013.)
I have yet to see any real economic growth in the U.S. economy as it was promised when quantitative easing was first introduced after the financial crisis. Quantitative easing is working to make big bank balance sheets strong and to create inflation, but I don’t see any economic growth being created by it.
I am looking at the Japanese economy as the best example of a country failing with long-term quantitative easing and what might be next for the U.S. economy and the dollar due to all this newly created money.
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Click below for the full article.
http://www.business2community.com/finance/u-s-dollar-to-become-the-next-yen-0486009
Ron Paul on Gold: No One Knows Value; I’m Buying
Reuters: Fed holds steady on stimulus, worried by fiscal drag
The U.S. Federal Reserve said on Wednesday it will continue buying $85 billion in bonds each month to keep interest rates low and spur growth, and added it would step up purchases if needed to protect the economy.
Expressing concern about a drag from Washington’s belt-tightening, the Fed described the economy as expanding moderately in a statement that largely mirrored its last policy announcement in March. Fed officials cited continued improvement in labor market conditions and did not change their description of inflation, saying it should remain at or below the central bank’s 2 percent target.
But policymakers reiterated that unemployment is still too high and restated their intention to keep buying assets until the outlook for jobs improves substantially.
“Fiscal policy is restraining economic growth,” the U.S. central bank’s Federal Open Market Committee said in its policy statement at the close of its two-day meeting. “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation.”
Some economists were surprised that the statement did not contain a clearer acknowledgement of a recent weakening in the economic numbers.
Until recently, analysts had expected the Fed to buy a total of $1 trillion in Treasury and mortgage-backed securities during its ongoing third round of quantitative easing, known as QE3, with expectations the Fed would start to take its foot off the accelerator in the second half of this year.
Now, things are looking a bit more shaky.
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Click below for the full article.
http://www.reuters.com/article/2013/05/01/us-usa-fed-idUSBRE94003X20130501
Reuters: PRECIOUS-Gold rises 1 percent, holds near one-week high
Gold rose more than 1 percent on Monday and held near its highest in more than a week, as a rebound in prices from multi-year lows failed to damp investor appetite for the precious metal, causing a shortage in physical supply.
Recent bleak U.S. growth data that raised hopes the Federal Reserve would keep its current pace of bond buying at $85 billion a month also supported gold, widely seen as a hedge against inflation.
U.S. gold futures, which often provide trading cues to cash gold, hit a high of $1,472.20 an ounce. By 0553 GMT, prices stood at $1,468.90 an ounce, up $15.30. Spot gold rose $6.70 to $1,469.20 an ounce.
Both cash gold and futures sank to around $1,321 on April 16, their lowest in more than two years, after a drop below $1,500 sparked a sell-off that prompted investors to slash holdings of exchange-traded funds. They touched an 11-day peak above $1,484 on Friday.
“I don’t think gold is out of the woods yet, but there’s room for upward correction. One of the reasons why gold has dropped so much was the strong signs of U.S. economic recovery. Now, we don’t see much of it,” said Joyce Liu, an investment analyst at Phillip Futures in Singapore.
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Click below for the full article.
http://www.reuters.com/article/2013/04/29/markets-precious-idUSL3N0DG04220130429
The Wall Street Journal: Are You Ready for the New Investment Tax?
It’s time to grapple with the new 3.8% tax on investment income.
The ordeal of 2012 taxes is barely over. But it isn’t too early to understand and cushion the blow of the investment-income levy, which Congress passed in 2010 to help fund the health-care overhaul.
The tax, which took effect Jan. 1, applies to the “net investment income” of married joint filers who have more than $250,000 of income (or $200,000 for singles). Only investment income—such as dividends, interest and capital gains—above the thresholds is taxed. The rate is a flat 3.8% in addition to other taxes owed.
“Affluent investors who ignore this tax will be in for a total shock next April 15,” says David Lifson, a certified public accountant specializing in tax at Crowe Horwath in New York. Such income is typically not subject to withholding, and people won’t be factoring it into their estimated taxes. Lower-bracket taxpayers who receive a windfall large enough to owe the tax will also be in for a surprise.
The new levy is one of several tax increases taking effect this year, including higher top rates on income and capital gains, limits on deductions, and an extra 0.9% payroll tax. But the 3.8% tax will cost many Americans even more.
The reason: an odd interaction between the regular income tax and the alternative minimum tax, or AMT, a separate levy that rescinds the value of some tax benefits. This year, many affluent taxpayers will have higher income because of new limits on exemptions and deductions. But this higher income will also help lower their alternative minimum tax.
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US News: What Gen X Doesn’t Know About Social Security
Members of Generation X, those born between 1965 and 1976, are planning to collect Social Security at an average age of 65, according to a recent survey. But that could be a mistake. Gen Xers won’t qualify for the full Social Security payments they have earned until age 67. Those who sign up for Social Security at age 65 will get permanently lower payments for the rest of their lives.
The Social Security full retirement age at which you can claim the entire benefit you have earned is 67 for everyone born in 1960 or later. Gen Xers who sign up for Social Security at age 65, as 29 percent plan to do, will see their monthly payments reduced by about 13.3 percent.
A GfK Custom Research North America survey of 1,000 adults ages 36 to 47 commissioned by the MetLife Mature Market Institute found that 18 percent of Gen Xers plan to claim Social Security benefits as soon as they are eligible at age 62. But workers who sign up at this age will see their payments reduced by 30 percent. For example, a worker who would be eligible for $1,000 per month upon retirement at age 67 would get just $700 per month is he signs up for Social Security at age 62. Another 16 percent of people in their late 30s and early 40s simply don’t know when they will start receiving Social Security benefits.
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Forbes: Big Brother Has A New Face, And It’s Your Boss
Recently, the CVS Caremark Corporation began requiring employees to disclose personal health information (including weight, blood pressure, and body fat levels) or else pay an annual $600 fine. Workers must make this information available to the company’s employee “Wellness Program” and sign a form stating that they’re doing so voluntarily.
CVS argues this will help workers “take more responsibility for improving their health.” At one level, this makes a certain sense. Because the company is paying for their employees’ health insurance, they naturally prefer healthier workers. But at a deeper level, CVS’ action demonstrates a growing problem with our current system of employer-provided health insurance. If our bosses must pay for our health care, they will inevitably seek greater control over our lifestyles.
Although most Americans take it for granted that they receive health insurance through the workplace, this is an artifact of federal tax rules from World War II. When the U.S. government imposed wartime wage controls, employers could no longer compete for workers by offering higher salaries. Instead, they competed by offering more generous fringe benefits such as health insurance. In 1943, the IRS ruled that employees did not have to pay tax on health benefits provided by employers; in 1954, the IRS made this permanent.
The federal government thus distorted the health insurance market in favor of employer-based plans. If a company paid $100 for health insurance with pre-tax dollars, the employee enjoyed the full benefit. But if the employee received that $100 as salary, he could only purchase $50-70 of insurance after taxes. Over time, this tax disparity helped employer-based health insurance dominate the private insurance market. In 2008, over 90% of non-elderly Americans with private insurance received it through their workplace.
Hence, government policy artificially injects the employer into the relationship between a patient and the health insurance system. Normally, what a worker ate or whether he smoked at home would be of no concern to his boss (unless it affected job performance). But U.S. government policy makes it the employer’s business.
To make matters worse, ObamaCare reinforces this status quo. ObamaCare requires large employers to offer health insurance to workers (or else pay a penalty). As a result, more people are discussing how best to link employment to healthy behavior. For example, the New England Journal of Medicine recently featured a pair of high-profile editorials debating the merits of allowing companies to discriminate against smokers, “for their own good.”
Furthermore, ObamaCare pays government grants to encourage companies to implement these “wellness programs.” Hence, employers who wouldn’t otherwise concern themselves with workers’ lifestyles now have an incentive to do so in order to collect federal funds.
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This is very well written and informative article. For those that wonder why employers are involved in health insurance (and not home owners insurance, car insurance, etc.) it was simply because of government intervention. Salary freezes caused the creation of “benefit packages.”
What do you think about government intervention like price freezes and the constitutionality of them? Click below for the full article.
http://www.forbes.com/sites/paulhsieh/2013/04/25/big-brother-has-a-new-face-and-its-your-boss/
Daily Ticker: The Economic Argument Is Over — And Paul Krugman Won (Big Surprise, Some Keynesian Claims Victory)
For the past five years, a fierce war of words and policies has been fought in America and other economically challenged countries around the world.
On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This “stimulus” spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again.
On the other side were economists and politicians who wanted to cut spending to reduce deficits and “restore confidence.” Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and “confidence” would return.
This debate has not just been academic.
Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called “Austerians” fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts.
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Of course Keynesians are claiming victory. When the bill comes due on the national debt, inflation goes wild, and a dollar crisis happens, what will they claim then? What do you think about this writers victory claim?
Click below for the full article.
http://finance.yahoo.com/blogs/daily-ticker/economic-argument-over-paul-krugman-won-150247189.html
Marketwatch: The slowdown is more than a soft patch, Goldman Sachs got it wrong before they got it right
For months, economists and the media have proclaimed that we are in full-recovery mode. While the markets were at record highs, unemployment had not improved, economic growth was stagnant and most corporate earnings had little to do with an increase in sales and revenue and were based on moves like laying-off thousands of people and shedding non-performing assets.
Last week, Goldman Sachs Group Inc. — one of those bullish outfits projecting enthusiasm — reversed its earlier upbeat message, saying that consumer spending is slowing down, which will likely have a negative impact on future growth. The significance is that most analysts and economists are coming to grips with the fact that the economic data doesn’t support stock-market valuations at these levels.
What economists and analysts failed to connect is the contrast between reality and the stock market — the low consumer spending, paltry economic growth, weak hiring by companies and reckless quantitative easing by the Federal Reserve while the stock market soared.
So, let’s look at everything Goldman Sachs (and many others) missed, and the chain of economic events.
The importance of consumption on the overall economy should not be overlooked. While in the economic cycle, it is production that comes first, as it provides the income necessary for individuals to consume, it is ultimately consumption that completes the cycle by creating the demand.
Despite repeated bailouts, programs, and interventions, economic growth remains mired at sub-par rates as consumers struggle in a low growth/high unemployment economy. Businesses, which have been pressured by poor sales, higher taxes and increased government regulations, have learned to do more with less. Higher productivity has led to less employment and higher levels of profits.
The dark side of that equation is that less employment means higher competition for jobs which suppresses wage growth. Lower wage growth and incomes means less consumption, which reduces the aggregate end demand. In turn, lower demand for products and services puts businesses on the defensive to “do more with less” in order to protect profit margins. Wash, rinse and repeat. This is why deflationary economic environments are so greatly feared by the Fed as that relationship between production and consumption is incredibly difficult to break.
I don’t believe that the current slowdown is just a “soft patch,” but is instead the end of the expansionary cycle that began in 2009. That belief is simply based on the fact that economies do not grow indefinitely but cycle between expansions and contractions.
In the current economic environment, where the consumer is caught in a balance sheet deleveraging cycle, economic contractions occur more frequently than they do under more normal economic conditions. This is not an indictment of fiscal or monetary policies, but simply a statement about the cycles of an economy.
So where does that leave us now and the remainder of 2013?
At some point, despite the ongoing interventions by the Federal Reserve, the stock market will revert to the underlying fundamental story which has been slowly deteriorating over time. The question that remains to be answered is simply how long can the Fed’s artificial intervention programs continue to elevate asset prices?
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Click below for the full article.