Where will we go after the Feds cut rates?

[Rhody Trader]

.....china just imposed price controls , S Korea have implemented 8 property laws , Iran are still trying to control prices of fuel as are others etc etc...price controls don't work except to defer a problem so watch those fast growing countries like a hawk. ...

All these folks need to take a look at what happened in the US when price controls were instituted in the early 1970s. The pressure just built and built until the whole thing blew apart, which certainly was contributory to the miserable economic situation and inflation of later in the decade and into the 1980s before Volker spiked interest rates. Read the commodity trader interviews from Market Wizards and you'll see how many of those guys made their fortunes basically by riding the trends of the times.

 

[Rhody Trader]

The British government, or the bank, a few days ago said that underlying British inflation was still around 2-3%. That is an outright lie! Even the biggest fool can tell you that supermarket prices have risen by alarming amounts over the past 12 months.

In the BBC's "The Farming World" yesterday we were told that farmers had seen their milk rise from 19p to 27p recently.

I don't buy milk (lactose intollerant) so I haven't really paid much attention to the price of a gallon since the days when I worked in a corner store. A short while back, though, I was in line behind a woman who was buying some and nearly fell over when I saw the price. Granted, it's been something like 15 years since those halcion days as a cashier, so the annualized rate or price increase isn't that high, but it does seem like the price has doubled.

In general terms, though, I can't help but wonder about the weightings. Yes, we're spending more on milk and whatnot, but that stuff is small potatoes (no pun intended) compared to other monthly costs. I'd like to see a comparative look at inflation in and amongst the various categories of our consumer expenditures.

 

[Atilla]

A credit boom such as we have seen over the last few years has an inevitable counteraction.
Had the Fed done nothing asset prices would have fallen off a cliff ,because at this point fewer institutions would lend to each other ,or to a lot of would be retail borrowers. That's a signal for a cashflow brickwall and anyone who didn't have the cash to sit it out would be technically bankrupt.Given the level of savings rate in the US and indeed some other countries, corporate savings etc...then production and consumption would have dropped through the floor with bankruptcy on a huge scale. Forget moralistic ,dramatic feelings that this is what should happen to cause Joe Bloggs to take his pain and learn his lesson..it would still have been chaos effecting the majority savagely. I think it was the wrong measure to take although they could still convert me by taking the right measure later having bought themselves some time.

That's what all this is now about...buying time for cashflow to unlock and disperse. For risk levels at default to be thinned out.
Lending practice is still going to get overhauled and there's enough anecdotal evidence to suggest it is so that means cashflow is still going to contract ,savings/reserves are going to built back up (to what level I don't know) ,but existing blockages will be untied and risk will be more evenly dispersed into those assets areas not yet subject to confidence issues. That is , commod's ,metals , currency etc. Rationalisation for that will be inflation based for hedging purposes ,but it presupposes that buying demand will stay in place...however ,in a post credit contraction it won't , demand from punters will drop and indeed the moneyflow for punters to use will drop also...that is what a credit boom contraction is all about.
Injecting and increasing moneyflow has been interpreted to be expansionary/inflationary...it isn't when the pressure on price from dwindling buying demand is greater. No action here would have seen price pressure dropping off the measuring scale...expansionary action offsets that ,but does not necessarily remove it altogther. Risk is just in the process of being transferred and mostly it is going to those countries who grew fastest and inflated the most in the last bull cycle .....china just imposed price controls , S Korea have implemented 8 property laws , Iran are still trying to control prices of fuel as are others etc etc...price controls don't work except to defer a problem so watch those fast growing countries like a hawk.
Buying demand sets prices ...in a money contraction enviroment you might be thinking of what happens to buying demand.

This is a very pragmatic down to earth analysis of recent events. I agree totally. Spot on.

 

[Old_Bob]

Euro closed at 1.4260
The way is open to 1.45 before the Xmas and 1.5 will not be a hard target in 2008.

 

[sizzler944]

fed rates

The fed's decision to drop rates by 50 bpts is an acceptence of higher inflation and a lower USD to re-position the US in the global economy by re-invigorate it's society and economic activity. A service dominated economy is not a long term runner for a country the size of the US. Too much was being taken by too few and it has resulted in a lower birthrate and reduced investment in society and manufacturing. Inflation will transfer wealth from the old and the capital rich to the young, the working and entrepreneurs.

 

[Rhody Trader]

The fed's decision to drop rates by 50 bpts is an acceptence of higher inflation and a lower USD to re-position the US in the global economy by re-invigorate it's society and economic activity. A service dominated economy is not a long term runner for a country the size of the US. Too much was being taken by too few and it has resulted in a lower birthrate and reduced investment in society and manufacturing.

The U.S. birthrate has definitely fallen off, but immigration has kept the population growing. Without seeing specific numbers, I won't comment on the reduced investment comment, but even though services have become an increasingly large part of the economy, there is still a massive manufacturing base.

Inflation will transfer wealth from the old and the capital rich to the young, the working and entrepreneurs.

The old transfer wealth mainly via taxes (estate/death) and inheritance to the younger generations.

As for the rich transfering wealth via inflation, that's completely backwards. Asset holders benefit from inflation as those prices rise. Who owns the assets? The rich. The non-rich (non-asset holders) are hurt by inflation as a result of higher costs.

 

[chump]

Old to young is an internal mechanism which certainly usually applies.
However ,what we are witnessing here is an external/global mechanism involving the transfer of wealth from Mature/Bureaucratic Capitalist countries to (relatively) Immature /less Bureaucratic countries of varying stages of capitalism where growth prospects are higher. If you consider that consumption is income biased and production is capital biased you can 'track' the flow from production to consumption in mature countries flowing into production first and consumption second in immature countries.
The overall effect of this is to raise global gdp above where the aggregate would be if you simply considered mature countries and which makes the bias mentioned above more obvious.
In effect we are narrowing the spread between the two types of world order , established and emerging economies,based upon where they are on the capitalist staging ladder.
Huge gulfs between the two are a relatively new phenomenon post industrial revolution and that gap looks to be unwinding prompted by political shifts.

 

[jacinto]

the entry for Sept 28th is actually an interesting read, wether one agrees with it or not

http://www.morganstanley.com/views/gef/index.html#anchor5561

 

[Atilla]

The fed's decision to drop rates by 50 bpts is an acceptence of higher inflation and a lower USD to re-position the US in the global economy by re-invigorate it's society and economic activity. A service dominated economy is not a long term runner for a country the size of the US. Too much was being taken by too few and it has resulted in a lower birthrate and reduced investment in society and manufacturing. Inflation will transfer wealth from the old and the capital rich to the young, the working and entrepreneurs.

You could say:

1. Fed's decision is a rejection of a slowdown in economic growth because there is an election round the corner?

2. Fed's decision to support the banking / credit system in US?

3. Fed's decision is based on data not yet available to rest of market?

Other than acceptance of inflation rest of your comment is pure opinion of someone who does not know the economic mechanism in the allocation of resources. Even the impact of lower USD and BoP is likely to be short term. Once the cycle has kicked in which to me already has expectations will also play it's part. EC has penalties for countries with defecits of 3%+. US defecits are 7%+ and rising. Just goes to show the approach to a balanced book. If fundamental issues not tackled lower currencies do not correct BoP situation but deteraite - as competitiveness is lost on exports.

I concur with others comments below.

Acceptance is misleading too. 'Acceptance' sounds as if they are in control. On the contrary if they kept rates where they are or raised them, pension funds would be wiped out, banking systems would fail, worse recession than 29 will ensue. The whole system is like a pyramid on its head. People right now are trying to get out of the way and guage the direction in which it will come down, how hard and wide it will disperse when it does.

 

[Rhody Trader]

'Acceptance' sounds as if they are in control.

I would argue the opposite. Acceptance implies someone/something else being in control.

That's my concern - that the Fed (and likely others eventually too) finds itself in a lesser of evils decision making position.

 

[Atilla]

I would argue the opposite. Acceptance implies someone/something else being in control.

That's my concern - that the Fed (and likely others eventually too) finds itself in a lesser of evils decision making position.

There is the option of rejection.

It's like you are being dealt a hand and you accept what's given to you. I would expect the Fed to lead, to set policies and control the economy. Utopia might sound nice but at least they should try.

Lesser of two evils perhaps best way of accounting for actions. Bernanke has already commented on two big fallacies in my opinion.

1. Need to balance economic growth with inflation.

2. Fed does not need to communicate direction to the market.

He used both these arguements in his speech. This tells the market we are not going to tell you what we are going to do and we are not telling you what our objectives are.

Going out fishing in the big wide oceans with no weather news or charts for direction can lead to deep waters... :-0

 

[Rhody Trader]

There is the option of rejection.

Rejection is indeed an option, but that means either going for another alternative (if there is one) or doing nothing (assuming that's not part of the original set of options). Sometimes doing nothing is the best decision. Unfortunately, we are an impatient society too often unwilling to wait for things to sort them out.

It's like you are being dealt a hand and you accept what's given to you. I would expect the Fed to lead, to set policies and control the economy. Utopia might sound nice but at least they should try.

Except that the Fed cannot control the economy by itself. It needs the help of fiscal policy. Furthermore, one could make an arguement that you wouldn't want the Fed running the economy since they are not elected officials and therefore not beholded to the people.

Lesser of two evils perhaps best way of accounting for actions. Bernanke has already commented on two big fallacies in my opinion.

1. Need to balance economic growth with inflation.

2. Fed does not need to communicate direction to the market.

He used both these arguements in his speech. This tells the market we are not going to tell you what we are going to do and we are not telling you what our objectives are.

Going out fishing in the big wide oceans with no weather news or charts for direction can lead to deep waters... :-0

What is the Fed's mandate? In the old days the Bundesbank had the clear mandate to keep inflation under control. The market knew that and could anticipate how they would react in a given circumstance. The Fed's mandate has always seemed a bit fuzzy.

As for the communication thing, failure of the Fed to keep the markets apprised of what the thinking will almost certainly mean higher volatility.

 

[chump]

I doubt the Fed has the degree of control over the US economy that it used to have anymore then the BOE has...the best parallel I can think of that is current is the Northern Rock event...in the absence of positive cash flow to balance it's books and keep trading it borrowed and effectively handed over a large portion of control to the Treasury/BOE...likewise the US and indeed the UK have done the same...without cordinated action outside of these countries any individual action they may take is only goingto have a limited impact.
The Fed therefore needs the other central banks to move in tandem either through their rates ,or through their currency.

 

[Atilla]

Rejection is indeed an option, but that means either going for another alternative (if there is one) or doing nothing (assuming that's not part of the original set of options). Sometimes doing nothing is the best decision. Unfortunately, we are an impatient society too often unwilling to wait for things to sort them out.

Agreed in that the options are

1. Acceptance - reduce rates
2. Do nothing - stay the course - leave rates as they are
3. Reject - raise rates

Except that the Fed cannot control the economy by itself. It needs the help of fiscal policy. Furthermore, one could make an arguement that you wouldn't want the Fed running the economy since they are not elected officials and therefore not beholded to the people.

What is the Fed's mandate? In the old days the Bundesbank had the clear mandate to keep inflation under control. The market knew that and could anticipate how they would react in a given circumstance. The Fed's mandate has always seemed a bit fuzzy.

As for the communication thing, failure of the Fed to keep the markets apprised of what the thinking will almost certainly mean higher volatility.

Fed's mandate is to maintain stable prices to facilitate a productive business environment. Fed may not be able to control economy as they would like but they can control supply of money.

The need to balance economic growth with inflation is new news to me. Ask most pure monetarists and they'll tell you. Economic growth not a Fed option imo. That is a government (political) option.

I agree with requirements for fiscal policies. Fed takes care of inflation and government takes care of tax revenue and public investment balancing it's books.

Problem is all this is now very fuzzy and this is the crux of the problem. No objectives, no criteria, no direction. No leadership.


There is too much defeatism in the question can the Fed or Government control the economy. I think they can if you take the politics out of it.

I can't help thinking we are edging to the stop go policies of the past, where Monetarists blamed Keynesian theory on over stimulating demand.

Isn't this the case of Monetarist over stimulating supply of money which will ultimately lead us to inflation without a corresponding increase in output and productivity? Sounds awfuly familiar.

 

[Rhody Trader]

Fed may not be able to control economy as they would like but they can control supply of money.

Not by themselves. If the government goes on a massive spending spree (increasing reserves in the system), or if they went in the opposite direction and massively cut spending and increased tax revenues (reducing reserves), the Fed wouldn't be able to do a heck of a lot about it.

There is too much defeatism in the question can the Fed or Government control the economy. I think they can if you take the politics out of it.

Take the politics out of it?

 

[Atilla]

Not by themselves. If the government goes on a massive spending spree (increasing reserves in the system), or if they went in the opposite direction and massively cut spending and increased tax revenues (reducing reserves), the Fed wouldn't be able to do a heck of a lot about it.

If Gov spends - Fed raises rates
If Gov cuts expenditure - Fed lowers raise - subject to inflation...

That is their level of control. Isn't this what you implied with Gov (fiscal controls) & Fed's (monetary controls).




Take the politics out of it?

So what was the politics of the Democrats when Clinton was in power. The US increased expenditure and reduced the defecits? Sound politics or sound economics or sound both.

Essentially, the Republicans and Tories are all about cutting taxes to show how they are so much better at managing the economy. It's all gone too far but the politicians are too big headed.

The mass of UK saw their public services reduced to tatters and got Labour in.

Republicans will go the same way.

You can keep your politics.

 

[Rhody Trader]

So what was the politics of the Democrats when Clinton was in power. The US increased expenditure and reduced the defecits? Sound politics or sound economics or sound both.

Or just taking advantage of the positive economic situation which had actually started before Clinton even got elected?

Essentially, the Republicans and Tories are all about cutting taxes to show how they are so much better at managing the economy. It's all gone too far but the politicians are too big headed.

Oh, please.

The basic Republican fiscal idea is that you and I can make better decisions about what to do with our money than the government can. Democrats, in turn, seem to take the view that they know better than you what's good for you. Of course the reality is somewhere in the middle.

That's why I'm an independent!

 

[Atilla]

Or just taking advantage of the positive economic situation which had actually started before Clinton even got elected?

Isn't it a shame Bush couldn't have taken advantage of a favourable finances left over to him... My understanding is that Clinton reduced borrowing whilst maintaining good management. I take it you are stipulating the last 7 years has been considerably bad in the global economy... I beg to differ.

Oh, please.

The basic Republican fiscal idea is that you and I can make better decisions about what to do with our money than the government can. Democrats, in turn, seem to take the view that they know better than you what's good for you. Of course the reality is somewhere in the middle.

What like people say no to pension and people say no to health expenditure. People say no to war but government does as it feels all the same because government knows best how to spend tax payers money. Like the government felt wiser to spend another $95m dollars in the war in Iraq instead of flood defences in St Orleans despite engineers recommendations. Did I forget collapsing bridges with a few 000s needing inspection.


Oh, please... That's nice I like that...

That's why I'm an independent!

You an independent? :-0 Yeah right... Let's give more tax breaks to the oil producers cause I'm independent... No sir, you views do no not sound independent at all to me?

 

[Rhody Trader]

Isn't it a shame Bush couldn't have taken advantage of a favourable finances left over to him... My understanding is that Clinton reduced borrowing whilst maintaining good management. I take it you are stipulating the last 7 years has been considerably bad in the global economy... I beg to differ.

Well, there was that little 9/11 thing, so we don't really have a level comparisson. Maybe he would have blown it. Maybe he would have keep things moving forward. No way of knowing.

And what about that little bubble there in the late 1990s, the one that exploded during Clinton's final year in office. If we're placing at least some blame at the feet of the current administration for the housing bubble, we have to do likewise for the tech bubble.

And, I am stipulating no such thing about the global economy. It's fair to say that the rest of the world has kept the U.S. in positive growth, or at least contributed a great deal to that. But it's a two way street. U.S. imports also benefitted the global economy.

Believe me, I'm not defending the Bush administration. I think this presidency isn't too far above the pathetic Carter administration of my youth. But I also think Clinton caught a bit of an easy ride because he inherited an economy that had already started coming out of a recession and didn't have any major shocks during his tenure.

You an independent? :-0 Yeah right... Let's give more tax breaks to the oil producers cause I'm independent... No sir, you views do no not sound independent at all to me?

Don't put words in my mouth. I've suggested no such thing, and you know it. In fact, I don't believe I have made any policy statements at all. Suggesting that there is an alternate approach to yours is not the same as voicing policy opinions.

I consider myself independent because I see both sides collectively as reactionary and short-sighted, and my own views don't mesh completely with either party.

 

[Atilla]

Well, there was that little 9/11 thing, so we don't really have a level comparisson. Maybe he would have blown it. Maybe he would have keep things moving forward. No way of knowing.

Richard Clark the NSA advisor to three presidents said Clinton wanted to take out Osama Bin laden using one of their armed spy planes but the Republicans objected as they accused him of brandishing war in Afghanistan to detract from Monica Lewinskey scandal at home.

He also resigned cause he couldn't stomach Bush and Condellisas approach to US national defence as they were never in to see him as they were on holiday or exercising on their tread mill.

War in Iraq has absolutely nothing - NOTHING at all to do with 9/11. That was a neo-con plan. Pure Whitehouse policy decision. I'm always outraged when I hear about the links.


And what about that little bubble there in the late 1990s, the one that exploded during Clinton's final year in office. If we're placing at least some blame at the feet of the current administration for the housing bubble, we have to do likewise for the tech bubble. That's in totally different league with share valuations rather than fundamentals. You talk about level playing field.

And, I am stipulating no such thing about the global economy. It's fair to say that the rest of the world has kept the U.S. in positive growth, or at least contributed a great deal to that. But it's a two way street. U.S. imports also benefitted the global economy.

Fair point, I agree with this.

Believe me, I'm not defending the Bush administration. I think this presidency isn't too far above the pathetic Carter administration of my youth. But I also think Clinton caught a bit of an easy ride because he inherited an economy that had already started coming out of a recession and didn't have any major shocks during his tenure.

Winners make it look easy. Always the case. Bush could have made many different decisions to the ones he has. He didn't.

Don't put words in my mouth. I've suggested no such thing, and you know it. In fact, I don't believe I have made any policy statements at all. Suggesting that there is an alternate approach to yours is not the same as voicing policy opinions. I'm sorry. You could always deny it as you do... Won't hold it against you... :cheesy:

I consider myself independent because I see both sides collectively as reactionary and short-sighted, and my own views don't mesh completely with either party.

Hmmm...