I apologize tot he Fed for underestimating their rational decision making. When I wrote this blog yesterday, all the indication were that the decision to curtail the QE was going to be made. I am happy that I was proven wrong.
http://www.nytimes.com/2013/09/19/business/economy/fed-in-surprise-move-postpones-retreat-from-stimulus-campaign.html?hp&_r=0
Many of us in the working world, struggling to make ends meet every day of the year, are oblivious to economic policy formulation and the impact it has on all of us. The system for making policy is very complicated when it used to function but it is no longer functioning. The system now has been reduced to this: whoever has the money has the votes and whoever has the votes makes the policy. Most people don’t want to get involved since they feel that their involvement stops at the voting booth. All I hear from people, when they talk about fiscal and social policy is: “THOSE” people in Washington making our lives miserable with their turf battles, or I hear how the House and half the Senate have gone off the deep end. Maybe they have. Many do not believe that the shenanigans in Congress do not affect them anyway, that what is done is Washington does not matter in their struggle to make ends meet. As a result we have grown numb to the fights in Washington and many of us have turned off and distance ourselves from the whole process. Bad mistake!
The fiscal, and social policy conflict we see in Washington is akin to the classical struggle between good and evil, the dark side and the side of the enlighten, the oppressed and the oppressor. The epic story of the Lord of the Rings, successful TV series like Stargate SG1, and epic movies, the latest being Elysium, have this basic struggle as their basic plot. To some extent the struggle going on in Washington is the real version of all these plots: You have a group of people that want to be free and have choices struggling against a group of people who want to control them and forced them to their will. The big difference is that in the book, the TV and the movies, the good guys usually win and there is closure to the story – that’s what we pay for.
In reality; however, the conflict in Washington is a never ending story where the good guys may lose lots of battles, and in fact, may lose the war. That is what is happening now, we are losing the war for enlighten life, a life of choice and personal freedom a life of cooperation and selflessness, sharing and philanthropy against the forces of ambition, self gain and control of others. From what I can tell the forces of enlightenment are losing.
This week is a pivotal battle is being waged between the forces that will impact the future of jobs in the country. No, Congress does not vote on cutting the budget again this week. But that battle will be here soon and the dark side is “digging in” to hold the country hostage once again to try to get what the American people don’t want and indicated in so many ways – the continual destruction of the security net and the livelihood of the average citizen. To any logical student of history, we are living in a pitiful state of government, with pitiful representation and with pitiful support from the voters. No, this week is not Congress’ turn at the spotlight; it is the Federal Reserve Bank (the Fed). For several years now they have been unbiased and just about the only source of economic policy sanity in government, but now it looks like they might be jumping over to the dark side. They are contemplating actions that might result in stopping and maybe reversing meager progress in job growth has made in the country.
The Fed is on the threshold of changing policy that will impact the availability of jobs in the U.S. They are set to reduce the Quantitative Easing (QE) that the Fed implemented about 5 years ago to stimulate investment in U.S businesses. The reduction or “taper” as it is being called will cause interest rates to start climbing. This will increase the cost of investment by U.S. businesses and reduce the creation of jobs. QE also had the effect of reducing the value of the dollar thereby making U.S. products more sellable in the world market – that advantage will also disappear with the reduction of QE.
So,
what is QE you might ask? QE is when the
Fed (central banks in general) goes from targeting interest rates to targeting
the amount of excess reserves held by banks - the quantity of currency in the
banking system. The Fed does this by
buying financial assets in exchange for reserves. With QE the target is the
level of purchases and not the interest rate.
In our case the interest rate was almost zero so QE can be seen as
driving the “virtual” interest rate even lower than zero and giving businesses
a bigger incentive to invest and create jobs.
In November 2008, the Fed announced that it would buy the debt of
government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, as
well as the mortgage-backed securities (MBS) that these enterprises sponsored.
The goals were to lower borrowing costs and to directly ease credit conditions
in the housing market. The goal was to further support economic recovery and to
anchor inflation expectations at manageable levels maintain price stability and
promote the maximum sustainable employment possible.
The diver for this policy change is the false argument by the dark side that if current policy is maintain, we will have growth in inflation. Inflation will reduce the profits and the value of the wealthy. It will also impact the poor and what is left of the middle class and should be kept in check. But inflation is not the main problem now and it will not be for some time. It’s pretty clear that that argument being made by the “dark side” is like the kid that cried “wolf” when there was no wolf or when Chicken Little claimed that the “sky is falling.” There is no wolf, the sky is not falling and the inflation monster is nowhere near on the “radar screen.” The point is if the “inflation monster” begins to show his ugly head we will know of it in plenty of time to stop it. In his most recent article, Paul Krugman argues that the Fed should not temper with monetary policy “Don’t taper, don’t tighten, until you can see the whites of inflation’s eyes,” and to “Give jobs a chance.” His write-up can be found at:
http://www.nytimes.com/2013/09/16/opinion/krugman-give-jobs-a-change.html?hp&_r=0
QE's intention was to avoid a situation
of deflation and prop up the economy and it did and many of the jobs and from
in unemployment from 10% to 7.3% was due to that policy. But we can expect QE to go “poof” and
unemployment begin to climb again. Oh
wait, that’s what the “Dark Side” wants so it can help them take back the
Senate in 2014 and elect the president they want in 2016. While a policy of Quantitative Easing is not
the long term answer to the working class problems, it has been able to provide
a sustainable boost to the economy. But
it looks like this will be a loss for the working class.
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