Nonfarm Payrolls grew at a paltry rate of 80,000 in June, the unemployment rate is stuck above 8%, retail sales are faltering and inflation is significantly low… It appears the economy is stagnating once again, and GDP may even once again slip into negative territory creating a double-dip recession. To some, the time seems ripe for the government to enact additional stimulus measures.
Proposed actions have ranged from the institution of QE3, to slashing the Fed Funds rate to zero, to even outright government job creation. With so many negative economic signals, why doesn’t the Fed or the government enact more stimulus measures to help jump-start the economy? These are 3 of the top reasons given against enacting more stimulus.
First, and probably the most popular reason, is the fear of sudden runaway inflation. This is always refuted by the fact that we’ve had minimal inflation as of late, and there has yet to be any signs of it increasing in the near future. Common evidence for this is the lack of an increase in TIPS breakevens, which is interpreted as the market’s consensus of expected inflation.
A second common reason against more stimulus (fiscal, at least), is the fact that increased spending will increase the deficit. An increase in the deficit, some fear, will lead to a decrease in confidence in the dollar and result in higher interest rates, a lower dollar and higher inflation. None of these are particularly healthy for the economy, at least in the long run. However, if investors have lost any confidence in our debt, they certainly haven’t shown it in the Treasury market. Even longer term real yields are currently negative, meaning the investor effectively pays for the government to keep their money safe.
Lastly, there’s been some talk about slashing the Fed Funds rate to zero (from a range of zero to .25%). The most common reason given against this strategy is its effect on the money markets. If the rate was slashed to zero, there would be less demand for overnight cash in the fed funds market, and it could cease to operate normally. Considering this would be a marginal decrease at best, Bernanke considers it too risky because it could make it more difficult to raise rates effectively when the time comes. Not to mention, with rates at zero, the money market mutual fund industry would no doubt suffer.
So should there be more fiscal or monetary stimulus? One thing’s for sure- if the economic data continues its recent troublesome trend, for better or worse, there’s no doubt someone will eventually act.
TLDR (only skimmed, I'm a dick, sorry)
But I am pretty sure that QE 1,2,3,4,5,6,7,8,9... are all priced into the market already. We are on life support, bernanke bills are the only thing keeping the show going at this point.
You need to remember that the stock market and the economy are two completely different things, at least to me they are. I see the economy as Joe Blow and Mary Jane getting up, making breakfast, sending the little fuckers off to school and going to work to push paper and make widgets, pay taxes, buy shit, fuck some more, have more kids and repeat. The human experience.
The market is quantifying the human experience. Then add in fear, anticipation, manipulation (some big some small), government reports (see BLS) that are nonsense, new housing #'s etc. that make a bunch of computers shit a trade every time they scan a + or - head line. Speculation, market making blah blah. I am rambling.
A lot of people use market performance as reported on the news everyday as a gauge. Most ordinary people will interpret poor market performance reported in the news as the economy sucks, which then can result in pulling back and maybe holding off on a few purchases, etc. which can create a feedback loop. So, the stock market and the economy really aren't two completely different things. They both effect the other.
As far as more stimulus goes, I think the issue is waiting for the absolute right moment. The Fed does not want to do anything unless it is totally necessary because it could be the last bullet they have. Not to mention the politics.......there is an election in 4 months
because stimulus is lame bro
Interest rates can't go too much lower than 0%. The marginal benefit of further quantitative easing simply isn't great.
QE = Lower Dollar = Increased Net Exports = Increased GDP
Not endorsing QE, but not many consider that aspect of QE. IMO that is the real goal, a cheaper dollar.
And who will be exporting too? Canada and Australia? Our dollar is not going to weaken much(if at all) relative to the Euro or GBP. China is slowing. India is shit. Japan is deflating. I'm not sure how Brazil is doing or Russia for that matter but probably not that well.
I think the big problem with manufacturing in this country is unions. They artificially inflate the workers wages amongst many other things and make us far less competitive in the global market. Outlawing unions would drop our unemployment rate substantially and would allow us to get things like the post office in line. Way too many overpaid post office workers that we cannot afford.
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This, investor sentiment will be sideways until Obama is gone. Hopefully by next January.
Agreed. Most people in my industry are Republicans and abhor Obama, but rates will rise if Romney wins the election because few people will do anything entrepreneurial unitl this un-American is kicked out of office. Higher rates is bad for my bottom line business but it will be an indication of more positive signs to come.
My personal belief is that if Romney wins, businesses will reinvest a lot. This will cause inflation to rise overnight which will cause rates to rise which will cause inflation to rise further. I'm thinking GDP growth of between 3-5% and inflation of around 7-10%. I think all this cheap money is bound to cause a spike in inflation, growth will follow but not at the same pace as inflation. It's a matter of when, not if.
Romney is not gonna win squat in November. The GOP made a complete mess out of what was supposed to be a gimme election.
The Americans that actually decide elections (5-8% of the voting population) are squishy and vote ONLY and ALWAYS for the candidate "they like" better and who they are more "connected to" and regarldless of performance.
All the GOP had to do was put up a 6 footer, white protestant with an Anglo-Saxon name who looked above average and talked easy. One who wasn't over 65 or younger than 45. Seems easy enough right? Surely there are GOP Govs who meet this criteria?
Instead they trot out the worst set of candidates possible. A weird talking Mormon with a liberal past, an old fart adulterer and a overly religious ex-senator. And a few other inconsequentials.
The only way Obama loses is if the economy starts losing jobs in October. Even then, knowing him he'll probably just start a convenient war with Iran to save his ass. And if the hope is that at least Romney would be tough, remember, this softie couldn't outmanuever Johnny McCain. lol.
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@ cplpayne
Thanks for pointing that out. Not arguing with you, I agree with you, a lot of people use market performance as reported on the news every day as a gauge.
The only issue is that the economy is not 100% wall street bros. There are uninformed folk out there as well as very smart people are financial duds, some doctors lawyers etc. Given that the news is mostly portrayed in a positive light, wouldn't the economy react positively to 'bad news' that a financial professional could understand and see through?
I remember reading some WSJ article about consumer confidence must be high because revolving consumer debt (credit cards) has increased - so people must be more confident if they are willing to take on additional debt. In theory that sort of makes sense; but given the fact the economy has been stuck in neutral, wouldn't the data really be pointing to stagnant wages, rising costs, depleting savings leading people to put ordinary and necessary goods on their credit cards to make ends meet?
Same deal with BLS reports. News says BLS beat estimates, loss not as big as expected. They fail to remind the reader that the last report's estimated figures were revised downwards 3x over and this report has been revised down as well. Or job surge in 4Q omg..... big whoop wal-mart hired a bunch of greeters for $5 an hour to hold a door open at midnight for the holiday season. Come Jan 1 they are gone.
If the theory was correct and enough people who could move the market / economy could disseminate good information from bad and plan accordingly then why isn't the 'real joe schmoe economy' picking up every time equities rise because JP Morgan beat earnings even though revenues across each division were down 40% and they lowered expenses by laying people off - or book face ipos?
Not going to take the time to edit this or really proof read it, if my tone seems angry or accusative its not you, just my disdain for our current condition.
All great points
Everything about this post, user name, and user picture is on point. Good stuff.
Side note: I really think, on a purely tactical level, that Pawlenty would've been a better candidate to run against Obama. I don't really particularly care for the guy, but he comes off as a nice guy and seems actually capable of connecting with real people and not sticking his foot in his mouth in the same way that Romney does.
This is the only reason you need. We can not afford it, plain and simple. Unless you want the US to look like Spain or Greece, that is.
Eventually, inflation will come and the US will have to pay a multiple of what it pays now to fund its borrowing costs. This will cripple us as a nation. And no one seems to understand this. This is why it is so vitally important to cut the deficit now.
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