I admit.. it doesn't yet "feel" like a recovery... but once again.. look at the data.. 5.7% growth is still growth no matter how you slice it or dice it.. the economy IS in RECOVERY!!
In the fall of 2008 confidence for what ever reasons collapsed.. and the money supply shrank as the velocity of money slowed... people collectively didn't want to spend.. along with the debt bubble poping in real estate caused the economy to contract.. rather harshly.. as seen in the Stock Market.
No one yet has accused me of being a rabid Keynsian.. However, I do agree that some pump priming was in order.. and Lord knows we got all of that. Personally I think what the Fed did was FAR FAR more instrumental than what the politicians have done with Fiscal policy. The Fed pumped up it's balance sheet upwards of Two Trillion Dollars by injecting liquidity into the market.. aka money.. so banks could convert risky assets into money to fight the collapse of the money supply due to the decrease in the velocity as described above. Here's a Bloomberg article that talks about some of these actions over a year ago.. at the height of the storm. http://www.bloomberg.com/apps/news?pid=20601087&sid=a9MTZEgukPLY As noted in the original post above the Fed made a tremendous profit on the purchase of these distressed assets as it had the ability (uhm.. to print money..) and outlast the storm... (wish I could do that... "well golly how much do I need today.. A Trillion ought to cover it..") A year ago we were all hitting the panic button... as we saw this printing of money as being wildly inflationary.. which also added more fuel to the commodity fire. However, opposing this was the collapse in the money supply which was deflationary as well as the growth in unemployment limiting the demand to push prices higher... it's hard to hoard when you are out of a job. Now the value of the dollar may be determined by.. "yal we are bad but not as bad as... say Europe." so it could appreciate by default.. which would again be bad for the inflationist as it would further constrain commodity price inflation. It could be good for the government who now really needs to float a lot of debt.. China may make out yet on those US bonds afterall...
Now before we get too bearish on the commodity side.. If indeed the economy is growing.. again right or wrong the number was 5.7% which by anyone's standard is pretty dang good. (sure there are revision's to come.. but the trend is upward sloping..) Again if the economy is growing.. and the data indicates that it is.. the leading indicators are flashing strong growth... then the real demand should start to be evident in a couple of months.. and hopefully... even if it is dumb luck.. the whole economy lands on both feet.. the Housing market continues to recover... Banks continue to add to reserves and work through problem assets while making money... Commodities don't collapse as real demand surfaces to sustain growth in China.. and energy demand in the US.. and the US consumer continues to add to savings but also opens the purse strings a little which encourages businesses to rehire... Dreaming..? Probably a little.. doubtful if it will be that painless... but we've done better than feared so far.. It is quite fortunate that the US Farmer cranked out record crops at a very good time to help hold everything together.. now we can put people back to work building the country again.. as more come back online.. tax receipts should grow.. and hopefully the pol's in DC will get a grip on spending and reign that in. The Fed along with Tarp should recognize Capital Gains from the recovery of purchased distressed assets.. which could potentially go a long ways towards plugging some of our nation's budget gaps... don't pinch me.. if I am dreaming.. just.. give it a little more time. This could work. Edit: I want to add this very good article to the discussion about the Fed's balance sheet growth not neccessarily being inflationary. http://www.reuters.com/article/idUSN1039110920090910 The Fed deliberately grew its balance sheet to offset the collapse in demand for U.S. credit after Lehman's demise. It did so to stop the economy tipping into the type of deflation suffered in Japan, where falling prices led to a decade of stagnation. This action has massively increased the level of reserves being held at the Fed by commercial banks. Critics fear this will lead to higher prices as the economy recovers, with banks turning to this cushion of reserves to ramp up lending. Reis, agreeing with recent remarks from a number of Fed policy-makers, said the central bank's ability to pay interest on bank reserves would prevent this from happening. "Once the Federal Reserve started paying interest on reserves ... the old money multiplier that linked reserves to the price level broke down." he said. Reis' work also focused on Fed interventions in credit markets and concluded not all measures taken were wise. In seeking to tame the financial crisis, the Fed invented a fleet of tools to ease credit conditions in specific markets, including lending for mortgages, consumers and small businesses. Reis built a new capital markets model to review the effect of the Fed's different interventions on the availability of credit and got some mixed results, with credit shortages potentially developing in different points of the system. "Looking back in a few years and using either the model in this paper or those that follow, some of the credit policies will be seen as ineffective or even harmful," he said. Reis also argues that if the Fed winds up losing so much money from its market interventions that it needs to turn to the U.S. government for cash in order to remain operational, this would seriously harm its autonomy. "Once transfers from the taxpayer to the Federal Reserve must be regularly approved by Congress, political pressure on the setting of interest rates is inevitable." Reis said. "There is a real danger that this will lead to a permanent increase in inflation in exchange for only a short-lived boost to output." I agree whole heartedly.. we MUST KEEP THE FED independent from Congress.. once political pressure is added to interest rate policy we are sunk. Regardless of how you feel about Bernanke... (personally I rank him right up there with Capt Sullenburger..) We have to get the plane on the ground... then we can argue about the wisdom of flying through the birds.. but right now the pilots are doing a dang good job!! Leave them alone.. As producers.. we are going to have to suck it up (again..) and continue to crank out the production... the pay back will be lower interest rates then otherwise possible.. if inflation takes off.. and by no means are we to that point yet.. but that alone was probably the biggest pain in the 1980's farm depression... which lead to higher real interest rates as a medicine to kill the inflationary fever.. which asset holders such as farmers paid dearly... Also the gov't must be able to float it's massive debt.. which will probably take at least a stable dollar to attract foreign capital. "Tower.. we are going to go for the Hudson..."
Edited by JonSCKs 1/31/2010 15:37
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Rally Cap time!!
