rodney johnson president, hs dent an independent economic research company how the fed is changing...
TRANSCRIPT
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Rodney JohnsonPresident, HS Dent
an independent economic research companywww.hsdent.com
How the Fed Is Changing Our World
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The World Has Gone Crazy
If economic news is bad, the market goes up, and if the economic news is good, the market goes down.
Everyone assumes the dollar will fall as the Federal Reserve prints more money.
What is the Fed doing, and why?
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The Problem - Deflation
Less spending
Falling prices
Lower employment
Less income
Less spending
This is AFTER $700 billion in bailout, then $800 billion in stimulus, then $1.25 trillion in Fed purchases, which was increased to $1.4 trillion.
We STILL have the hallmarks of deflation!
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The Fed Solution – Use Tools toForce Spending, Raise Prices
Interest rates - Lower rates make borrowing cheaper, lowering bar for ROI, causing payments on mortgaged items to be lower, punishing savers
Printed money – adding liquidity frees up credit markets, devalues currency, forces rational decision to buy hard assets or otherwise put dollars at risk, and lowers interest rates on longer maturity government debt, causing entire yield curve to fall
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Chairman Bernanke’s Explanation of Quantitative Easing
Large increases in bank reserves brought about through central bank loans or purchases of securities are a characteristic feature of the unconventional policy approach known as quantitative easing.
The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets.
Such purchases should in principle both raise asset prices and increase the growth of broad measures of money, which may in turn induce households and businesses to buy nonmoney assets or to spend more on goods and services.
In a quantitative-easing regime, the quantity of central bank liabilities (or the quantity of bank reserves, which should vary closely with total liabilities) is sufficient to describe the degree of policy accommodation.
Bernanke, 10-08-09, FRB Conference on Key Monetary Policy Developments.
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Chairman Bernanke’s Explanation of Quantitative Easing
Large increases in bank reserves brought about through central bank loans or purchases of securities are a characteristic feature of the unconventional policy approach known as quantitative easing.
The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets.
Such purchases should in principle both raise asset prices and increase the growth of broad measures of money, which may in turn induce households and businesses to buy nonmoney assets or to spend more on goods and services.
In a quantitative-easing regime, the quantity of central bank liabilities (or the quantity of bank reserves, which should vary closely with total liabilities) is sufficient to describe the degree of policy accommodation.
Bernanke, 10-08-09, FRB Conference on Key Monetary Policy Developments.
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We have printed over $1.7 trillion out of thin air, with more to come, effectively betting the country on “idea,” “hope,” “should,” and
“may”!
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5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
10,5001995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Real Personal Consumption Expenditures January 1995 through June 2010
Missing Growth
Source: Bureau of Economic Analysis
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Real Monthly Retail Sales
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Unemployment Rate January 1948 – August 2010
2
4
6
8
10
12
1948 1958 1968 1978 1988 1998 2008
Source: US Census Bureau
Un
emp
loym
ent
Rat
e
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Out of Work 6 Months and Longer,as Percentage of Labor Force
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Ignoring the Facts
Government policy is ignoring the situation and motivation of consumers/investors.
The individual goal is to repair personal balance sheets, not collect more stuff.
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Who Spends What in the Economy 2010
70.5%
12.6%
20.5%
-3.7% PersonalConsumptionExpenditures
Gross PrivateDomesticInvestment
GovernmentConsumptionExpenditures
Net Exports
Source: U.S. Department of Commerce, Bureau of Economic Analysis
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18-22
Single
22-30
Young
Married
31-42
Young
Family
46-50
Family,
College
Kids
50+
Empty
Nesters 60+
Retired
Changes in Spending at each Age & Stage of Life
Spending By Age
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2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
5,500,000
1930 1950 1970 1990 2010
Immigration Adjusted Birth IndexIm
mig
rati
on
Ad
just
ed B
irth
s
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Household Debt as % of Disposable Income, 1946-2009
Household Debt as % Disposable Income1946 - 2009
0%
20%
40%
60%
80%
100%
120%
140%
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30-Year, 10-Year, and Fed FundsJanuary 88 through April 2010
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Adjusted Monetary Base
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Data from Federal Reserve
Federal Reserve Balance Sheetas of 10/20/10 in $ millions
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The Trend Lower in Consumer Spending is Here
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Consumer Metrics - Daily Growth Index Real Time Measure of GDP
Source: Consumer Metrics
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Change in U.S. Debt Outstanding 2000 - 2010
Source: Federal Reserve Flow of Funds Report (FRB Z1), including Domestic Financial Sector
(1,500,000)
(1,000,000)
(500,000)
0
500,000
1,000,000
1,500,000
2,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Financial SectorHousehold MortgagesFederal GovtCorporate DebtState and Local Govt
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The Fed Is Pouring Money In
While Borrowers and Lenders are Leaking Money Out
Amount of Money in the Economy
The Money Supply Fight
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Outcomes – Desired vs. Actual
Wanted –inflation expectations, increased borrowing and spending, falling unemployment, higher wages, asset inflation (reinflation).
Got –split prices – deflation in services and real estate, inflation in commodities – local vs. global.
Workforce is a local commodity, and oversupplied, price is falling. But global trade makes agribusiness international.
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Source: Casey Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
Select Commodity PricesOct 2009-2010 Year-Over-Year Change
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Who Gets Helped, Who Gets Hurt?
QE favors real assets, hurts dollars, so the question becomes, what is more important to your household, real dollars (dividends, interest, paycheck) or assets such as stocks, metals, commodities?
Assets Income
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Who Gets Helped, Who Gets Hurt?
Wealthy households tend to hold assets, poor households tend to rely on income. While higher food/energy costs might annoy rich households, the increase in their assets more than offsets the price difference. Not so for the poor.
Affluent households own more hard assets
Modest households rely on earned income
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Percent of After-Tax Income Spent on Food and Energy by Income
Source: U.S. Bureau of Labor Statistics, CEX, 2009
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The Results Are Painful
“Food Sellers Grit Teeth, Raise Prices”
“Apparel Makers to Raise Prices”
“Earnings Continue to Climb Despite Higher Costs”
“Oil Rallies, Hitting 6-Month Highs”
“Sugar Near 30-Year Highs”
“Wall Street Expects 5% Bonus Raise”
All headlines are from the WSJ on November 4, 2010
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The Fed Is Printing A LOT More
• Federal Reserve to print an additional $600 billion, bringing total printed to $2.3 trillion since March 2009.
• Fed will effectively “monetize” US debt issuance from November 2010 through June 2011… NO NEW TREASURIES!
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Where Does Money Go In The End?
The Fed prints $1.7 trillion, buys MBS, some USTs.
Now the Fed uses runoff from MBS to buy more USTs.
What happens when USTs mature on the books of the Fed?
The answer will hurt your brain.
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What Happens If Securities Just Mature?
“In addition, reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Federal Reserve mature or are prepaid.”
Bernanke, 10-08-09, FRB Conference on Key Monetary Policy Developments
At the end of each year, all excess monies earned by the Fed are turned over to the US Treasury, and are thereby an offset to US debt. In 2009, the Fed earned over $46 billion, the highest in history.
This is a basic “forgiveness of debt” for the US Govt.
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Where We Are
In an effort to bolster economy, Fed has devalued dollar, pushed food & energy higher, pushed stock market higher, and pushed bond prices higher. The wealthy made more and the poor pay higher prices for necessary goods
In the end, US Government will have hundreds of billions if not trillions of dollars of debt forgiven through a central bank accounting maneuver.
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Rodney JohnsonPresident, HS Dent
an independent economic research companywww.hsdent.com