« Can Europe take over? | Main | Can Japan protect quality? »

Thursday, September 21, 2006


Arthur Eckart

The FOMC gave another general indication of likely future monetary policy (a little more dovish than the last statement). Anyone desiring a comprehensive statement of a large economy will be disappointed, because that cannot be done well in a few paragraphs. Also, FOMC statements seem to be for other central bankers or "money & banking" economists, given "Fedspeak" signals or thinking (e.g. when the FOMC first used the term "measured," many non-economists wrongly believed that was hawkish).


Excellent post-analysis. I understand you said that the statement was "as dovish as possible" ? I have a rather different opinion. Re: the opening statement, by omiiting the phrase - "the lagged effects of increases in interest rates and energy prices" (1) (which has appeared in May, June and August statement)- in my opinion leave the Fed moderately hawkish. Reason: during the last hike in June, the general concerns were if the Fed will overshoot (as they "did" in 1994) during the current rate hiking cycle. The Fed subsequently pause in August and cited the wait and see mode especially on the potential late kicking factors from previous rate hikes and high commodity prices. Wouldn't the ommission of phrase (1) indicates that the Fed think that they have truly in a neutral rate environment and would be ready to hike if data warranted ? Inflation remains an issues, as both the y/y measure of core PCE and CPI measures remains high (if not accelerating).

Is it wise for the market and the Fed have 100% faith in the fact the basis effect would bring inflation from now? What about the unforeseen second round effects? Perhaps the falling fuel prices would spur further consumer spending ? (there is a recent article published by FRB Richmond on US Household borrowing (essential saying the mentality of consumer: CREDIT is good, DEBT is bad, interesting read). Also, a lot of analysts cited the negative impact of falling house prices - but as far as i know, there remains NO conclusive links between "recession" and housing prices is there? Indeed, if you looking at y/y chart of US personal spending and the NAHB index, one would see US Personal spending remains as resilient as ever despite the near vertical drop of NAHB index. (I guess there are always charts outthere to support arguments from both (hard and soft-landing) camp.

Naturally, i don't have the answer for my question (not sure if there are) - though i tend to belive that growth will moderate but i am not sure if discounting the Fed to cut as soon as in early-mid 2007 is sensible either. Still think the FOMC statement is slight on the hawkish side - the sole dependent of oil price on inflation and housing market on growth is a bit "dangerous" as economy simply doesn't just influenced by ONE overriding factor. Oil prices future still points to a near $70 per barrel on long-dates future - can we be sure the recent fall in oil prices marks the end of peak in oil? i don't think so.

Arthur Eckart

The most recent FOMC statement removed the word "gradual" from cooling housing market and revised a sentence to "moderation in economic growth appears to be continuing," which both indicate greater concern for slower economic growth. Removing interest rates and energy prices "lagged effects" reflect most of the adjustment process is completed (after two pauses) and oil fell over $16 a barrel over the past month. Another sentence also cites that lower oil prices will reduce inflation. Last month's Core CPI and PPI reports were lower than expected. So, it removed "in recent months" regarding elevated inflation. Also, the performance of financial markets show the price of oil fell below a multi-year support level and may either stabilize around $60 a barrel or fall lower. The 10-year bond yield fell below 4.60%, which is well below the Fed Funds Rate at 5.25%. Consequently, the yield curve inverted further, increasing expectations of slower economic growth.


Authers: "Judging by their reaction, traders found Wednesday’s Federal Reserve statement disappointing. It is hard to see what they were hoping for."

They are hoping for ANY news that will push the market further up and attract investors. That is where their commissions come from. Duhhhh ...

Maybe Greenspan would have accomodated them. But, it appears that Bernanke is being more cautious. (Having learned the lesson of too expansive an economy of the Greenspan years? Time will telll.) What America does NOT need is Wall Street euphoria that enhances the Feel Good Factor, which gets Americans spending beyond thier means. With a savings rate clearly one of the lowest in the industrialized world, that is exactly where they are. (See chart: http://neweconomist.blogs.com/photos/uncategorized/20050407_net_national_savings_rates_econ.gif)

Also from this blog: (http://neweconomist.blogs.com/new_economist/2005/04/the_economics_o.html

The Economist: "low long-term interest rates do imply that, for now, global savings are more than adequate relative to investment opportunities." But is this sustainable? Even in a more global capital market, there are limits to foreign borrowing. The debts incurred must be serviced, capping how big the current-account deficit can become. ... To maintain high productivity growth, investment rates probably need to rise."

With a national savings rate of around 3% and an inflation rate of slightly larger, the US in the aggregate is treading water in terms of adding to the savings/investment pool. So, where are the funds coming from with which to invest? One guess, allowed. Only one.

Arthur Eckart

A Perla, it's somewhat of a paradox the U.S. bond and stock markets remain high or continue to rise, while the Fed has drained liquidity from the (commercial banking) system. Currently, cash positions of U.S. investment institutions (e.g. mutual funds, pension funds, hedge funds, insurance firms, etc.) are low, reflecting they're generally fully invested (consequently, there has been more rotation recently, e.g. from cyclical to non-cyclical stocks, etc.). Also, foreign capital inflows may have peaked. Moreover, the housing market Wealth Effect already peaked. Nonetheless, U.S. financial markets are doing their part (since they have a vested interest) to keep interest rates low (e.g. mortgage rates) and maintain the stock market Wealth Effect, to help the Fed, and the country, achieve a "soft-landing," and hope for an easing cycle to begin next year.


Eckert: “U.S. financial markets are doing their part (since they have a vested interest) to keep interest rates low (e.g. mortgage rates) and maintain the stock market Wealth Effect”

This “wealth effect” is pure fiction. It’s like flipping a condo in three months with a 20% profit – where is the wealth “created”? It is pure speculation.

Of course, the stock market’s Wealth Effect is based upon perceived future value, in terms of dividends, from a stock. Unfortunately, the stock market also discounts into the present future value in terms of earnings potential of a purely risk-based nature. MBOs are nothing but this sort of manipulation. It creates enormous wealth based upon the expection of a sizeable market revaluation of an initial offering.

So, what “wealth” is created? What is the nature of economic activity engendered such that the added value is based upon a real transformation? E.g., when you build a house, you transform materials into a residence. This is real wealth creation.

Financial creation of wealth, though disposable income, is purely speculative. It can appear, by means of a market transaction, to result in added value - but that value can also disappear. Whereas, a house, even if it’s value diminishes, it does not dissipate like the morning dew. That is “real” value.

Both “wealth creations” are products of a market transaction, but one is fictitious since it is based upon a variable market valuation. The market builds and destroys valuations each and every minute of its activity. Wealth that results from a process of transformation, either industrial or services, is tangible wealth.

I don’t believe that the purpose of financial markets is to create fictional wealth appreciation. Unfortunately, that is very much a minority opinion.

My point? Speculative wealth should be heavily taxed and wealth based upon transformation should not.


Arthur Eckart

A Perla, when people feel more wealthy, or more optimistic, they're more likely to spend. So, when the price of an asset rises, e.g. through increased demand, real wealth is created (although it may be a recognized gain rather than a realized gain). In a free market system, when prices rise, there's excess profit. So, new supply is created, until excess profit disappears. This is a mechanism to keep supply and demand in equilibrium. Unfortunately, the heavy hand of government with a one-size-fits-all policy is often not an optimal policy.


Eckert: "when people feel more wealthy, or more optimistic, they're more likely to spend. So, when the price of an asset rises, e.g. through increased demand, real wealth is created ..."

Yes, like when a drug addict has their fix. The feeling is euphoric.

Consumption is addictive and only psychology explains its nature. Not economics and certainly not the "free market", to which you attribute far too much credence.

This is the basic reason why consumption is manipulated by publicity in an attempt to channel it towards specific brand names. The stakes are enormous. Why are more than one third of Americans obese? Something in the water?

Of course not. It is their massive intake of couch-potato television that defines their consumption behaviour as regards fast-foods ... and just about everything else, including politics. (Besides, this phenomenon has become global. If fewer people are eating BigMacs in America, India and China are taking up the slack.)

Eckert: "... In a free market system, when prices rise, there's excess profit. So, new supply is created, until excess profit disappears."

This too is fictitious. A great many Americans made a lot of money in the appreciation of stock assets in the Clinton decade, just up to the dot.com bust. Then a great deal was also lost, but market value for those who were in the uptrend before its last five years before the bust still had a sizable appreciation in their portfolios. This did spur some consumption, especially in the baby boomers coming to retirement.

Most middle-income Americans were playing with interest rates to enhance their disposable income. With the great facility, known specifically in America, of refinancing mortgage rates lower to unlock asset value, disposable income was increased, which financed the boom of the Clinton years. This cycle ended in the early part of this decade.

Which is why America cannot create jobs. The demand is satisfied largely with the current workforce and the stock market, seemingly approaching its "historical highs" is not having the same Feel Good Effect.

Let's not look at economic history towards thinking it is likely repetitive. History repeats itself, but rarely in the same way. Especially economic history.

America, the world's economic engine despite China (which is little more than a production source for American household demand), needs another "good idea" to get it rolling again. That "good idea" will take time to root, given America's present fixation on ... er, other things.

But, the "good idea" WILL occur. Count on it.

Arthur Eckart

A Perla, there are real forces that have always existed, like gravity and a free market, and yet you choose to reject or ignore them. I stated above that speculators have a function in markets. For example, bidding up the price of oil, because future demand will exceed future supply, will raise supply and lower demand for oil, and increase production of alternative energy, to prevent a future shortage. Also, the Wealth Effect is psychological. However, there's much psychology implicit in economics and the effect is real. The U.S. creates and destroys jobs perhaps faster than any other country, which may explain why the U.S. leads the world in emerging industries and productivity is high in older industries. Also, I may add, the U.S. stock market bubble from 1994-00 created a steeper slope of stock market returns from 1994-06 than from 1982-94 (i.e. when the bull market began until the bubble began). So, the stock market bubble, even with the crash, has been a benefit to investors. Moreover, I may add, there are greater disparites in the U.S., e.g. between education, income, health, etc. So, perhaps the top third of Americans are the best in the world.


Eckart : "A Perla, there are real forces that have always existed, like gravity and a free market, and yet you choose to reject or ignore them.

Gravity has been a very intimate part of my life since birth. I know it very well. ;^)

Free markets are not of the same realm. They are man made, and for as much as I believe in them wholeheartedly, I do not genuflect at their cult altar.

At the very heart of the liberalist movement (during the period of Enlightenment that so influenced the founders of the United States) is a moral notion, which has been forgot by current investment thinking. It was that of the greatest good for the greatest number of people. This moral principle does not caution the unlimited accumulation of wealth as, necessarily, a prime societal need. (Go see Maslows's "Hierarchy of needs" ... nothing there about the absolute human need to accumulate billions. It is a distortion of a market economy that is allocating too much of the wealth created to too few.)

I am trying to square the circle, Eckart. Economic and financial training/education focuses on one and only one imperative: The maximization of profit. "Free-market thinkers" hang there hat on this notch, sensing that it is the raison d'être that accords them the moral approval for playing their market games. Speculation is such a game. There is no other way to characterize it. Games are great for people to play ... except when they become an integral part of any economic activity. (The outrages of dot.com days abuse of stock-options and pre-buy out distribution of company stocks to select Top Management in order to solicit further business is … immoral if not illegal. It is a game played to manipulate markets for immense personal gain.)

When these manipulations become something more than a game, then they deserve to be considered under the microscope of morality (particularly that of fairness). This is so particularly when gains are made speculatively. I repeat: There is NO fundamental dishonesty to making profits. In fact, there is much goodness. There IS abuse of publicly held assets, when market profits are concentrated into specific individuals or groups of individuals who manipulate a free and open market.

On a larger scale, I simply do not see that the generation of billionaires, so exulted by Forbes, is of any moral imperative to any economy on earth. The concentration of absolute financial power corrupts absolutely.

The billions of Joe Bloggs, in the middle-class existence, are far more important, to my mind, than the odd Bill Gates. The former are the very fibre of a society. And, given the way wealth is typically generated by the very rich, scratch the surface and you will see often a fraud. (Example: How did Bill Gates get away with a market monopoly in which he leveraged Operating System dominance to generate profits in other software products? Microsoft was found guilty by trial of the latter. The former is a "natural monopoly", the latter is illegal. Did anyone at Microsoft go to jail, however? No. Is this of any consequence? Yes, it is the manipulation of market economics for personal gain.)

My point? I am trying to make the connection between economics and moral philosophy that underpins human comportment. And, it aint easy. Especially in a society/economy that figures that market morality is either specious or irrelevant.

Arthur Eckart

A Perla, it's not possible that people created the forces in free markets, because they've existed before people existed, similar to gravity, mathematics, and time, which I'm sure people didn't invent. Supply & demand, opportunity cost, diminishing returns, etc. are natural forces with moral implications. Also, it's unfair to imply Bill Gates or other billionaires are criminals. Some people make moral choices. Consequently, the "Invisible Hand" rewards them. I'm sure Gates created billions of dollars of value for society, which also made thousands of Microsoft employees millionaires. Otherwise, why would society willingly pay Microsoft? Perhaps, some people resent buying a product for $100, to save thousands of dollars, because that'll make someone rich. I agree Gates is odd. However, there should be more people making the same moral choices.


Eckart: "it's not possible that people created the forces in free markets, because they've existed before people existed, similar to gravity, mathematics, and time, which I'm sure people didn't invent."

Oh, bollocks. Get yourself together.

Market forces are transactional, not planetary.

"Consequently, the "Invisible Hand" rewards them."

Bollocks again. Smith would turn over in his grave if he thought that you were using his moral philosophy to justify market thievery sanctioned by the state because it was a "successful business and made two multibillionaires, a few multimillionaires and more than a thousand millionaires".

The mafia tried this argument. Look where it got them.

About Smith, go here for your edification: http://www.adamsmith.org/index.php/main/individual/adam_smith_the_critic_of_exploitation/

Arthur Eckart

A Perla, I'm quite aware of Adam Smith and agree with his principle that when individuals improve themselves, society will improve. Unfortunately, you're unaware of the natural order of economics where the "system" fits and works very well together. Also, creating good for society and earning far less than the value of that good is not thievery.


"Unfortunately, you're unaware of the natural order of economics where the "system" fits and works very well together. "

You haven't been to Africa or parts of Central and South America.

Neither had Smith for that matter.

Arthur Eckart

The natural order of economics works in every country, since it's universal. It's unfortunate the world community is not interested in freeing oppressed people from excessive government (including dictators and warlords), which it certainly has the combined power to accomplish effectively. Of course, that would require a higher moral standard.


"It's unfortunate the world community is not interested in freeing oppressed people from excessive government (including dictators and warlords),"

Here we go again with the "world community". How many times have I heard this lamentation.

What "world community"? It doesn't exist except at the UN and that body has no charter whatsoever for "freeing oppressed people" from excessive government. (It does have a bit in it about protecting any member when invaded by another member ... but that clause is a matter of political "convenience" apparently.)

The only concept that is available for such is one called "liberty" and each country accepts or refuses it according to thier particular circumstance. There is no "World Order" to inflict it upon a people who do not want it for a variety of whatever idiot reasons.

Iraq has proven that point. Liberty is organic, from within. It cannot be imposed from without. (Just like in 1776 in the US and 1787 en France and ... and ...)

The comments to this entry are closed.


  • TEST

  • Subscribe in NewsGator Online

Economist Weblogs



  • This is a personal web site, produced in my own time and solely reflecting my personal opinions. Statements on this site do not represent the views or policies of my employer, past or present, or any other organisation with which I may be affiliated. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.