by Jack
The job of the Federal Reserve bank is act as the nation’s bank, regulating the money supply and adjusting the prime lending rate, which other banks use to borrow money. If they are doing their job right they (fed) will hold inflation to near zero.
The Feds Board of Directors aka the Board of Governors is the most powerful board in the world, because it has it’s hands on the US economy. (The Federal Reserve consists of the Main bank and 12 Federal Reserve districts banks located across the United States. The Federal Reserve is also the only bank authorized to business with foreign countries.)
Prior to the Great Recession the Federal Reserve offered a much higher interest than it does today. The reason was to hold the economy back just enough that it didn’t overheat, but the Fed Chairman at the time Alan Greenspan, lets housing get away from us and that was a big setup for the recession.
An overheated economy tends to form hot spots in certain sectors, we call them bubbles, like the dot.com bubble and the housing bubble and this leads to speculation driven commodity prices. Without something more substantial than speculators to support those higher prices, the law of supply and demand kicks in and those inflated values eventually collapse only to retrace their steps and remove the gains. So, it serves no useful purpose to create a bubble because they never last and they give up almost all the profits.
Now we have Ben Bernanke as the Fed Chief and were coming off the Great Recession, recovering from the housing bubble and their bundled derivatives that almost destroyed our economy. Interest rates are at the bottom because the Federal Reserve has been steadily dropping the prime rate hoping this would stimulate businesses into borrowing and banks into lending, but it didn’t and our national debt was one of the reasons it didn’t. Almost like an act of desperation the quantitative easing by the Fed and the Central Bank of Europe put more money into our supply, but it didn’t change the economy because the amount of goods for sale didn’t change, when this happens there is a major risk of inflation.
The stock market has been skittish over another recession looming and has shown a downturn of over 500 points off the recent high. At the same time economic analysts are becoming increasingly pessimistic that President Obama’s policies will ever start working, so far they have only served to a create a great deal of pent up expectations.
John Hussman, Ph.D., is one of the most brilliant of our nay-sayers and he is somebody I have been following because his market calls to be very accurate. So, when he see’s danger ahead – I listen.
Here’s what Hussman recently said, “To date, the stock market has largely shrugged off the evidence of oncoming recession, in the confidence that the Federal Reserve will easily prevent that outcome and defend the market from any material losses. On that point, it is helpful to remember that the real economic effects of Fed actions in recent years have been limited to short-lived bursts of pent-up demand over a quarter or two. Not surprisingly, as interest rates are already low, and risk-premiums on more aggressive assets are already remarkably thin, the impact of quantitative easing around the globe continues to show evidence of diminishing returns.” end
To sum it up, the Feds have backed themselves into a corner and there’s very little room for the prime rate to do anything and we’ve tried the bailouts and they didn’t work either. The 15 trillion dollars of debt the nation has recently acquired has almost assured us that we are headed into a period of high inflation and a weak stock market. Hussman gives it about a 98.5% probability and he sees the market dropping almost 50%. Click here for the full story by Hussman.
Nouriel Roubini: Next year’s perfect global storm could be much worse than 2008
Here are the highlights, which are delivered in perfect bullet-point format by Roubini, one after another:
“By 2013, the ability of policy makers to kick the can down the road is going to run out of steam”
“In the eurozone the slow-motion train-wreck could become a faster-motion train wreck”
“The US looks close to stall-speed and a recession, given the latest economic data”
“The landing of China is becoming harder rather than softer”
“The other emerging markets are all sharply slowing down in terms of growth-the BRICs, China, Russia, India, Brazil, and also Mexico, Turkey. Partly it’s because there’s a recession in the Eurozone and UK, partly it’s because they’re not doing their reforms.”
“And finally there is the time bomb of a potential war between Israel and the US and Iran. Negotiations have failed. The sanctions will fail. Obama doesn’t want a war before the election, but after the election, regardless of whether it is Obama elected or Romney, chances are the US is going to decide to go and attack Iran and then you’ll have a doubling in global oil prices overnight.”
“So, it’s the perfect storm! You could have a collapse of the eurozone, a US double-dip, hard-landing of China, hard-landing of emerging markets, and a war in the Middle East. Next year could be a global perfect storm.”