Wednesday, December 17, 2008
This report looks at the latest move by the Fed to drop interest rates to zero and to print massive amounts of money as part of a quantitative easing effort. It looks at the most recent Fed statement that accompanied the rate decision in some detail and closes with an exploration of what this could mean to the dollar (hint: not good) and our financial future. I offer my view on the dollar, stocks, bonds, gold, and real estate.
Welcome to a brand new world. Today the central bank, stewarding the world’s reserve currency, took a step so bold and so fraught with danger that it is difficult to envision all the possible ramifications. The US now has an official interest rate of zero and a strongly worded promise from the Fed that monetary printing (a.k.a. “quantitative easing”) will now begin in earnest.
These are steps that heretofore Bernanke has only explored in highly technical academic-style research papers.
Here’s a small bit from the abstract of one of those papers:
In this paper, we apply the tools of modern empirical finance to the recent experiences of the United States and Japan to provide evidence on the potential effectiveness of various nonstandard policies.
Our results provide some grounds for optimism about the likely efficacy of nonstandard policies.
Rather than comfort, I find much to be cautious about in their “findings” while their “non-standard” policies are little more than a doubling-down on past policies that have already demonstrably failed. I seriously doubt that things will work out anywhere near the way they hope.
For starters, I happen to think that Japan is a poor model for how this program of zero interest rates might work out for the US condition for three major reasons:
- Japan began their quantitative easing experiment with a savings rate of nearly 20%. Bernanke is beginning the US experiment with a US savings rate near zero. During a downturn, people with ample savings are more easily induced to return to borrowing and spending than people with no savings whose first order of business is usually to build some savings. On this basis, the US and Japan are simply not comparable. Just as importantly, ample savings mean the seed capital for renewed growth is in place.