Previous related posts
- NBA team owner Mark Cuban has an idea of how to save the economy – Part 1

Unlike the president who focus on condemning those who shift jobs abroad, it is important to understand that the Law of Economics has stipulated saving dying or noncompetitive industries and jobs through quotas, tariffs, and protectionism actually cost the country’s economy as a whole.  In winning some new devoted voters whose jobs he saved, the politician actually put everyone else at a disadvantage by forcing everyone to pay a higher price for the product, but more importantly to the politician is he or she can claim that he or she is workers’ champion and walked out as the winner.  If in doubt, go back to your basic college freshman level macroeconomics text book, and look for the related subjects in comparative advantage, tariffs and quotas.  Disobeying the law of economics have always produced disastrous results, just look at what happened to the communists and socialists countries before the adoption of market economy and capitalism, and look at European countries who believes in entitlements and easy lives, rejecting the need for efficiency, innovations and sensible government spending.

It takes two to tango.  The Republicans’ single minded agenda of lower taxes for the wealthy does not help the issue either.  Most of the time, they know nothing about federal budgets, and the effects of cutting taxes and spending cuts during a bad economy. It would be refreshing to see them talk about fostering an environment that encourages fresh thinking and innovations, not wars, guns, and tax breaks for the wealthy.  Growing the pie is perhaps more sensible at desperate time than grabbing a bigger slice of the shrinking pie.

I have always believe in great ideas and innovations that change lives, and revolutionary products that address needs and better living standards.  After all, to sustain an advanced economy with well-trained/educated human capitals and high living standard, devaluing a currency to encourage exports and shifting manufacturing jobs back is not a long term viable solution.  What this advanced economy need is entrepreneurs to bring about new innovations, new designs, revolutionary products that consumers need and want, thus creating sustainable demands, good jobs and incomes that fuel the consumer confidence as a result.  Facebook’s stock may be a disappointment but you cannot deny the economic stimulation Social media as a whole provides to the surrounding area, the state, and the country.  We need more of these great ideas and innovations that can stand the test of time, in stead of dirty/clueless politicians’ political rhetoric that pitch the haves and the have not against each other in a class warfare. Obviously, the political bickering will never end, the question then become, is more money always the solution to our problems? Perhaps not always, but in the short term, I don’t see how this would hurt.

 

Previous related posts:
QE3
Commentary and view on QE3 – Part 1
Commentary and view on QE3 – Part 2
- Commentary and view on QE3 – Part 3

According to Columbia University Economist Michael Woodford on a paper he authored and presented during the Jackson Hole meeting this year, he believes of all the tools remaining at the Fed’s disposal, it is Bernanke’s clear transparent communication of Fed’s time frame and commitment that is the most effective of all. He further concludes that the assets purchase and expansion of Fed’s balance sheet contribute very little to job creation, keep in mind that the Fed’s two mandates are full employment and inflation targeting.  Some people would jokingly say that the launch of iPHONE 5 actually has a more profound economic effect than the whole QE3 announced.  Some call on the Fed to adopt the Taylor rule that sets target GDP in stead of its current focus of setting inflationary target, the result may be debatable.

Richmond Federal Reserve President Jeffrey Lacker was the lone wolf that opposed to the central bank’s third round of quantitative easing.  He believes that it is the Congress or the U.S. Treasury’s job to channel or allocate credit to a particular sector of the economy through Fiscal Policy.  This implies that the Fed is worried about the upcoming Fiscal Cliff, and trying to do whatever it takes to carry the load when the Congress and the president fail to come to a bipartisan agreement on taxation and spending issues.  There are studies that indicate if all the weaponry the Fed fired hit their respective targets, the most dent the Fed can do is to knock 0.4% off of the current employment rate, well short of the 2% off that is needed for a full steam recovery.

The equity market seems to be in euphoria every time the fed hint at a new round of easing, it is getting difficult to break this addiction and dependency, when the country’s political system is largely dysfunctional.  All the Fed is doing is trying to reboot and instill confidence in the American Consumers.  The Fed’s action is no panacea, and consumer confidence is the key to recovery, it however requires the Fiscal side to get its act straight, and take that baton from the Fed and finish the run of getting the economy back on track.

 

In a post dated on Sept 18, 2012, NBA team Dallas Mavericks owner Mark Cuban revealed an article he wrote 4 years ago, please click on the link to see the entire original content.  One analogy that I found intriguing was the use of shuffling deck chairs on the Titanic, to imply both parties in arguing who should pay more in this game of greed and need federal budget of tax and spend, was pointless because we are all in a sinking ship.

He pointed out the solution, as blatantly simple as it may seem, lies within the entrepreneurial spirit that made this country great.  I agree, it doesn’t mean you have to, but hear me out.  Entrepreneurs are great at seeing what others don’t see, creating and inventing solutions that solve problems, producing products that we sometimes didn’t even know we needed, stimulating aggregate demand and creating jobs.

 

Previous related posts:
QE3
Commentary and view on QE3 – Part 1
- Commentary and view on QE3 – Part 2

Previous observations indicate that the major banks’ balance sheet are full of liquidity.  It is well known that the fed’s monetary action such as easing is as difficult as pushing a string, while tightening is easier as if pulling a string.  The previous rounds of easing were no exception, and it probably resulted in moderate inflation.  Think back to previous boom time, the fact that people felt wealthy encourages spending.  Majority of People’s largest assets are their homes, or the stock options from back in the dotcom boom.  The wealth effect phenomenon, albeit phantom some might consider, enhances people’s psyche and boost consumer confidence.  When you are wealthy with good income prospect, you are more willing to spend, because chances are you will regain spent liquidity from a job income or asset sales.  Many including myself suspect that in order to get out of this deep recession, corporate America and individuals alike may need to stop the de-leveraging, a result from the aftermath of the financial/subprime/credit crises, and begin to supplement their balance sheet with more debt, obviously in a responsible and sustainable manner unlike previously.  If there was a way for the liquidity injection to find ways into the pocket of individuals, private businesses, and corporate America, the recovery process may enjoy a solid ground to stand on if there’s a will to spend these money.  The fact that the Fed is paying interest on the big banks’ excess reserve is preventing this liquidity from reaching where it is needed the most.  I assume that this helped contributed to the low inflation the Fed refers to.  While it is debatable whether there is demand out there for such funds, it is absolutely crucial that the Fiscal side must do its job to stimulate such demand and establish a favorable and stable business environment.

 

Previous related posts:
- QE3
- Commentary and view on QE3 – Part 1

Another result that the Fed hopes to achieve is driving investors away from the safety of treasuries, and into riskier assets such as high quality corporate bonds and equities. On the lending front, as the spread between fixed rate loans and floating rate loans narrows, the yield give up for owning floating rate securities is minimal.  Many banks require an interest rate floor on (a long put option from the lender’s perspective) these floating rate commercial loans, as a result, in spite of the treasuries nominal rate might be lowered, the real rates paid on these commercial loans will not go much lower.

The QE3 has a similar effect by allowing the Fed to go into the secondary mortgage market and purchase Agency MBS, the higher demand increases the price of such securities, and thus help lowering the rate, plus the Fed had previously purchased some MBS, as those loans amortize and mature, I believe they will commit the principal and interest proceed to more MBS purchase.  Translation:  lowered mortgage rate and higher disposable incomes for borrowers.  This has a similar effect as Twist 2, except, Twist 2 seems to lower rate on the front end, and QE3 does it through the back end, so to speak.  It is, however, difficult to judge how effective this stimulus is, when there is an overall anemic demand for housing with multi years worth of shadow inventory that needs to work through the system.  This nevertheless, is not what some people worry about, the fact that this Quantitative Easing is not sterilized would result in propping up asset price including Housing price, Business Values, Commodity Price, Food Price, Energy Price, and most recently readily observable, Equity Price, so on and so forth.  There is a good chance the newly created currency may find its way into the circulation and causing inflation(or god forbid Stagflation) to spike.

The spiking of U.S. Dollar denominated asset prices is often accompanied by a drop in the U.S. dollar.  Weaker dollar is beneficial to U.S. Export, and increasing export may attenuate the trade deficit, which supports GDP growth and shifts jobs here, unless the rest of the world does something to counteract the situation.  More likely, in such weak world economy, Central banks of the Euros, Yen, Yuan, and other trading partners of the U.S. are gonna fight back, and this may cause a full fledged currency war, and who knows what that may lead to.

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