Well Chairman Bernanke finally rolled the dice. The question is, what will be the results of this unconventional bet? The U.S. is now officially in uncharted waters. We have never seen interest rates this low before, and the U.S. has never been in such a precarious position.
Chairman Bernanke's proposed solution is a simple one. Let's do everything the exact opposite of what we did during the Great Depression and let's see if we can spend our way out of it. This is an unproven thesis and there's no guarantee that it's going to work. What if it doesn't?
I think right about now we need to have a reality check and look at the facts as we see them:
Fact #1: The consumer is in a state of shock. With the collapse of the stock market, the American people have seen the value of their property rapidly diminish in value as well as the depletion of the retirement programs they may have had in place. This double whammy basically destroyed consumer confidence, which is going be a difficult task to correct as the public is waiting for the other shoe to drop. So, let's say this dramatic drop to record low interest rates doesn't work, then what? Well the Fed will just print more and more money which will create its own set of problems in the future. Mark my words, the amount of money to be printed will be close to $5 trillion as the FED is determined to get us out of this hole. This in turn can only mean one thing in the future ... rampant inflation. This is something that we are all going to have to deal with down the line.
I notice that most comments about the "financial shift" are focused on the US, like the rest of the world does not exist. People also say things like "the Fed is determined to get us out of this hole."
What if there is no hole? What if the Fed's design was to elevate consumer confidence to an extreme- by pumping easy lending into real estate and stocks and so on- and then promote the idea that "now that you are up that tree and stuck with no way to get down, we'll come and rescue you. Just wait there while we go get a ladder." Then, you never hear from them again.
Adam, you seem to think of the Fed as all-powerful: "They got us into this." No, maybe they leaned a ladder up a tree, but you either climbed up the ladder or not. You either trust them or not. You either place your faith in Obama or not. You either accept responsibility as yours personally or not.
Bond market sentiment is at an all-time extreme of 99% bullish. However, looking at the various bond prices (yields)for 30 year and 10 year and 2 year, there is some clear divergence. With 99% sentiment, isn't it time to diversify out of bonds- since that leaves only 1% of currently surveyed investors not already bullish?
In the last year or so, gold bulls (and even worse for silver- still down by about 50%) have been disappointed... while forex traders bullish the US Dollar have been pleased with a sharp 25% rally. Yes, the last few days have been the biggest drops in the last 10 years in US Dollar exchange rates, but that is after the biggest multi-month rally in the last 10 years as well.
If you did not see the recent rally in the US Dollar coming, or the collapse of prices of gold, real estate, stocks, and the contraction of lending markets, then consider that you just have a lot of company up there in the tree with you. Are you all waiting for the Fed to come and send your gold prices through the roof?
Hedging against inflation (or hyper-inflation) is not a reason to buy gold specifically. In hyper-inflation, converting cash to most anything is favorable. However, 0% yields in the short-term US treasury bond market (which the Fed is FOLLOWING, not leading) is not inflationary.
If I'm not positioned for DEflation, then I may be surprised that my inflation "hedges" of real estate, stocks, and gold (???) continue to plunge as people struggle to cover their over-extended mortgages. I put the "???" next to gold... because in two decades of inflation, from 1980 to 2000, the purchasing power of gold lost about 80%... after adjusting for inflation. So much for an inflation hedge, eh?
Oil appreciated 1200% from 1999 to 2008, then plunged 70%: 7% just the other day... and you are still talking about gold??? Sure, gold has a finite supply so as a medium of exchange, we can argue about how much better it "should be" than paper money. However, the gold market was MADE by governments. Many people ignore this- at their own detriment.
Gold mines were monopolized and then the governments required payment of "protection taxes" in gold, so gold became valuable. However, gold was only valuable because it kept people safe temporarily from the armed military personnel patrolling their vicinity.
By the way, do you know what makes the Federal Reserve's US Dollar Note valuable? Could it be... military force?
For those of you who wish to invest in premise of the US Taxpayer bailing out the US Taxpayer, I have some bad news and some worse news. Which do you want first?
Hey, thanks for the 4 facts. I am not that sure the dollar will go down; all the money FED is pumping is not making its way into the economy. So while lower prices for stocks (fact #4) doesn't imply stronger dollar, this is not an inflationary environment; can you point actually a fact which shows inflation? 10% unemployment, if we will see that, is very deflationary actually; as in 2008 funds and banks were hoarding money, 2009 will be "Main Street" turn to start hoarding dollars. More is that while FED is at 0, the course to ZIRP will be all over; Trichet is bluffing right now talking pause in cut rates. It won't last long until UK, Canada, Australia, etc. are all going to zero. Switzerland are almost there. What do you think?
to little to late, now the time has arrived the fate of America is unltimate loss or savings for retiring.
Bernanke is in a spot.
I wan't to think that there is a bigger plan. Even if it's one we can't know about. Maybee one to catapult America back to the top of the heap in terms of global empire.. but sadly histroy shows that it may have been our imperial status that helped us get here as well as that there are no givens like that. I'm sure turn of the century german economists weren't trying to get people to burn money instead of wood.
Obama will take this opportunity to nationalize all significant sectors, such as medical care, housing and financial institutions. Many of our most visible private names will become nothing more than the equivalent of a Chinese SOE. Taxes will be raised in 2011. An equivalent to the Social Security System will be created and all retirement contributions will be converted and deposited there. Contributions will be mandatory. People will be given homes and the government will pick up the mortgage. The Federal and state governments will hire millions more. There will be food and gas subsidies for millions. Politicians will patronize enough voters to keep themselves and their policies in power. People will come to accept that if they have food, clothing, shelter and medical care, that is enough. Prescient writings, such as the above article, will be nostalgic memories of another era.
What concerms me is the rest of the world is following the United States and looking at spending their way out of this crisis. Only time will tell whether it will work or not. No one would want to be in a position like Japan and experience long drawn recession.
May we all go through these turbulent times unscathed (well, relatively atleast!)