Fed's Plan is an illusion....Its risky.......By Shan Saeed
The cat is out, Ben Benanke announced massive $600 billion bond purchase to kick-start the economy. But will it work? I doubt and its a risky path. Its an illusion. The U.S. central bank's plan to buy hundreds of billions of dollars in government bonds probably won't do much to boost the economic recovery.
The Fed announced Wednesday that it would purchase $600 billion in Treasury, aiming to lower long-term interest rates in an effort to spur spending, increase asset price and ultimately lower the U.S. unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of $1.7 trillion in mortgage and Treasury bonds. QE1 did not work to boost the economy....If US compares itself with German, they are doing much better...USA borrowed 6% of GDP for the stimulus injection in the economy. The German's borrowed 1.5% of GDP for stimulus to revive the economy..Stimulus is working in Germany but the size is small. But not in USA.....The confidence level remains very low....
The Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."
The Fed's move has caused worries in South Korea and other emerging markets in Asia. Those governments fear that lower interest rates in the U.S. will further push investors to seek higher returns overseas and that this tide of money will drive up their currencies and destabilize their markets. Let me warn you that the U.S. won't find its way out of the economic doldrums through over-stimulation.
"The thought that you can create a prosperous economy by inflating is an illusion, in my judgment. And we should never forget that. I thought what the lesson I learnt at Uni. of Chicago, Booth School of Business should spread and be shared with others. Printing money does not fix the economy..Its a tactical maneuvering to provide breathing space to the economy....Fiscal and Monetary policies work in tandem not alone....
The Fed faces a dilemma in balancing the aim of boosting the economy now while avoiding fears of a future jump in inflation due to the monetary stimulus.
Fed Game plan looks very simple. The influence of this kind of action on longer term interest rates, in particular, is ambiguous because the immediate impact of buying bonds ought to be to drive bond prices up, lower yields and interest rates down. But if people get concerned about longer run inflationary impacts, the effects go in the other direction."
In theory, the Fed's action is expected to lower interest rates because bond prices and interest rates - also known as yields - move in opposite directions. The yield is the fixed amount of annual interest paid to the owner of the bond expressed as a percentage of the bond price, so the extra demand created by the Fed's purchases should push bond prices up and lower the yield. But when investors fear inflation will be higher in the future they demand that bonds pay a higher interest rate to protect their investment from the value-eroding effects of inflation.
SOME AFTERSHOCK PREDICTIONS
Aftershock's predictions for the future are not positive for US economy. The picture is very disturbing. Please hold your breadth.
— A nearly unfathomable level of unemployment.
— An already bad real estate market gets drastically worse
— A historic drop in the stock market
— An attack of hyperinflation
— The collapse of the dollar and possible rise of a one-world currency
— Simple goods become unaffordable
Disclaimer: This is just a research piece and not an investment advice. Please use your own due diligence / judgment call for investment strategy or decision