‘Quantitative Easing’ has involved the Federal Reserve Bank into buying longer-term financial assets and paying for them by crediting bank’s reserve accounts. This transaction leaves ‘net private financial assets’ unchanged, but alters their composition in which it affects yields and returns. The theoretical intention of this policy was to create excess bank reserves, which should have encouraged banks to lend to households and firms. In return, they should have used these funds for consumers spending or productively investments in new capital investment projects.
Reserves, also known as ‘base money’, can only be extinguished by the FED as part of a strategic balance sheet reduction policy. This can only be achieved through outright asset sales, reverse repos and negative interest rates. This would pull the much-needed liquidity out of the market place. The intention of this policy was to reduce longer term interest rates which should encourage private investments.
Presently, there are 95 million Americans out of work, which currently reflects the unemployment rate at 22.7%. How is the FED going to unwind its’ balance sheet of over $4.5 trillion? If they start to liquidate, then the liquidity will dry up in the market place and consequently there will be Monetary Armageddon ahead! Therefore, there will be no winding down of the FEDS balance sheet.
Take a look at the chart below which shows what happens when FED raises rates during a weakening/fake recovery… It triggers a market crash and we are headed into another crash and its going to be big, ugly, and painful for those not positioned correctly.
There are ways to take advantage of these fast-moving markets to earn a steady income and/or grow your trading account. That is possible by using my Momentum Reversal Method (MRM). My proven strategy will work in all market environments, regardless of all the external noise!
In an interview with Bloomberg Jim Rogers, he explained “that the United States Central Bank has driven interest rates to historical lows, causing the rest of the world to follow down the same path. This monetary policy experiment has also enabled debt to skyrocket unlike we have ever seen before.” Jim Rogers explained that “The Federal Reserve… has no clue what they are doing. They are going to ruin us all.”.
I certainly agree with Mr. Rogers in that there will not be a happy ending to all of these manipulations taking place.
To have a positive impact on aggregate demand, and hence potentially create inflation when the economy’s productive capacity is reached, the policy would need to induce a change in the ‘saving behavior’ of the private sector. The FED’s forecasting models, which have become obsolete, incorrectly implied that if they increased bank reserves, this should have led to more lending and a multiplied increase in deposits.
Currently, there is a need for a newly updated forecasting model. The FED believed that reducing longer term interest rates would stimulate private investments and create aggregate demand. The lower long-term interest rates reduce the interest income of those who are saving and who have reduced their consumption in accordance with their saving plans.
The FED intended to create the Wall Street ‘bubble’ which should have created an economic boom but rather created an unevenly distributed wealth effect, that did not stimulate demand. It resulted in an uneven income gap in the United States which has exploded over the last 8 years.
If the private sector, in aggregate, felt wealthier in response to the artificially inflated Wall Street ‘bubble’, they have been lulled into taking on more debt. These borrowed funds increased their market share price through their stock buyback programs. This did not kickstart the ‘real economy’. The ‘real economy’ is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets. There is no evidence that the ‘Quantitative Easing’, to date, has produced any economic growth over all that resulted in any boost to aggregate demand.
It expanded wealth inequality and a reshuffling of all social stratification classes. What the FED did achieve, in this manner, was unsustainable due to the heavy indebtedness of the private sector.
If policymakers want the private sector to have an impact on the economic recovery, they need to arrange for an orderly cancellation and/or significant write down of private debts. This would free up income for private expenditures. Monetary policy was ineffective as they placed their money into the stock market, thereby creating an artificial high! As a result of their investments, the money never reached Mainstream American.
Failure To Act!
Fiscal policy targeted at job creation is much more effective. If balance sheets are in better shape, the private sector will be able to ignite and implement economic activity. Therefore, banks will be more willing to lend.
- Infrastructure, (Trump to unveil $1 trillion infrastructure plan in 2017: official), is the backbone of the U.S. economy. It is critical to every nation’s prosperity. The fundamental impacts of underinvesting in infrastructure will result in higher costs to both businesses and households due to less efficient and even more costly infrastructure services, down the road.
Business related travel and personal travel will also become more expensive and less reliable. Travel times will lengthen due to inefficient roadways and more congested airports and airspace. This will cause goods to be more expensive to produce and more expensive to transport to retailers for households and/or to business customers. Hence, U.S. businesses will become more inefficient. Costs will rise and business productivity will fall, thereby causing GDP to drop, cutting back employment and ultimately reducing personal income. If electricity grids or water delivery systems fail to keep up with demand, expenditures to households and businesses will increase.
The U.S. economy will lose approximately $4 trillion in GDP, between 2016 and 2025, if investment is not forthcoming. If the country’s aging roads, railways and bridges are left to decay even further, that expense could rise to $14.20 trillion by 2040. Likewise, business sales will also take a substantial hit. The report forecasts that if left unchecked, poor infrastructure will result in business sales losing $7.04 trillion by 2025 and $29.30 trillion by 2040. American household incomes will also feel the impact. The economic turmoil will also result in job losses and 2.55 million people are destined to become unemployed, by 2025. This statistic could reach 5.81 million people who will become unemployed, by 2040.
Not that I want to be negative here but rather just share the reality of what we could experience in our aging years. This does not even account for the rise of automation (machines, robots, driverless cars etc…) This alone has a devastating impact on jobs in the next 15 years.
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I wanted all of our readers to be aware of the multiple correlations that support our analysis and the fact that volatility is set to start rising. Keeping this in mind, we are positioning ourselves and our clients to take advantage of these expected moves and we will continue to monitor the markets price action to take advantage of opportunities as they fold. If you want to know more of our unique Momentum Reversal Method (MRM) and our trade setups, please visit www.ActiveTradingPartners.com to learn more.