It is necessary to consider whether an economy that is traditionally addicted to free money can suddenly deal with a global depression in the middle of its ‘withdrawal’.
The world’s most important stocks markets have enjoyed very profitable times for the past four weeks. Hundreds of investors have made a lot of money in what seemed to be an insatiable rush to buy and sell stocks to squeeze the most out of them. Unfortunately, those profitable times seem to be cooling off. Stock markets around the world experience a slow down and some of them a drop in activity after the United States’ Federal Reserve put out its latest economic outlook report.
Although most of the details in that report were unknown to many investors, leaked information did negatively impact the appetite for investing.
The bullish rally and optimism that markets have experienced in the last four weeks of summer, where thousands of investors used particular sales transactions to reap huge benefits could change faster than anyone can say ‘crash’. Crash seems to be the word in the minds of many investors and economists and the place where the global economy may be heading to, if the FED stops its injection of fiat currency sometime in 2014.
It has been the FED’s pumping of fake money what has kept the markets afloat. It has been that artificial scenario what made investors bold during a time of global economic crisis. The $85 billion that the US central bank issues every month to keep the markets stable may just have been given an expiration date. The Federal Reserve has already begun the countdown to phase out massive buying of bonds that had applied in recent months as a measure of encouragement and generator to revive the economic engine. That initiative has failed to lift the economy from the current economic depression, as it has only benefited the large banking institutions that control the FED itself.
Wednesday evening the FED Committee met to put together a list of conclusions, before Ben Bernanke leaves the Chairmanship. The change in the FED’s policy will coincide with the change in command at the private entity. Bernanke will be relieved of his post by President Barack Obama next year, and the FED believes that the macroeconomic data of the US provides signs that they can recover and grow, so it is no longer necessary to maintain the flow of fake dollars into the economy.
Investors interpreted this gradual withdrawal of stimulus, which will occur before the end of this year, as a loss of important economic support to provide credit lines to companies and individuals. However, it is important to remember that most of the money used by the US government to bail out banking institutions has not been lent to neither companies that have the intention to help the economy grow. The money is sitting in secretive bank accounts as supposed to financing the creation of business or the hiring of more people for the workforce. As a consequence, economic activity has not really picked up.
According to the FED, as of January 1, 2014, the U.S. economy will have to find a way to be and banks and companies will have to serve as economic engines. The scenario envisioned by the FED did not happen during the bailouts or the period the central bank implemented its infamous quantitative easing program, so it is hard to see how it could happen in 2014. Will the banks suddenly decide to lend and in doing so use bailout money? At what interest?
“Almost all the members of the FED Committee agreed that it was not appropriate even a change in the program,” says the document, although, it is recorded that one of its members claimed that the FED needs to indicate in a “more explicit” way that its asset purchases program will be reduced in the short term. Meanwhile, a few members stressed the importance of “being patient and evaluate additional information before deciding on any changes regarding the pace of asset purchases,” reads the report.
The minutes of the July meeting says that “almost all participants” are “comfortable” with the latest perspectives brought about by the central bank, under which if economic conditions improve as expected, the bond purchases could moderate later this year.
“From this perspective, if economic conditions improve as expected, the Committee would moderate the pace of its purchases of securities by the end of the year, and if economic conditions continue to develop as anticipated, the Committee will gradually reduce their purchases and complete its program purchases in mid-2014.”
Furthermore, the minutes reveal that mebers of the FOMC dismissed the idea of incorporating more information on the program of bond purchases in the statement after the last meeting of the FED. They consider that any changes in this regard could have caused an unwanted reaction in market expectations about it.
The monthly purchase program of $85 billion in Treasury bonds and mortgage securities was launched in mid-2012 to support the tepid U.S. economic recovery after the financial crisis. At least that is what the FED said publicly.
The opportunity to begin their gradual withdrawal by the end of the year was first advanced by FED Chairman Ben Bernanke last June, when he repeated that this decision would depend on signs that showed economic improvement in the U.S..
At its meeting, the members of the Open Market Committee of the Fed, who run the country’s monetary policy, reiterated its forecast of a “further strengthening” of the economy in the second half of 2013. However, “a group” was “less confident” in its June meeting due to rising oil prices, the slowdown in U.S. export markets and rising mortgage costs.
The U.S. central bank had forecast the expansion of the American GDP in a range between 2.3% and 2.6% for 2013. But the most recent data from the end of July show that the numbers will be lower than expected. The pace of U.S. economic growth was 1.7% in the second quarter, slightly above the 1.1% in the first quarter.
Luis R. Miranda is the Founder and Editor of The Real Agenda. His 16 years of experience in Journalism include television, radio, print and Internet news. Luis obtained his Journalism degree from Universidad Latina de Costa Rica, where he graduated in Mass Media Communication in 1998. He also holds a Bachelor’s Degree in Broadcasting from Montclair State University in New Jersey. Among his most distinguished interviews are: Costa Rican President Jose Maria Figueres and James Hansen from NASA Space Goddard Institute. Read more about Luis.