Thursday, August 13, 2009

Fed's Actions Speak Louder Than Words

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The old adage that 'actions speak louder than words' is something everyone learns as a young child because it is one of the most important things to know. In its press release from its meeting yesterday, the Fed's words were very upbeat and said the recession appears to be ending. However, they then followed this up with they would be keeping interest rates at zero for "an extended period." Zero interest rates are an extreme policy action only justified in the most dire economic circumstances and bear a high risk of causing massive inflation. So if the economy is doing much better why do they need to keep interest rates this low?

The stock market of course rallied on the Fed's positive outlook on the economy, even though the Fed's outlook has been completely wrong for the last two years. The Fed didn't see the Credit Crisis coming even one month before it blew up. Even in the spring of 2008, they were releasing statements that a recession could be prevented, even though a recession had already started in December 2007. This time the Fed has said that "economic activity is leveling out" and conditions in financial markets "have improved further." And what are the signs of the improving economy? They are increased factory activity, homes sales picking up and companies firing less workers. It should be immediately obvious that less firings are not a sign of a growing economy. As for factory activity, it is not adjusted for inflation, so rising prices can make it look better. If you check you will see that petroleum products are at the top of the list and not because there was a huge increase in their use, but because prices went up. Nevertheless, once again the Fed assured us in their statement that there will be no inflation.

As for the improving real estate market, in the last two days we have covered why that's not likely for years to come. News out today had foreclosures up 7% from June to July and 32% year over year. In the month of July, 360,000 U.S. households received a foreclosure notice raising the total for 2009 to 2.3 million. July was the third month out of the last five when foreclosures hit a new record high (that certainly looks like a recovering housing market doesn't it?). The huge rise in foreclosures is taking place even though there are a number of federal and state programs to prevent foreclosures including Obama's housing rescue plan (about as effective as the federal government's post hurricane Katrina rescue plan in New Orleans). Several states have even put moratoriums on foreclosures to temporarily stop them altogether. Foreclosures are still rising at a break neck clip however. Yet the Fed and the media are telling us that real estate is recovering.

The Fed also said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities and claims it will shut down this program at the end of October, a month later than previously scheduled. Mainstream media reports state that this program is aimed at lowering rates on mortgages and other consumer debt, but admit that some people think that it looks like the Fed is printing money to pay for the exploding federal budget deficit. Who are these people who insist on dealing with reality? Next they'll be claiming that this will be causing massive inflation like it has every other time in history when it's been done. Imagine believing history repeats itself instead of believing Ben Bernanke, who has apparently been wrong in every prediction he has ever made. Fortunately, we have the mainstream media to tell us that words speak louder than actions.

NEXT: A Recovery Reminscent of 1990s Japan

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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