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   Investment Thoughts - Macro Observations

The Fedís Dual Mandate Responsibilities: Maintaining Credibility during a Time of Immense Economic Challenges
Rather than fighting the inflation ghosts of the 1970s, I am more worried about repeating the mistakes of the 1930s.

Some interesting remarks on the current Fed policy delivered by the President if the Federal Reserve Bank of Chicago:

"I largely agree with economists such as Paul Krugman, Mike Woodford and others who see the economy as being in a liquidity trap: Short-term nominal interest rates are stuck near zero, even while desired saving still exceeds desired investment.

This situation is the natural result of the abundance of caution exercised by many households and businesses that still worry that they have inadequate buffers of assets to cushion against unexpected shocks. Such caution holds back spending below the levels of our productive capacity. For example, I regularly hear from business contacts that they do not want to risk hiring new workers until they actually see an uptick in demand for their products. Most businesses do not appear to be cutting back further at the moment, but they would rather sit on cash than take

the risk of further expansion.


(...)

Monetary economists often point to the poor economic experiences of the 1970s and 1930s as times when the Federal Reserveís credibility account was debited substantially because of both of these factors. I believe the current liquidity trap environment following the 2008 financial crisis is similarly challenging todayís policymakers. So far, I believe we have done the right thing. Since the recessionís end in 2009, more than once the FOMCís projections have proved too optimistic, and the U.S. economy has been unable to achieve escape velocity for returning to stronger, self-sustaining growth.

(...)

Rather than fighting the inflation ghosts of the 1970s, I am more worried about repeating the mistakes of the 1930s.

As in the 1930s, today we see a lack of demand for loans and a resistance of lenders to take on risk ó factors that mean the high level of bank reserves is not finding its way into broader money measures. As in the 1930s, todayís low Treasury interest rates in good part reflect elevated demand for low-risk assets ó we see investors run to U.S. Treasury markets every time they hear any bad economic news from anywhere in the world."

Chicago Fed-Speech delivered by President Charles L. Evans, October 2011

13.03.2012


Themes

Asia

Bonds

Bubbles and Crashes

Business Cycles
Central Banks

China

Commodities
Contrarian

Corporates

Creative Destruction
Credit Crunch

Currencies

Current Account

Deflation
Depression

Equity
Europe
Financial Crisis
Fiscal Policy

Germany

Gloom and Doom
Gold

Government Debt

Historical Patterns

Household Debt
Inflation

Interest Rates

Japan

Market Timing

Misperceptions

Monetary Policy
Oil
Panics
Permabears
PIIGS
Predictions

Productivity
Real Estate

Seasonality

Sovereign Bonds
Systemic Risk

Switzerland

Tail Risk

Technology

Tipping Point
Trade Balance

U.S.A.
Uncertainty

Valuations

Yield