The latest Economic news.

 2/13/09

Hello,

For those lucky few who will be attending our trip to the D.C. Fed, I thought I would talk a little about how the system governing monetary policy works in our country, if you don't know already. There are five components to the Federal Reserve, one of which which are the district bank. Our nation is divided into 12 sections, each with its own district bank.  There are also its member banks, which are any nationally chartered banks. These banks must follow strict regulations set by the Fed, specifically the reserve requirement. There are also the board of governors, certain advisory committees, and the FOMC (which is definitely the most interesting).

We will be meeting with those who interact on a daily basis with the FOMC, whose goals are anything to do with promoting employment, economic growth, and fighting off inflation through controlling the money supply, which is done directly through the NY Fed specifically.

Basically the FOMC has three main tools which they use to achieve their economic goals. They are:

1) Open Market Operations (OMO's)

2) The discount rate

3) Reserve requirements

In regard to OMO's the fed meets atleast eight times a year to set targeted interest rates by basically selling or buying U.S. Securities. Through this, fractional reserve banking and the given reserve requirement, we get the Money Multiplier which is basically 1/r. They use this to help control interest rates, maybe lowering them when consumer spending is needed, or raising them by selling securities to prevent inflation.

Here's a chart of the Fed Funds rate versus bank's interest rates. Basically, the lower the Fed funds rate is, the easier it is for a bank to procure loans for itself and ultimately you.

 I believe Bernanke testified yesterday or something in front of Congress. He said he would be planning on raising interest rates and reducing the reserves of its member banks. Even though our country needs more accommodating monetary policy to fight unemployment and boost GDP, excess spending coupled with ultra low interest rates will eventually lead to inflation. That's something many people are contemplating will occur to the U.S. dollar eventually if these pro-spending tactics continue.

As this year progresses, I always wonder what would going to college studying business be like if we were in normal, economic sound times. Good luck on your first wave of midterms!

- Samir

 11/01/2009

Hello again,

Sorry for the delay. Its been over a month since I have posted, and allot of events have occurred since then. Bernanke claimed we were officially "out" of the recession and the DJIA broke 10k just to name the few. But it seems as if this rally that we have been going through has finally hit some sort of brick wall, and the market is trending away from its bullish behaviors after this multi-month rally. 

However, it is obvious many banks (main stream and subsidiary) are still suffering massive losses from the credit crisis. Even though it has been deemed to be over (which is just BS IMHO so people aren't as stringent as to where they allocate their assets), banks are still continuing to fail left and right. In just this year, over 115 banks have failed, closing a plethora of offices and ultimately many fin/econ jobs all over the country. 

Even though U.S. GDP grew around 3.5 percent 3Q09 (something around that), we are still not even close to our original level of output. Also, I believe this rise isn't really affiliated at all to where our economy is really heading. I think this boost in consumer spending has just been grown from allot of Gov. freebies. To name a few, many consumers have begun buying big ticket items because congress continues to give tax exemptions to new home buyers (the mortgage interest deduction is somewhere around 1 million for joint taxpayers). Congress is also saying "hey why not boost home equity loans as well" by giving interest expense deductions of up to 100,000 for taxpayers as well. Heck, Ill refinance my already absurd mortgaged house and buy a Ferrari with the proceeds tax free (Yes, Congress allows deductions of sales tax on your cars as well on your 1040k as well). Cash for clunkers has also given rise to this spending as well.

Basically, what I am saying is GDP is rising not because of our increased output and economic consistent growth over the last three months, but just at the governments expense. I forget the name of the economist, but he stated this growth is a bit more "soggier then it looks" - I agree.

In regards to our friends @ the D.C. Fed, I think Ben Bernanke made a very smart move as well in regards to the fed interest rate. Many economists would be misled into thinking this would be a textbook example moment to begin slowly increasing interest rates, but he didn't. Why? This growth is artificial. Companies are still liquidating out of their rear ends, and unemployment rates have not stopped rising. Also, fall is usually a bad time for the markets, and decreasing investors' incentives to spend at this time would not be the brightest of ideas. Sorry for the pessimistic rant, but we are still in this for the long haul.

Please email me with your incites/ideas. If your opinions are well written and with some academic merit, I'll post them here as well in your name.

For those who thought we were out of the water

It is basic Economics 101 that gold and paper currency rise and fall in an opposite fashion. However, some argue that it is not that much of a leading indicator as to which direction the economy is moving in, but just an indicator regarding the value of inflation. 

I didn't bother gathering all of the "official" dates and their corresponding values to make a proper best fit line, but from the looks of it, it has been acting very hazardous since around the start of the credit crunch. Ever since President Obama has taken office, gold's Standard Deviation has skyrocketed. If you're a risk adverse investor,this might not be to your appetite, but the way we have been throwing money around, I would say this is a good time to be a little daring...

On the other hand, the Fed Funds rate is still @ .15, and for once these ultra low interest rates do seem to be stimulating investment (as they should in theory). 

More to come later.