Titanic Problem or Day of Rekoning for the Feds

[Nemo]

And (IMHO) its getting closer and closer.  A real good place to find this info--  http://drudgereport.com/

Nemo

http://www.businessinsider.com/hsbcs-stephen-king-on-the-world-economy-2015-5

Markets More: HSBC Bearish
HSBC WARNS: The world economy faces a 'titanic problem'
Akin Oyedele, May 13, 2015,

HSBC chief economist Stephen King is already thinking about the next recession.

In a note to clients Wednesday, he warns: "The world economy is like an ocean liner without lifeboats. If another recession hits, it could be a truly titanic struggle for policymakers."

Here's King (emphasis added):

Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.

King notes that this far into the recovery, there's a lack of "traditional policy ammunition." For instance, Treasury yields have not risen, the budget deficit is not falling, and welfare payments are still on the rise.

As for what might trigger the next recession, King highlighted four things:

    Wage growth will hurt corporate earnings and reduce the share of corporate profit contributing to US gross domestic product (it also doesn't help that worker productivity is low). In turn, households and businesses will lose confidence in the economy, and the "equity bubble" will burst with collapsing stock prices.
    Nonbank financial systems such as insurance companies and pension funds will increasingly not be able to meet future obligations. This will cause a huge demand for liquid assets, forcing people to rush to sell despite no matching demand, triggering a recession.
    Forces beyond the Federal Reserve's control, including the possibility that China's economy and its currency could collapse. Weak commodity prices could also cause collapses in several emerging markets, as could continued strength in the US dollar.
    The Fed could cause the next recession by raising interest rates too soon, repeating the mistakes of the European Central Bank in 2011 and the Bank of Japan in 2000.

OR IS IT?


http://thehill.com/blogs/pundits-blog/finance/241836-reckoning-for-the-fed

May 13, 2015, 07:30 am
Reckoning for the Fed
By Judy Shelton, contributor

If you queried American citizens as to whether they would support a monetary experiment conducted by the Federal Reserve to stimulate economic growth — an unorthodox approach that would mostly benefit the government, large corporations and wealthy investors at first, but would ultimately help everyone else — would they approve?

And if you explained that it might take some time to deliver the desired outcome of higher employment at higher wages, and that people in the vast majority of households would have to accept much lower rates of return on their savings in the meantime, wouldn't a few perceptive respondents tilt their heads and ask: How long?

So why does such a reasonable question raise such ire from former Fed Chairman Ben Bernanke? Responding to a recent editorial in The Wall Street Journal citing persistent low economic growth as perhaps an indication that the Fed's unconventional monetary policies are not working as intended, Bernanke fairly bristled with indignation, writing in his Brookings Institution blog that he never promised monetary policy would be a "panacea" for our economic troubles — and besides, "nobody claims that monetary policy can do much about productivity growth."

Such defensiveness is not reassuring. It's been nearly six years since the recession officially ended in June 2009. Still, the Fed continues to pursue its zero-interest-rate policy in the name of supporting the recovery, even as the negative aspects of this approach are imposing significant economic costs.

According to a report issued in March by Swiss Re, the world's second-largest reinsurance company, the Fed's policy of financial repression has cost U.S. savers roughly $470 billion in lost interest income. Other unintended consequences described in the report include "crowding out viable private markets" and "lowering the funds available from long-term investors to be used for the real economy."

Bernanke's riposte to those who would question the wisdom of perpetuating zero rates is to assert that the inflationary consequences predicted by some have not materialized. But after so much pumping, subdued inflation is hardly grounds for crowing; it's further proof that the Fed's policies are not working. Cheap money is not expanding production and raising wages as planned, it's not increasing demand — and thus not raising prices for goods and services. Inflation is the dog that's not barking.

Something is wrong. The monetary stimulus theory behind zero interest rates is not playing out in reality. Where's the economic growth? This mystery will not be solved by former Fed prima donnas refusing to acknowledge that American citizens and their representatives in Congress have every right — indeed, Congress has a constitutionally mandated responsibility — to call to account those who have been appointed to the task of regulating U.S. money.

No one is accusing anyone of less-than-noble intentions or less-than-heroic efforts in utilizing central bank powers to influence economic outcomes. But when monetary authorities themselves are repeatedly stymied by less-than-optimal results, it's time to consider changing course. An accountable Fed would accept the notion that its monetary stimulus strategy needs to be examined because it has not delivered anticipated results, by the Fed's own projections, within a reasonable time period.

Maybe the problem stems from the Fed's enhanced regulatory scrutiny over banks' lending decisions in the wake of the crisis. Overregulation may have had an especially inhibiting effect on community banks. Before the Dodd-Frank bank regulation law passed in 2010, an average of more than 100 new banks opened each year; in the five years since 2010, only one new bank has opened. Fear of violating regulations has caused many hometown banks to reject loan applications from traditional customers — with the result that small business lending has been dampened. And that factor alone is a blow to economic growth.

Then, too, the normal money multiplier has not been functioning properly due to banks' massive buildup of excess reserves, which have gone from $1.9 billion in August 2008 to a staggering $2.6 trillion currently. A study issued by the Cleveland Fed in February states that banks now find it "both easier and more attractive" to hold excess reserves than make loans. Why? Fed policies have altered the terms of the trade-off; the marginal benefit of holding reserves has increased because the Fed now pays interest on them, while the marginal cost in terms of forgone interest on loans has decreased under the low-rate conditions engineered by the same Fed.

So in crafting its monetary strategy to stimulate economic growth, it seems the Fed has given short shrift to the middle-income Americans who fuel the private sector — the true engine of productive economic growth. How much has consumer demand decreased because personal savings accounts pay zilch? How much has employment and production suffered because entrepreneurs can't get loans from their local banks?

Yet, even as business investment languishes and manufacturing has hit the skids, and with America's annual growth rate coming to a near halt at 0.2 percent for this year's first quarter, our monetary authorities seem clueless about the impact of their own policies. Indeed, the Fed's instinctive position is to call for more government intervention in the economy. Don't expect any initiatives to scale back regulatory burdens or liberate market forces to spur real economic growth.

Instead, you can expect increasing calls from Fed officials to give themselves more room to maneuver by raising their target rate of inflation to 4 percent or higher — never mind that such monetary mischief utterly confounds business planning and leads to the misallocation of investment resources. And you can expect further demands for massive government spending on "public infrastructure development" to create jobs. It's what Bernanke recommends in his blog post, insinuating that some other part of government needs to join the Fed's stimulus party to attain economic growth.

But shouldn't we start by figuring out the reasons for the Fed's own lack of success?

Shelton, author of Money Meltdown, is a senior fellow at the Atlas Network and co-director of the Sound Money Project.

[Kbop]

like watching a scary movie... but it doesn't seem to end.

[Nemo]

But when it does end, and it will-- sooner rather than later, its going to hit each of us like a 4D movie aimed dead between our eyes*.

Nemo

*But unlike the vast majority of the entire earth, we are at least a bit ready for it.

[Kbop]

I hate it when reality intrudes on my carefully constructed fantasy.

[JohnyMac]

I wonder...Just typing out loud here...On purpose what if China purposely allowed their country to go into recession/depression first, in theory they would come out of it first and take what is needed globally.

Another thought, war has been the cure for many poor economies. 

[Kbop]

JohnyMac - I agree
  China has already claimed a largish area of influence in the South China Sea, the cows tongue.  it includes parts of Japan, Viet Nam, The Philippines and several other areas.  If the economy was manipulated to bring the country (China) together under patriotic vitriol, then it would allow China to expand and endure the pain of that expansion internally.  - they have set up several sphere's of influence (using US trade to finance it  ) It would be very ironic if they used 'gunboat diplomacy' after setting up their expansion process - a method of influence they learned from European and US governments 
-
I'm more concerned with them purchasing the resources wholesale in places like Africa.  can  you imagine what would happen if China runs an area down using internal friction to cause unrest?  they could then move in to pacify the violence and 'help' the local government.  I doubt they would then leave until the resources are gone.  it is highly likely they would then spread out from there. 

-
Cow's Tongue -

http://en.wikipedia.org/wiki/Nine-dotted_line

Chinese investment in Africa
http://www.businessinsider.com/map-chinese-investments-in-africa-2012-8

Gunboat diplomacy
http://en.wikipedia.org/wiki/Gunboat_diplomacy

[JohnyMac]

Good thoughts Kbop 

Just a side note: The Vietnamese people hate the Chinese just a tad more then the Japanese people.

Apparently China has been trying to take over Vietnam for centuries. If you remember, we first supplied Ho Chi Ming because he and his troops were fighting Mao post WW II.

When I was in Vietnam in '04 there were many museums I visited that dedicated whole wings to China's aggressiveness over the centuries towards Vietnam.

I read somewhere that 25% of Vietnam's current economy is based on exports (Sales) to the USA.

Trust me here, Vietnam will never rollover for China.