It is not surprising that the FOMC has decided not to restrict the scale of asset purchases so soon after they were initiated, and yesterday`s dismal data on home prices certainly reinforces the notion that the Fed is not being too hasty in pumping liquidity into the system. The situation of the residential real estate market in the U.S. remains grim, and it is likely to get worse under the impact of judicial processes that could drag on for a long time. The Fed`s buying of Treasuries, if it does help to reduce mortgage rates, will certainly help alleviate the pressure on the economy. Yet this is far from being certain, because the market in question is enormous, and even if the bank temporarily manages to keep it afloat by engaging in quantitative easing, it is possible that a dosage of the medicine will need to be administered continuously in order to keep the sector afloat.
And that is the main problem, of course. The market is not so pessimistic that the Fed cannot engineer a jolt to growth for the near term, and its capability of boosting inflation somewhat for a limited time period is not a matter of great doubt. But there is no indication that such a short term program will deliver the necessary impetus to sustain a longer term reversal of course leading to elimination of the masses of the unemployed, and creating a self-sustaining momentum that can prevent asset price depreciation, and encourage Americans to spend. Although, on the basis of the demographic trends in the U.S., one may argue that the chances of such a plan succeeding over a considerable period of time are better than many would admit, the uncertainty surrounding the trajectory of U.S. public finances, and the USD during the implementation of this project depresses the enthusiasm of market participants.
The threat of the Moody`s rating agency, that it may place the U.S. on negative outlook if the present policy stance is maintained was not heeded by the markets today, and the CDS market was mostly bullish, as traders seem to have some confidence in the notion that the Fed`s easing scheme will eventually contribute to an improvement in the economic situation. While there is no sign yet that the market is planning to abandon the U.S. government at any time soon, there are events that can make the market give up on U.S. assets. The degree to which the democratic process is effective in the U.S., the extent to which the best opinions are freely propagated to the public, will determine whether we`ll become witnesses to such events in the near future. The results of the November elections do not look discouraging in this respect.
Ultimately, the outcome for the public debt of the U.S. and the dollar is dependent on the outcome for the rest of the world. Those who espouse an overly pessimistic point of view on the U.S. economy are failing to place the country in a global context within a wider analytical framework. While it is true that the U.S. management monetary and fiscal policy is too adventurous and extreme in many ways, there is hardly a nation in the world that cannot be made subject to similar criticisms with a little bit of effort. Due to the increase in the velocity of money on a global scale over the past two decades, governments are unable to respond in a timely and effective manner to challenges created by capital flows. This is as true fo the Fed and the U.S. as it is for China, Brazil, the E.U. or any group of nations that is operating a sufficiently liberal economic system. The challenge is to the existing system, and not to any nation. With all its handicaps, the U.S. still enjoys a favorable status as it has the unique advantage of possessing a powerful reserve currency that almost no one wants to depreciate, enjoys a well-established and healthy system of alliances, and dominates economic and political institutions around the world. Its media channels enjoy almost uncontested supremacy in the world, which contributes to the maintenance of a reasonable positive image. It is beyond doubt that Americans possess the means to destroy all these by foolish choices over the next years, but the background for the dollar-death scenario that people continue to speculate about is a remote possibility for now.
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