Bogey For Wall Street At Jackson Hole: Markets Should Not Take Fed’s QE3 For Granted

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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19m Transformations ‏@c_tamirisa
@SquawkCNBC Creating smaller GLB banks is arbitrary given the size of the global economy.
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20m Transformations ‏@c_tamirisa
@SquawkCNBC Money supply growth is currently incommensurately high relative to real investment in US economy.
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22m Transformations ‏@c_tamirisa
@SquawkCNBC Analysis of John Hatzius of Goldman Sachs predicated on real sector is out of touch with market dynamics.
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29m Transformations ‏@c_tamirisa
@SquawkCNBC No QE3. Beginning April 1 2013 @federalreserve will raise rates 25 basis points every quarter.
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German John Hatzius, the Chief Economist of Goldman Sachs, was on CNBC’s Squawk Box this morning telling St. Louis Federal Reserve Bank President James Bullard in the run up to the annual Jackson Hole, Wyoming meeting of central bankers that his firm has factored in a third round of Quantitative Easing (QE3) by end-2012 or early 2013 into its economic forecasts. He may have to revise those forecasts.

Federal Reserve is currently scheduled to be at zero-bound or near-zero federal funds rate to end-2014. The current unemployment situation, however, continues to be worrisome for the country looking to the end of this year and supplying more money, doing more of the same thing over and over again may not produce a different result.

In real terms, by the usual Taylor benchmark of making monetary policy – low demand conditions typically Granger-cause low inflation below potential growth indicating below potential real investment, and high demand conditions typically Granger-cause high-inflation above potential growth indicating above potential real investment – the potential growth rate determined by the economic structure – is indeed valid as Mr Hatzius appears to be implying in his early morning Squawk Box remarks. This text book policy analysis, though, is not sufficiently comprehensive.

First, Fed’s promise of near-zero federal funds rate through end-2014, in fact, maintains, an incommensurately high growth rate of the monetary base relative to the real investment expected for the potential growth rate of the US economy. If forecasters are to structurally expect a potential growth rate of 2-3 per cent at a de facto annual inflation target of 2 per cent, the economy could experience inflation given the monetary base. Growth is at 1.5 to 1.7 per cent and expected to fall to 1 per cent by end of quarter 3 in 2012. Ceteris paribus, a declaration of recession after that is feasible.

The Fed could meet its inflation target but not the growth rate because of improper allocation of real investment – in energy, food and other commodities for immediate term returns – by the financial markets – the same mistake they made in the run up to 2007-2008. Energy and food prices are once again on the rise, raising headline inflation, despite a global slowdown.

Second, United States Congress and The White House have not signaled that they would stop issuing new Treasury debt. Any new QE by the central bank should not raise US debt burden. It must only buy back existing debt beyond the zero-bound.

Third, the size of the global Gramm-Leach-Bliley (GLB) financial holding companies (FHCs) which have also been given the charter of Bank Holding Companies (BHCs) since 2007-2008 is not material given the size of the global economy. For the world financial markets, FHCs and BHCs are playing in a near-perfect market with many global institutions from the various continents competing with each other and with new entrants on the way.

Fourth, Congress and The White House have not paid attention to simpler and more immediate solutions to reduce unemployment quickly and sustainably at a cost of about $250 billion to the tax payers raising serious questions about QE or low interest rates for through end-2014 for that matter.

We, therefore, advise the Federal Reserve to, in fact, signal a policy reversal beginning April 01, 2013 at the rate of 25 basis points every 3 months to enable higher levels of domestic real investment in the US economy under conditions of appropriate portfolio allocation by financial institutions such as Goldman Sachs to prevent a recurrence of the conditions preceding 2007-2008. The markets must:

  • Go long on sustainable infrastructure and housing, as for example, Mr Warren Buffett is doing.
  • Invest in real alternative energy and sustainable agricultural production but not in speculative commodity (including energy and food) markets.


About Chandrashekar (Chandra) Tamirisa
This entry was posted in Economics, Finance, Financial Regulation, Fiscal Policy, Housing, Infrastructure, Monetary Policy, Transformations LLC, World and tagged . Bookmark the permalink.

3 Responses to Bogey For Wall Street At Jackson Hole: Markets Should Not Take Fed’s QE3 For Granted

  1. 2m Caroline Horn ‏@CNHorn
    (Caroline Horn is Senior Producer for Politics at CBS News)
    Biden: We’re better off! ( ). Ryan: No we’re not! ( ).
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    1m 1776 ‏@1_776
    @CNHorn Both Biden and Ryan are better off. Why does it feel like the country is in a depression when the economy is growing?
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    4:24 PM – 3 Sep 12 · Details

  2. 31 Aug David Wessel ‏@davidmwessel
    Bernanke: Jim Tobin and Milton Friedman Would Both Support QE
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    31 Aug 1776 ‏@1_776
    @davidmwessel I lobbied in the media for QE I. QE II was acceptable. Not QE III. A complement would have been industrial policy design.
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    3:14 PM – 31 Aug 12 · Details

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