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Monetary Policy Prescription

Monetary Policy Prescription

With the prospect of deflation, monetary policy alone without strong fiscal policy has a marginal effect in stimulating the economy.  By expanding Quantitative Easing by doing portfolio-restructuring purchasing corporate bonds, the Federal Reserve will expand the beneficial effects directly into the corporate financing environment.  The Feds choice is limited, by cutting out the stalled banking system and applying QE directly to businesses they have the best chance of creating a beneficial shock to the system and some measure of sustainable growth.    

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Yuan Appreciation Implications

Yuan Appreciation - Implications for China’s U.S. Treasury holdings   

Many commentators expect the appreciation of the yuan to force China to invest more in US Treasury bonds.  I believe it will have the opposite effect as their past investment motives have not been fully understood.  These speculations ignore the fact that China is the major foreign purchaser of U.S. Treasuries because of its exchange rate policy.  The historical data shows that China’s exchange rate policy was complemented by China’s ownership of U.S. Treasury securities, more than some economists will admit.

The CDO role in financial crisis

Did the CDO cause the financial crisis or was it blindness, the need for riskier assets?   

CDOs played a notable role in the financial markets.  Did the CDO cause the financial crisis or was it blindness, greed and the need for riskier assets? The constructors of the CDOs may not bear direct responsibility.  Rather their reckless use, misunderstanding and ignorance of key warning signs likely contributed to the magnitude of the financial crisis.  You can observe the financial landscape today and recognize from the survivors, walking wounded and the absentees those who knew and those who had not understood the use of these tools.

Housing values skewed

Housing values skewed, Index can misdirect   

Distorted home price indicators can adversely affect the consumer by increasing expectations of a stabilized housing market. If these false expectations do not become reality, the result will be consumer fear. The S&P/Case-Shiller Home Price Indices are more designed to measure the growth in value of residential real estate more towards where the market should be rather than where the market actually is.

Defending Bernanke

Fed's magic is weak.  Bernanke cast his QE spell on the only target in range, "financing wages"  

Monetary policy intervention did not achieve the effects that most hoped.  What merits applause is the ingenuity of targeting an increase in "financing wages" as a means to spur spending out of profits.  More ambitious targets were beyond the firepower of the Fed - the analysis proves that QE2 was at least deployed intelligently towards one goal that could be achieved.

Job creation stuck

Job creation stuck in the slow lane

The Fed keeping the pedal on metal for asset purchase won't accelerate employment



The Fed keeping the pedal on metal for asset purchase won't accelerate employment

This paper seeks to answer two questions: i) Has QE become less effective with each additional round in stimulating job creation? and ii) With the increasing use of QE, determine if it is truly suitable  as a monetary policy in the future.

Fed's Fata Morgana is to increase employment

Dual Mandate puzzling; Price stabilization should be Fed's long-run objective


The Fed keeping the pedal on metal for asset purchase won't accelerate employment

Feds Fata Morgana

The Federal Reserve dual mandate has never been more controversial since the financial crisis began in December 2007.  Maximizing employment has been recently regarded as the central bank's primary mission, yet this is chasing a mirage.  Each round of QE became increasingly less effective. The fact is that the advance of the economy is essentially determined by the course of prices and, respectively, profits.

A fall in initial jobless claims may not be such a good thing

Has the decline in initial claims without healthy job advance become a predictor of economic collapse?


The Fed keeping the pedal on metal for asset purchase won't accelerate employment

A fall in jobless claims

Although first-time claims have been trending down for years it was not accompanied by healthy job creation. We can state that businesses are laying-off less workers but managing to produce more with fewer workers, therefore hiring fewer. Moreover, if demand does not substantially improve as a result of strong employment and wages increases, business will have less flexibility this time to adjust productivity in the face of deteriorating demand.  

Is a robust rise in U.S. equity prices leading to a dangerous bubble?

Divergence-convergence of capital investment to equity prices has a very strong correlation with market extremes


The Fed keeping the pedal on metal for asset purchase won't accelerate employment

Is a robust rise in equity prices leading to a dangerous bubble

With the U.S. equity market rallying to all-time highs, some market technicians are pointing to the "triple" top formation in the S&P 500 as an indication that the rally in stocks may be over.  Can we say that the massive boom of the stock market is approaching "bubbly" levels? The jury is out.  The divergence-convergence of the capital investment to equity prices has a very strong associations with market extremes.