Posts tagged ‘Federal Reserve’
Rogers: Fed Following in Path of Dodo
Jimmy Rogers, the bow-tie boss of Rogers Holdings and past co-founder of the successful Quantum Fund with George Soros, is no stranger to making outrageous predictions. His latest prophetic assessment is the Federal Reserve Bank is on the path of the Dodo bird to extinction:
“Don’t worry – the Fed is going to abolish itself. Between Bernanke and Greenspan, they’ve made so many mistakes that within the next few years the Fed will disappear.”
Given the shock and awe that transpired from the Lehman Brothers collapse, I can only wonder how investors might react to this scenario….hmmm. If this doozy of an outlandish call catches you off guard, please don’t be surprised – Rogers is not shy about sharing additional ones (Read other IC article on Rogers). For example, just six months ago Rogers said the Dow Jones could collapse to 5,000 (currently around 10,472) or skyrocket to 30,000, but “of course it would be in worthless money.” Oddly, the printing presses that Rogers keeps talking about have actually produced deflation (-0.2%) in the most recently reported numbers, not the same 79,600,000,000% inflation from Zimbabwe (Cato Institute), he expects.
I suppose Rogers will either point to a data conspiracy, or use the “just you wait” rebuttal. I eagerly await, with bated breath, the ultimate outcome.
Is U.S. Fed Alone?
If the U.S. Federal Reserve system is indeed about to disappear after over nine decades of operations, does that mean Rogers advocates shutting all of the other 166 global reserve banks listed by the Bank for International Settlement? Should the 3 ½ century old Swedish Riksbank (origin in 1668) and the Bank of England (1694) central banks also be terminated? Or does the U.S. Federal Reserve Bank have a monopoly on incompetence and/or corruption?
Sidoxia’s Report Card on Fed
I must admit, I believe we would likely be in a much better situation than we are today if the Federal Reserve board let Adam Smith’s “invisible hand” self adjust short-term interest rates. Rather, we drank from the spiked punch bowls filled with low interest rates for extended periods of time. The Federal Reserve gets too much attention/credit for the impact of its decisions. There is a much larger pool of global investors that are buying/selling Treasury securities daily, across a wide range of maturities along the yield curve. I think these market participants have a much larger impact on prices paid for new capital, relative to the central bank’s decision of cutting or raising the Federal funds rate a ¼ point.
Although I believe the Fed gets too much attention for its monetary policies, I think Bernanke and the Fed get too little credit for the global Armageddon they helped avoid. I agree with Warren Buffett that Bernanke acted “very promptly, very decisively, very big” in helping us avert a second depression while we were on the “brink of going into the abyss.”
Beyond the monetary policy of fractional rate setting, the Fed also has essential other functions:
- Supervise and regulate banking institutions.
- Maintain stability of the financial system and control systemic risk of financial markets.
- Act as a liaison with depository institutions, the U.S. government, and foreign institutions.
- Play a major role in operating the country’s payments system.
I will go out on a limb and say these functions play an important role, and the Fed has a good chance of being around for the 2012 London Olympic Games (despite Jimmy Rogers’ prediction).
Sidoxia’s Report Card on Rogers
As I have pointed out in the past, I do not necessarily disagree (directionally) with the main points of his arguments:
- Is inflation a risk? Yes.
- Will printing excessive money lower the value of our dollar? Yes.
- Is auditing the Federal Reserve Bank a bad idea? No.
My beef with Rogers is merely in the magnitude, bravado, and overconfidence with which he makes these outrageous forecasts. Furthermore, the U.S. actions do not happen in a vacuum. Although everything is not cheery at home, many other international rivals are in worse shape than we are.
From a media ratings and entertainment standpoint, Rogers does not disappoint. His amusing and outlandish predictions will keep the public coming back for more. Since according to Rogers, Bernanke will have no job at the Fed in a few years, I look forward to their joint appearance on CNBC. Perhaps they could discuss collaboration on a new book – Extinction: Lessons Learned from the Fed and Dodo Bird.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (VFH) at the time of publishing, but had no direct ownership in BRKA/B. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Getting Debt Binge Under Control
Given the endless daily reminders about our federal government’s insatiable appetite for debt, the inevitable collapse of the dollar, and the potential for civil unrest, the average citizen might be surprised to find out the overall debt situation has actually improved. While our federal debt has been exploding (see also Investing Caffeine D-E-B-T article), households and businesses have been tightening their belts and cutting down on the debt binge of recent years. In fact, the overall debt for the U.S. grew at the slowest rate in a decade according to The Business Insider.
Source: The Business Insider. Steady debt growth decline.
As you can see from the nitty-gritty in the Federal Reserve chart below, total Nonfinancial Debt grew at +2.8% in the 3rd quarter of 2009 (comprised of -2.6% Household Debt; -2.6% Business Debt; +5.1% State & Local Government Debt; and +20.6% Federal Debt).
What does this all mean? Not surprisingly, we are seeing the same trends in the debt figures that we are seeing in the components of our GDP (Gross Domestic Product). We learned from our Economics 101 class that the equation for GDP = C + I + G + (NX), which explains the components of economic growth.
- C = Consumer spending (or private consumption)
- I = Investment (or business spending)
- G = Government spending
- NX = Net exports (or exports – imports)
Consumer spending has been the biggest driver of growth before the financial crisis (fueled in part by the contribution of debt growth), accounting for more than 2/3 of our GDP. Now, with the consumer retrenching dramatically – spending less and saving more – we are seeing government spending (i.e., stimulus) pick up the slack.
These same dynamics are playing out in the total debt figures. Since the consumer is retrenching, they are saving more and paying down debt. Business owner debt has been chopped too, either by choice or because the banks simply are not lending. Here again, the government is picking up the slack by ramping up the debt growth.
Encouragingly, all is not lost. Economic principles, like the laws of physics, eventually take hold. Fortunately consumers and businesses have gone on a crash diet from debt – and the banks haven’t accommodated the pleading cash-starved either. Now legislators in our nation’s capital must do their part in dealing with the weighty spending. The overall debt progress is heartening, but Uncle Sam still needs to get off the Ho-Hos and Twinkies and start shedding some of that binge-related debt.
Read Full Business Insider Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and equity securities in client and personal portfolios at the time of publishing. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Spitzer the Pot Calling the Fed Kettle Black
Eliot Spitzer, whose job as the former Attorney General of New York was to convict criminals, was forced to quit himself as Governor for his illegal solicitation of prostitutes that he funded with secretive ATM withdrawals of government funds. Now, Mr. Spitzer is getting on his soapbox and telling others the Federal Reserve has been committing a Ponzi Scheme.
There are a lot of conspiracy theories floating around regarding the Fed’s motives and questions relating to the benefits of those receiving government bailout funds. Dylan Ratigan’s interview of Mr. Spitzer on MSNBC feeds into these conspiracy views. I can buy into conflicts of interests and the need for more transparency arguments, but let’s be realistic, this is not the DaVinci Code, this is the slow, bureaucratic Federal Government. Even if you buy into this skeptical belief, the Fed isn’t exactly a “black box.” The Fed proactively provides the minutes from its private meetings and systematically releases a full accounting of the Fed’s balance sheet (assets).
Mr. Spitzer and other critics point to the egregious benefits handed down to the banks and financial institutions through the bailouts and monetary system actions. Well, wasn’t that the idea? I thought our banking system (and the global banking system) was on the verge of collapse and we were trying to save the world from impending disaster? So, I think most people get the fact that our financial institutions needed a lifeline to prevent worse outcomes from occurring.
Should the Fed have carte blanche on all financial system decisions? Certainly not, but extreme situations like this generational financial crisis we are slogging through now, requires extreme measures.
Accountability I believe is even more important than the micro-managing transparency details Ron Paul (Republican/Libertarian Congressman from Texas) and others are asking for. If indeed it is the Fed’s job to remain an independent body, then maybe it’s not Congress’ job to question every word and minor decision. However, when it comes to these massive bailouts (AIG, Fannie Mae, Freddie Mac, etc.), additional details and accountability should be provided and seems fair. What we don’t need are more regulatory bodies and committees creating more inefficiencies in an already tangled system of regulatory fiefdoms.
Before Mr. Spitzer starts pointing his finger at the black Fed-kettle, perhaps he should get his illegal decision making pot in order first?
Read Full Daniel Tencer Spitzer-Ponzi Scheme Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Investing Caffeine 
