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Page added on September 17, 2012
The Last 14 Days Will Go Down As A Turning Point In The History Of Economics
Whew. Those were a crazy couple of weeks we just wrapped up.
Morgan Stanley’s interest rate strategist Matthew Hornbach writes:
When the history books are written or market participants look at charts three months from now, the past two weeks may go down as the most important of 2012 – aside from how the US government handles the fiscal cliff (which may not occur this year anyway). The ECB introduction of the Outright Monetary Transactions (OMT), China’s approval of construction projects to spur growth, the German Constitutional Court decision that paved the way for Germany to ratify the ESM and fiscal compact, and the Fed’s decision to introduce an open ended purchase program – which may one day include Treasuries – represent a bazooka blast of monetary and, to a much lesser extent, fiscal policy support.
Hornbach isn’t the only one who thinks the world just saw something historic.
His colleague at Morgan Stanley Vincent Reinhart titles his latest US Macro Dashboard note 1492.
The longstanding problem at the Fed has been that while each policymaker more or less agreed that guiding policy by a rule made sense, they could not collectively agree on the rule. At its September meeting, the Fed effectively evaded the issue by setting QE off in a general direction, much in the same way Columbus pointed his three ships West and expected eventually to land in India
…
The history books admire the audacity of a man with a vision. Columbus sailed in the direction toward the known world’s end. Of course, he also sailed further than expected and landed on a completely different continent than planned.
And Greg Ip, commenting for The Economist in the wake of the Fed’s QE-Unlimited, wrote:
Between the ECB’s action last week and the Fed’s today, the world’s two most important central banks are bringing unprecedented resolve to bear on economic growth. The world may one day look back and conclude the first half of September was either a turning point for the global economy, or the final nail in the coffin of the doctrine of central bank omnipotence.
Ip correctly alludes to the risks of all this, which is that if things don’t get better, then you risk confidence collapse in all sorts of institutions, from the Fed to the German constitutional court.
Regardless, both the Fed and the ECB have done something that went beyond what people thought their institutions were capable of.
The Fed, which has previously intervened during periods of market weakness, has now fired its bazooka at a time of market strength, because of a lack of satisfaction with the jobs market. And it did something very un-central-banky, which is to hint that it’s not going to be worried about inflation for awhile.
And the ECB, which is narrowly tasked with “price stability” is now putting itself in the place of being (whether Draghi would admit this or not) the lender of last resort to the various Eurozone nations.
Now to see if this foray into uncharted water is successful is the new story we’ll be watching.
8 Comments on "The Last 14 Days Will Go Down As A Turning Point In The History Of Economics"
Wheeldog on Mon, 17th Sep 2012 10:28 pm
In other words, this is a Hail Mary pass! It it doesn’t work (likely) we are in deep do do.
BillT on Tue, 18th Sep 2012 12:55 am
Wheeldog, we are in very deep do do already. The only question is: When does it all finally fall apart? We passed the point of no return 41 years ago with the end of the gold standard.
Ely Goldsmith on Tue, 18th Sep 2012 3:40 am
Most investors have assumed the osrtich position by assuming that the next congress will somehow solve a trillion dollar (1/3) budget shortfall without causing some severe econmic pain. We will soon be facing the same kinds of ausertiy choices now beeing foisted on Europe. The trick is to ride the markets climb of the wall of worry and to exit before the wall wins. Goodluck to all of you
Stephen on Tue, 18th Sep 2012 8:30 am
I think we are going to have to prioritize spending, enact tax increases (with public input into what programs they want to preserve), and I think we will have to spend less on wars, and more towards surviving resource depletion. I think it will also take a debt jubilee.
In fact, I think if we want a survivable society worth living in, we will have to make decisions that aren’t for corporate profit gain, economic growth, or for making the bankers richer as a national priority. Instead, we will have to devote a lot of resources toward repairing and rebuilding the domestic infrastructure needed for a re localized, sustainable society and do it fast. Printing money is not sustainable, extreme austerity is not sustainable either, neither is more debt.
A different plan would look like this:
* Jubilee most government and private debt including bonds, home mortgages, credit cards, and student loans.
* Government takeover of all banks
* Implement an alternative banking model similar to JAK, Bank of North Dakota, Free Lakota Bank, an others.
* Do a nationwide survey of all abandoned railroad lines. See which ones can be put back into service and start a massive project refurbishing them.
* Start bulldozing strip malls and turn them back into farms again.
* Create a plan to assemble goods close to where they will be sold as opposed to shipping them all over the world.
* Flex work days / hours to eliminate rush hour gridlock.
BillT on Tue, 18th Sep 2012 10:02 am
I like your ideas, Stephen. I don’t see them ever being put into practice, but they are good ideas. Too bad the powers in charge (1%)do not want them to happen.
Arthur on Tue, 18th Sep 2012 12:16 pm
When the next war is over, the 1% will be no longer in charge. Not entirely sure what will happen with the 99% though.
As to the plan of Stephen, I would suggest to unearth old episodes of Bonanza and watch them on your tablet to see how they got along in 1860, without fossil fuel and trains. And when banks were mainly there to rob. All you need is a horse, a gun, a lasso, a saloon, some cattle and a little terrain. Nobody needs marketing studies, ensurances, 6 cylinder cars, 48 working hours in an office, holidays in Acapulco, etc., etc.
“I go right, you go left, we cut them off at the pass, heeehaaaa!”
BillT on Tue, 18th Sep 2012 2:42 pm
Arthur, you made my day! I laughed for at least 3 minutes. I DO remember Bonanza. I think we will be lucky if the world has even that much left by 2100, not that I will still be around to see if I was wrong, but my latest great grand kid just might.
Arthur on Tue, 18th Sep 2012 7:08 pm
Dedicated to Bill. I was allowed by my parents to watch these movies on saturday night on television, provided I had taken a bath. The sixties were one big heaven:
http://www.youtube.com/watch?v=RJsZ3CfCeQQ
Totally on topic, just to illustrate how life can be without fossil fuels. Just like a movie, this time starring you. You have to bring your own script though.
One, two , three… action!