Monetary policy is the mechanism through which the supply of money is controlled by monetary authorities. The goal of almost every monetary authority around the world is stability of prices. If prices are unstable—either too high or, in some circumstances, decreasing—this causes unforeseen and unwanted consequences for the economy as a whole.
Monetary authorities usually enact changes to interest rates for the purpose of changing the demand for money. Monetary policy can be either expanding, when interest rates are lowered and more money is available at a cheaper, or contracting, when interest rates are raised to make money more expensive to slow price increases.
The stock market is certainly getting all the attention these days, but not a lot is said about other disturbing fundamentals. These fundamentals are troublesome, and if they aren’t fixed, the U.S. economy could end up in a downward spiral in a very short period of time. With these conditions, those who are saving and investing for the long term can face a significant amount of scrutiny.
I’m talking about the U.S. national debt and the U.S. government posting another budget deficit.
When someone goes to get a loan, the bank usually asks how much in assets the person has or what their credit score is; this way, the bank can judge their ability to pay back the loan. If a person has a significant amount of debt already and a bad credit score, then banks will be hesitant to give them anything. There’s no rocket science behind this; the chances of a person with bad credit and a lot of debt defaulting on their liabilities are very high.
When I look at the U.S. economy, I see something very similar and wonder if those who are buying U.S. bonds, thereby giving loans to the U.S. economy, will one day say, “No, we will not give you any money.”
You see, since the financial crisis, the U.S. government has been registering a massive budget deficit. For example, in fiscal 2012, the U.S. government posted a budget deficit of over $1.0 trillion. In fiscal 2013, the U.S. government registered a budget deficit of $680 billion—slightly lower than the preceding years, but a deficit nonetheless. (Source: “Final Monthly Treasury Statement of Receipts … Read More
The housing market is one of the biggest challenges currently faced by the U.S. economy. When it improves, or when we see an increase in activity, then it can be assumed that there will be some economic growth.
For example, if there’s activity in the housing market, meaning that home buyers are buying homes, those home buyers are going to need things that are necessary to run households. This phenomenon has long-lasting effects: it increases consumer spending in the U.S. economy and creates jobs.
When the housing market in the U.S. economy improved in 2012, we saw the gains; but going forward, we are seeing a significant amount of trouble.
First of all, the U.S. economy is in jeopardy, on the brink of a monetary policy shift—the primary concern being quantitative easing. We are hearing the Federal Reserve will start to slow its asset purchases in September and end the quantitative easing by next year. This monetary policy by the Federal Reserve kept the mortgage rates in the U.S. economy low. This was great, as it gave Americans incentive to buy homes; as a result, we saw the housing market improve. Now, with the speculations on quantitative easing ending, the mortgage rates in the U.S. economy are increasing.
Consider the 30-year conventional mortgage rate tracked by Freddie Mac. In August, this rate stood at 4.46%; in the same period a year ago, it was at 3.60%, meaning it has increased almost 24% in the matter of a year. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed September 11, 2013.)
While some will argue that these mortgage … Read More
It turns out that May 22 was very critical for the key stock indices. But surprisingly enough, this wasn’t just the case for stock exchanges here in the U.S.—it was the same for the global economy, as well. Just take a look at the chart below.
At first, the chart may look a bit confusing, but simply stated, it’s the performance of the S&P 500 (indicated by the black line) and other key stock indices around the world. For example, the blue line represents Japan’s Nikkei 225 Index, the green line shows the performance of France’s CAC 40 Index, the brown line depicts the changes in the Bombay Stock Exchange in India, the red line is the German DAX Composite Index, and the yellow line represents the performance of the Shanghai Stock Exchange Composite Index.
Chart courtesy of www.StockCharts.com
It’s interesting to note that since May 22, when the Federal Open Market Committee (FOMC) meeting minutes hinted that the Federal Reserve may start to pull back on its quantitative easing as early as June, the stock markets around the world haven’t reached any new highs. As a matter of fact, they have been trending downward, continuing to make lower lows and lower highs.
Essentially, what this shows me—and what shouldn’t be a surprise to you—is that the key stock indices around the world were climbing on hopes of easy monetary policy and increased money printing. Now that the Federal Reserve may be ready to pull the punch bowl from the party, investors are panicking and selling.
Looking at all this, should investors take this as a turning point on the … Read More
The U.S. bond market seems to be the topic of discussion among investors these days. The pundits of the financial media are constantly screaming out their stance on where it’s headed next and how it will play out for the investors who are involved.
While the majority seems to be favoring a possible downturn in the U.S. bond market, others are saying we might stay at these levels for some time, and are even suggesting buying on the dips. No matter what their opinion may be, they all seem to have solid reasons for their take.
Aside from this, what we already know is that bond yields are on the rise. I mentioned in these pages not too long ago that May wasn’t a great month for the bond market—the momentum was more towards selling. Yields on 10-year and 30-year U.S. Treasuries have surged significantly over the course of the month.
Remember, rising yields of 10-year and 30-year U.S. Treasuries are important for the entire U.S. bond market, because they act as a benchmark for other types of bonds, such as corporate bonds.
Looking at the selling in the U.S. bond market and the increased talks of downturn, I question how big of an impact a collapse in the bond market could really have on the overall wealth of investors and how much money is on the line.
According to the Securities Industry and Financial Markets Association, the outstanding U.S. bond market debt stood at $38.13 trillion at the end of the fourth quarter of 2012. (Source: “Statistics,” Securities and Financial Markets Association web site, last accessed June 6, 2013.) … Read More