jueves, 30 de agosto de 2012

jueves, agosto 30, 2012


Markets Insight

August 29, 2012 12:11 pm
 
Shake off the addiction to Fed stimulus
 
By Jim Paulsen

Monetary policies are undergoing significant changes on both sides of the Atlantic. In the US, perhaps for the first time in this recovery, the Federal Reserve seems increasingly uneasy with additional monetary easing actions.



In the eurozone, on the other hand, after almost two years of championing fiscal austerity and only reluctantly employing monetary easing in the face of an ever widening crisis, the case for broader policy stimulus seems to be rapidly gaining support.



In our view, what has caused policy regimes on both sides of the pond to abruptly shift is the recent recognition of two major events – the Fed is out of bullets and Germany and France are nearing a recession.



Oddly enough, although these events sound frightening, they may finally push monetary policies in both regions of the world towards more appropriate and beneficial outcomes.




The eurozone crisis is about the incompatibility of monetary union without fiscal union. How does one choose an appropriate monetary policy when member countries face very diverse economic conditions? Since the inception of this crisis, the answer has been to consistently align European Central Bank policy with the needs of leadership in the regionthat is, primarily with Germany.





Consequently, until last autumn, despite ever worsening economic conditions throughout many of the periphery economies, since German economic growth was accelerating, ECB monetary policy remained restrictive. Even worse, an aggressive fiscal austerity programme was adopted. This approach did not work for US president Herbert Hoover in 1929. Nor has it worked in Europe today.




By last autumn, however, conditions in Germany also worsened, starting a process of eurozone economic alignment. As German attitudes about their own economic fate darkened, monetary policy was abruptly altered as new ECB president Mario Draghi promptly lowered interest rates and began expanding the ECB balance sheet. Today, for the first time since the crisis began, the eurozone has both a monetary and an economic union.




Greece and Germany are finally on the same economic page with the same economic goalspromoting growth. A unification of economic conditions across the eurozone is increasingly producing unified support for ECB monetary accommodation (and has also lessened aggressive calls for fiscal austerity) which gives the region the best chance yet of improving its economic outlook.




Unlike the ECB, the Fed has been in persistent easing mode since the 2008 recession. Only recently, and despite the 2012 US economic soft patch and renewed eurozone fears, has the Fed seemed somewhat reluctant to undertake yet another round of quantitative easing. Why?


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Could it be because it realises it is “effectivelyout of bullets? With $1.5tn in excess US bank reserves, is anyone really suffering from a lack of liquidity? And, with record low mortgage yields, who is being held back by oppressive interest rates?




The Fed may yet decide to undertake QE3. But would it really do any good? Did QE2 and Operation Twist provide successful outcomes? While they may have helped on the margin, despite almost constant and massive monetary stimulus throughout this recovery, there remains considerable angst surrounding the speed of real gross domestic product growth and the pace of job creation. By repeating round after round of QE when liquidity is already in surplus and interest rates are already at record lows, US monetary policy could be described by the old popularised definition of insanity – “doing the same thing over and over and expecting different results”.




The Fed may sense as much which could be why it is taking time to consider another easing round. Encouragingly, Fed reluctance and inactivity might represent the best outcome for US monetary policy. While economic fundamentals (eg, debt burdens) have improved significantly in the past couple of years due in part to past Fed actions, what is still lacking is economic confidence.



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The best outcome would be if the US economy recovered from its soft patch and the stock market rose to new recovery cycle highs while the Fed stood down. An unassisted economic and stock market revival would boost confidence by creating a sense of a much more sustainable, less monetarily addicted economy.




For the past couple of years, monetary policies on both sides of the pond have arguably been misaligned. The ECB has been overly restrictive killing economic growth and the Fed has been overly accommodative killing confidence.


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Fortunately, bad things have happened which may bring about good results. Germany is headed for recession and the US Federal Reserve is out of bullets
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Finally, some good news.


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Jim Paulsen is chief investment strategist at Wells Capital Management


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Copyright The Financial Times Limited 2012

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