Dysfunctional Fiscal and Monetary Policies

Dysfunctional Monetary and Fiscal Policies

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Podcast Summary

Louis and Ryan discuss the ongoing budget debates. Ryan notes that Congress continues to raise the debt ceiling. Louis highlights the dysfunctional monetary and fiscal policies of the Fed and Congress. Louis notes that both pretend they are interested in cutting spending but always increase it. Louis predicts that the United States will neither default nor cut spending.

Louis discusses the nomination of Janet Yellen to head the Federal Reserve and notes that she follows in a long line of interventionists Fed Chairmen who have increasingly cut rates and monetized debt. Louis notes that Greenspan had a low interest policy; Bernanke a no interest rate policy and Yellen might implement a negative interest rate policy.

Louis notes that U.S. Treasury Jack Lew claims that spending can’t be prioritized because he doesn’t want to. Louis notes that even local governments when faced with budget shortfalls always threaten the essential services (not back office waste) if their budgets are not passed.

Shutdown Impact on Real Estate

Louis notes that the shut down will give the Fed yet another excuse to continue QE because of the harm caused by the government shut down and also because of the lack of economic data being reported due to the shut down.

Ryan discusses how to navigate a real estate transaction during the government shut down.

The Fed Reaction to the Government Shutdown

Louis predicts the fed will increase QE as a reaction to the government shutdown. Louis notes that the appointment of Janet Yellen is an indication that the Fed is serious about continuing their wreckless QE policies as Ms. Yellen is a strong proponent of QE.

Louis also notes that the Fed likes to temper the public perception of their zeal to print money by claiming their desire to “taper” QE or about being “concerned about inflation”.

Louis and Ryan discuss the $9 billion J.P. Morgan legal charge against earnings.

Louis notes that Yellen will probably increase QE during her term. Louis notes that the stock market cheers on when the Congress raises the debt ceiling and the Fed continues QE. Louis adds that if the Fed and Congress led sensible policies the markets would crash!

Louis notes that in an event of a US default investors may rush to buy US Treasuries even though a default would be highlighting why its risky to own US Treasuries. Louis notes that during the financial crisis of 2008 gold and silver that are considered traditional safe havens actually dropped. Ryan notes that the U.S. pays the money it owes by borrowing more money.

Louis notes that in a perverse way investors take comfort in that the U.S. controls the printing press and can pay its debt and calls the printing press the new gold standard.

Ryan notes that the government shut down is a farce but that the U.S. credit and the dollar to date has not been impacted as the entire world has a vested interest in keeping the U.S. system strong as dollars and dollar denominated assets are held worldwide.

Ryan notes that the economy and housing might improve in the spring if the Fed is successful in lowering interest rates. Louis agrees with Ryan and adds that Yellen might double down on QE to reflate the housing market and economy.

Louis discusses his blog post where he outlines three outcomes for the current debt ceiling negotiations.

Louis expresses surprise that the Fed still has credibility given they have been printing trillions of dollars for four years.

Louis notes that the Syrian situation was supposedly the most important issue of our time and is no longer dominating the media cycle even though the issue was not resolved with the military intervention that was promoted.

Taper Bluff

Louis notes that the Fed Presidents spoke like they might taper in October based on the data, but now that they don’t have the data and there has been a government shut down (all things they knew might be the case) tapering QE is probably out of the question.

Louis also notes that tapering is unlikely as Bernanke’s final move in December and that Yellen will establish Fed monetary policy next year. Louis notes that the stock market might rally after the budget crisis is resolved but the economy will not have improved and indeed will have been set back as a result of the shut down. This of course will pave the way for more QE.

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