Sunday, April 20, 2014 – 10:00 a.m.
Much effort is being put into making Americans believe the economy is building strength.
The assertion is prominent within government circles.
Some interesting signs are emerging that indicate things might not be as rosy.
The Federal Reserve Bond Buying Program
Let’s start with the Federal Reserve Bank, the institution which sets U.S. monetary policy, such as interest rates.
The Fed, until recently had been pumping $85 billion a month of stimulus into the economy, by using the printed money to buy up various types of debt, thus keeping interest rates very, very low.
Now that pump is being reduced at a rate of $10 billion per month. It should be at zero by year-end. But, more than $3 trillion of debt is now on the Fed balance sheets.
The interesting question is when will the Fed start to allow the bonds, as they mature, to fall off its books?
It’s this explosion of bond buying that has inflated the stock and real estate markets.
The gamble here is that investors will gradually step-in and take the Feds place.
The bigger question is will the markets hold their ground? That answer is probably not.
Bank Capital Reserves
The next noticeable Fed issue is bank capital reserves.
The Fed has recently said that large too-big-to-fail banks have to increase their capital reserves, even more than they already have. All the money center banks, except Citigroup, passed the most recent round of stress tests.
A larger capital cushion helps banks whether market collapses like what happened in 2007 and 2008.
So this begs the question of why do banks need more capital?
Everyone has been trumpeting job growth.
Yes, there has been some. But those pre-2008 high-paying jobs are gone. They’re being replaced by low and minimum wage positions.
Advancements in automation and productivity hasn’t helped the situation.
Interestingly, the latest employment report from U.S. Department of Labor, Bureau of Labor Statistics, wasn’t too encouraging.
While the official unemployment rate (U-3) was unchanged at 6.7%, the broader underemployment rate (U-6) edged up to 12.7% in March.