The stark contrast between European economic policy and US economic policy

I was on CNBC yesterday ahead of Ben Bernanke’s speech explaining the FOMC’s recent decision to add an explicit inflation target to its decision to extend its rate easing/permanent zero policy. If I find a video, I will post it below. Here are some thoughts I have since put together on the US economy first.

I just wrote this week’s premium content post. I concluded that the Fed’s Rate easing and Obama’s Mortgage refi plan are bullish. Here’s a brief view on why.

  • The Fed is out of bullets on interest rate policy and has turned to other nonconventional measures like targeting medium-term inflation and interest rates and using a communications strategy as an expectations anchoring mechanism to increase its influence on medium-term outcomes. This campaign began as early as last February with now-Vice Chair Janet Yellen’s Unconventional Monetary Policy and Central Bank Communications. I think this is small beer and said so yesterday on CNBC.
  • Moreover, President Obama recognizes that the Republicans in Congress have his removal from office as a top priority for 2012 and will not allow him to add to budget deficits, especially if it adds stimulus to the real economy. So, despite Bernanke’s saying the Fed cannot do more, legislated fiscal stimulus is off the table. Therefore President Obama is using Fannie and Freddie as a vehicle to add stimulus via the mortgage market.
  • The combination of the US President’s State of the Union mortgage announcement and the Fed’s aggressive monetary policy the very next day demonstrates a monetary agent and fiscal agent working hand in hand to achieve twin goals of full employment and price stability. We should expect the Fed to continue supporting fiscal policy rather than working at cross purposes to it. This is the most important bullish point.

P.S. – I have a lot more on what this means for the US economy and asset markets, including the mortgage market and REITS at Credit Writedowns Pro. I think this is a very big deal actually. I am therefore moving to a more bullish view on both the US real economy and US asset prices, with Europe and Iran being the major identifiable factors that could cause the secular deleveraging trend to re-assert itself. It will certainly help Obama in a bid for re-election, especially if Republicans commit electoral suicide and nominate the polarising Newt Gingrich for President.

The video prelude on Europe, where I am less optimistic is below. Right now, Europe is in deflationary mode while the US is still in expansionary mode. The difference owes almost entirely to economic policy. Sorry I don’t have the video of what we had to say as Bernanke came on and that was more important. Here’s Brian Sullivan on the setup though.

  1. Anonymous says

    I disagree with your analysis. This policy is insane , it is only delaying the reckoning day. The FED is trying to rob you by keeping artificially interest rates at zero with inflation about 3% for 6 years would mean savers woul loss 25% of  their capital meanwhile BANKRUPT banks (yes, european banks are but american are too) keep paying bonuses, bondholders interests and shareholders dividends. Rather than buying american assets i will keep and increase my holdings in gold, right now stock markets are behaving as if everything will turn out ok. Too much complacency.  All in all , the fundamentals of us economy are not much better than europe, a deficit of 10% is unsustainable. Sooner or later the party has to be paid and i will try not to be the turkey at thanksgivings. Bernanke , the FED and all Obama’s economic team are a disgrace. Unfortunately this charade has too many chapters o sagas, USA needs people like Ron Paul but every country has what it deserves and outrageously Obama (to me is a populist like chavez but more articulate and educated) will beat these republican  candidates.

    1. Edward Harrison says

      carmelo, you’re confused about the difference between advocacy and forecast. Did I ever say anywhere in this post that I ADVOCATE this policy? No. What I do think is that it will goose the economy (and asset prices)  from whatever baseline we have already set over the medium term, which is exactly what it is designed to do (at least from the Obama perspective).

      The policy is designed to both get jobs over the short-to-medium term and to win an election. Whether it is sustainable over the longer-term and whether I advocate it is not the point of the post.

      1. Anonymous says

        ok edward, i got it! but i dont advocate your bullish stance towards stocks!!!(sarcasm). I think that in the long term mostly either bullish or bears will loss at the expense of the government. We are all doomed to the incompetence of politicians.

        1. Edward Harrison says

          Right! Carmelo, I wouldn’t say I am bullish. It’s that the combination of stimulative monetary policy and refinancing mortgages would be bullish. By that I mean that compared to any baseline scenario, this policy response raises your estimates for consumer spending, GDP growth and hence corporate earnings.

          There are two caveats:

          1. My baseline is for weakening growth and weakening corporate earnings, which is bearish.
          2. It’s not clear the mortgage proposal will actually happen

          These are two big caveats. 

          And I am just talking short-to-medium term here. I still think we are in a secular bear market.

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