Economy | timiacono.com - Part 4

Everybody Just Relax…

While cavorting with the world’s rich and powerful in Davos, Joe Stiglitz, Professor of Economics at Columbia University and Nobel Laureate in economics, talks about such things as the fragile global economy, income inequality, and the political mood in the U.S.

Somehow, the word “discontent” was omitted from the embedded video above (i.e., “Joseph Stiglitz: Political climate is reflecting a discontent”) – perhaps this was part of some sort of conspiracy to keep voters from getting even more riled up…

Ray Dalio on Downside Risks

Ray Dalio, head of Bridgewater Associates and their $155+ billion in assets under management, shares a few thoughts in Davos about the state of the global financial system and the Federal Reserve’s next move.

To wit:

…the risks are asymmetric on the downside, because asset prices are comparatively high at the same time there’s not an ability to ease. That asymmetric risk exists all around the world. So every country in the world needs an easier monetary policy … I think the next major move in Fed policy will be toward quantitative easing, not toward a tightening.

Why China Matters

After the worst start to a new year on record for stocks, news this morning that China’s exports were not nearly as bad as many feared sent stock markets surging higher for reasons that should be clear in the Voronoi diagram below from HowMuch.net.

Mission Accomplished

Fed whisperer Jon Hilsenrath of the Wall Street Journal gives central bank chief Janet Yellen a big pat on the back for yesterday’s first interest rate hike in nearly a decade, a move that, by nearly all accounts, was just what the world needed.

Of course, history shows that asset bubble don’t really get their groove on until the Fed starts raising rates, so, we’ve got that to look forward to now…

Maybe 2% Inflation Isn’t Ideal

Among the many rate-hike-related themes appearing in the financial media this week is what some are calling the Federal Reserve’s “Inflation Conundrum”, an homage to a similar stumping of the central bank more than a decade ago when short-term rates were raised but long-term rates didn’t budge, that is, until the yield curve inverted and, voila!, financial crisis and recession ensued when another asset bubble burst.

The WSJ weighs in with The Mystery of Missing Inflation Weighs on Fed Rate Move ($) today.

Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, close to estimates of full employment, but inflation is stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Fed officials also don’t know why they target a 2 percent inflation rate rather than say, 1 percent or 3 percent or some other number, a question that is perhaps worth answering first, before they attempt any further investigation into why they’re not meeting this target.

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