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A Dovish Fed? The Same, Just Different

I’m still catching up on what happened today at the Fed meeting that resulted in stocks turning in their best day of the year. Apparently, stock traders liked what they said.

After looking at the photo above from this Marketwatch story, clearly, a lot of people have placed a lot of trust in a lot of white-haired economists at the Fed.

UPDATE: OK, I’ve read a bit about what went on today and this WSJ item does a good job of detailing the tortured semantics that necessitated a title change above.

Robert Shiller on Stock Market Valuations

After yesterday’s decline and if stock trading today follows what futures are indicating, my guess is that Yale Economist and Nobel laureate Robert Shiller is going to be getting a few more interview requests to talk about the same thing he did yesterday for CNBC.

Not surprisingly, Federal Reserve officials this morning are already running away from the WSJ/Hilsenrath trial balloon of dropping the “considerable time” pledge for the start of interest rate hikes as detailed in Fed Aims to Signal Shift on Low Rates.

Given the difficulties in the rest of the world and how super-sensitive U.S. stocks have become to Fed moves, I’d bet that we won’t see any rate increases in 2015.

Bathtub Economics and Aggregate Demand

In this item at his Contra Corner blog, David Stockman again has a hard time accepting the idea that the solution to our economic woes is as simple as spurring aggregate demand after the savings rate went to zero and the nation reached peak debt a few years back.

The Fed can do only do two things to influence these income and credit sources of spending—–both of which are unsustainable, dangerous and an assault on free market capitalism’s capacity to generate growth and wealth. It can induce households to consume a higher fraction of current income by suppressing interest rates on liquid savings. And it can inject reserves into the financial system to induce higher levels of credit creation.

But the passage of time soon catches up with both of these parlor tricks. When household savings decline to the vanishing point, as has occurred since the turn of the century, there is no more incremental spending to be extracted from current income.

Likewise, when balance sheets become totally exhausted with leverage—as is also the case at present—there are no more one-time increments to spending available from the simple expedient of ratcheting-up household and business leverage ratios. That condition amounts to “peak debt” and it characterizes upwards of 90% of US households today.

Of course, this condition is more politely called “a balance sheet recession” and, as we’ve learned in recent years, one of the common side effects of central bank handling of balance sheet recessions is ever larger, increasingly dangerous asset bubbles.

Dow 200+ Point Up/Down Days

I don’t know why this chart fascinates me so, but it does…

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