Topic Category: U.S.

One of the defining economic events of 2014 has been the dramatic decline in crude oil prices over the last six months. Prices have fallen 45 percent to their lowest levels in 5.5 years. This precipitous decline, which was unexpected as oil prices stabilized around $100-$110 a barrel during the three years prior to mid-2014, will have global, political and economic ramifications for consumers, governments, industries and central banks.

A number of factors are putting downward pressure on the American economy. At the same time, various trends are giving economic growth a boost. This interplay, which often is reflected in the stock market’s level of volatility and vast swings, has left many confused and unsure of what’s next. Surprisingly, a number of driving factors and trends reveal much about where we are headed.

William McChesney Martin, former chair of the Federal Reserve Board, famously stated that “the job of the Fed is to take away the punch bowl when the party is still going.” A quote from the 1960s, but very relevant today as the Fed voted in October to end the third quantitative easing (QE3) program. What is the impact?

Steve Jobs’ death was a sad and traumatic event for Apple. His ability to drive marketing and product design was truly amazing. It was unheralded the way he was able to see the market for the MP3 player, drive a better design, and use this product to move a niche computer company to unimaginable heights. Yet, Jobs also held the company back.

The recent story of a Liberian man in Dallas who had Ebola sparked a political conflagration around travel restrictions for countries where there are Ebola cases. The virus does not appear to have spread from him to anyone that did not come into direct contact with him in the Dallas hospital.

China’s university system is growing. However, the People’s Republic of China still lags behind the U.S. and other Western nations. Chinese students increasingly are heading to America for higher education. While recently playing tourist in Beijing I spoke to a number of young Chinese. They were bright and inquisitive, ambitious and nationalistic. They worried about finding good jobs and were irritated by government restrictions on their freedom.

The rally in U.S. Treasuries this year is due in large part to China’s continued appetite for longer-term U.S. government debt. In the first five months of this year, China bought $107 billion of Treasury debt maturing in more than one year, up from $81 billion for all of 2013. That pace is the fastest on record and has put downward pressure on yields even in the face of the Federal Reserve’s decision to end quantitative easing by October.

The U.S. has experienced 11 recessions since the end of WWII and the most recent one has been the most severe. The Great Recession started in December 2007 and ended in June 2009 as determined by the National Bureau of Economic Research, an independent group of economists that has officially defined business cycles since the 1920s. So June 2014 marks the fifth anniversary of the end of the Great Recession.

The U.S. Federal Reserve Bank’s three rounds of quantitative easing and near-zero target for the federal funds rate have not provided the promised stimulus. The idea that dramatically expanding the Fed’s balance sheet and rapidly increasing the monetary base would revitalize the real economy is a fantasy. Printing fiat money does not lead to economic growth.