Strategic Wealth Advisory Group | Cliff Morgan
While the media has spent a considerable pointing out positive economic signs lately (like rising housing prices, consumer confidence, and declining unemployment), by and large they are not highlighting what many people consider to be the primary cause of the good news: the Federal Reserve.
Specifically, the Fed’s decision to continually flood the market with “cheap” money. In an effort to spur borrowing, lending, and investing, the Fed has made it possible for major financial institutions to borrow money at interest rates of essentially zero. In addition, the Fed has now purchased trillions of dollars with of treasury securities, enabling the US government to continue borrowing money at low interest rates.
And though these measures have been successful in the short term, many experts are concerned that these actions are setting the economy up for rampant inflation down the road. Last week, Fed chairman Ben Bernanke responded to this criticism. From a Reuters article on the subject:
Federal Reserve Chairman Ben Bernanke on Monday defended the central bank’s aggressive easing of monetary policy, saying while it was aimed at bolstering the economic recovery, it was helping other countries as well.
The Fed’s asset-purchase programs, aimed at keeping long-term borrowing costs down and spurring investment, have been criticized overseas for their adverse impact on emerging market currencies.
But the Fed chief, fresh from a grilling from Congress on the potential domestic risks of his quantitative easing measures, countered the rhetoric about “currency wars,” though he did not use the term specifically.
In prepared remarks to a group of academics in London, Bernanke said the integrated nature of the global economy meant the whole world benefits from a sturdier outlook.
“Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor’ but rather are positive-sum, ‘enrich-thy-neighbor’ actions,” he said.
In response to a deep financial crisis and recession, and subsequent weak recovery, the Fed not only lowered overnight interest rates to effectively zero but bought more than $2.5 trillion in mortgage and Treasury securities.
While it’s encouraging to see that the economy is starting to pick up speed, both here in the United States and across the globe, prudent investors are….