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Sent: 18-09-2012 13:55:02
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Fed policies to spur asset prices

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

The launch of another round of quantitative easing by the US Federal Reserve will boost asset values but doubts will persist about whether the Fed can engineer a seamless transition between its market interventions and a sustainable recovery in US domestic economic activity.

The US Federal Reserve has concluded that the momentum of US economic activity is fading. The pace of growth is insufficient to reduce unemployment to any material extent.

At the same time, Fed chairman Bernanke is unable to rely on the executive or legislative arms of government to pull their weight. He is simply the only game in town if the pace of economic activity is to pick up.

More than that, the rate of growth could be set to sink lower over the next few months as US politicians first jockey for election and then deal their way out of the imminent tax rises and spending cuts which have been built into the system because they have fluffed their chances to stabilise their fiscal balances in the past.

The US government is at the heart of the employment problem in another way. Government cutbacks in this cycle have retarded the overall expansion of employment.

Since the Second World War, the number of government employees had increased over the three years following the end of each of the 10 recessions in the US with only one exception. The exception was the recession that ended in July 1980 but was followed very quickly by another downturn that began in July 1981 and finished in November 1982. Even so, three years on from the end of this second recession, government employment had risen by over 4%.

In other words, government employment in the USA has typically supported a recovery in economic activity. Not so in this cycle. Three years on from a recession which finished in June 2009, government employment is 2.8% lower. Meanwhile, private sector employment has risen by 2.9%.

This private sector growth outcome is more than three times the pace of growth coming out of the 2001 recession and only slightly lower than the 3.9% gain coming out of the recession that ended in 1991.

Fewer government employees and less government spending on goods and services are another wet blanket on the enthusiasm of the private sector. Not only is the Fed trying to compensate for a range of international financial market circumstances but is also battling decisions among many governments in the USA to pare their budgets.

The Fed cannot act directly against these pressures. Buying financial assets is, if it works, an indirect way in which to help boost employment, at best.

The Fed will be hoping to have two effects. One will be through the housing market. Purchasing mortgage backed securities will help to reduce already low funding costs and, at the margin, might boost demand. There is a backlog of inventory to clear so that higher demand will only translate into construction activity with a lag of currently unknown duration.


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