Tuesday, January 20, 2009

Ashes to Ashes...

OK... did you mentally sing "funk to funky" or fill in the more somber "dust to dust"? That question sounds a lot like one of those queries on a personality test that purports to tell you something profound but the results instead read like a horoscope out of the Sunday paper. But the title was chosen deliberately.

In the last few months I've read a few stories about assigning blame and generally at least some of it has been laid at the feet of the Fed and their too-loose monetary policy. To be more specific, their absolute refusal to "take away the punch-bowl" to use the most favored phrase. And it's probably true. As usual, here's a chart - this time of the Fed Funds rate. For reference, the data set begins on July 1, 1954 with a Fed funds rate of 0.80% and the last update is 0.18% on 1/15. Interesting and kind of symmetric in a way that appeals to my sense of order.
It certainly supports the premise that the Fed was unwilling to tighten policy since Volker was in charge. Since his tenure each time the rates were cut, they are never subsequently raised back to the level prior to the cuts. One could argue that the Fed has become more supine to the Executive or generally just wants the good time to keep on a-rollin'.

Now, waaaaay back before I started reading about any of this stuff in relation to markets and trading I had a basic academic/political interest in national debt and what-not. If you look back at 1954 as the US emerged from WW2 with some fairly substantial debts, the national debt to GDP ratio in 1954 was 73.3%. (Trivial aside: this number peaked at 121% of GDP in 1946.) In late 2008, this number was... ~72.5%! I must admit, I do like coincidences even if they don't really mean anything.

So moving forward, will we see a return to progressively tighter policy at the Fed? I guess that depends on how much of the money currently being shoveled into the fires of the financial sector manages to remain unburnt and floats off into the broad economy to reappear as inflation. On the flipside, will it even matter as rates are forced upwards because nobody (or at least fewer somebodies) wants to buy the debt? That's perhaps a more ominous possibility. It feels like this could be a great entry point to explore a rich topic but it will have to wait for another post.