Easy Money Being Drawn Out Of The Economy!
(ThyBlackMan.com) The Federal Reserve Bank (Fed) announced on January 29th that it has decided to continue to reduce its bond buying activities, thus taking more easy (cheap) money out of the economy. What the stock market signaled with its downturn of close to 400 points over two days in the prior week is the beginning of a long and torturous road of economic instability in our country. The decline of the market will accelerate in the coming weeks unless the Fed reduces or stops withdrawing cheap money from the economy. Here is why. The reason being given for the prior week’s stock market retreat is that Chinese manufacturing took a hit. Manufacturing in China declined based on an index used to record manufacturing activities in that country. The index is known as the PMI index (Purchasing Managers Index). The PMI Flash Manufacturing Index showed a decline to 49.6. This was under the 50.6 that was projected. It was an indication that Chinese manufacturing maybe contracting for the first time in six months.
The bottom line is that if there is less manufacturing in China, it is logical to assume that the leading economies of the world as a whole are sending fewer orders to the Chinese manufacturing floors. You see, leading economies, and the American economy being foremost, use to manufacture things within their own borders. However, in recent years, leading economies in an effort to stay competitive in some industries have outsourced labor to China because it is so cheap. Therefore, China has replaced the factories, which at one time manufactured goods here in the United States. The question is, are we seeing a trend developing when it comes to the leading economies in terms of reducing their need for manufacturing activity or is this just a one-time occurrence?
Remember, in our last piece ( http://thyblackman.com/2014/01/14/tough-economic-times-aheadand-not-just-for-blacks/ ), it was stated that the Fed’s cheap money policies had not led to corporations expanding hiring as the Fed had anticipated. It led to them taking the low interest rated money that the Fed is providing through its quantitative(qualitative) easing program (QE) and using it to tidy up their balance sheets by rolling over long term high interest rated debt to cheap low interest rated debt.
Many corporations used the inexpensive money to initiate stock buy back programs to increase the price of their stock. Overall, corporations have not invested in expanding, buying new equipment, investing in new products and hiring. Therefore, the suggestion being made here is that the reduced manufacturing orders to Chinese manufacturing floors may not be a one-time occurrence, but may well herald a trend. If it is a trend, a rise in unemployment is inevitable.
The question of tapering of the Fed’s QE program, which was supposed to be a short-term fix for the economic woes of our country, will have to be reconsidered. It was discussed in our last piece as the Fed withdraws cheap money from our economy, the benefits of such a program would recede with it. It was pointed out that the reason the benefits would recede with the program is that the activity of continuously providing cheap money to the economy is not a job creation plan. What the Fed has done with its cheap money policy since 2008 is given this economy an opportunity to right itself. However, cheap money is not the engine that will move the economy forward. Cheap money can be the fuel once an honest to goodness national job creation plan is adopted and activated, but “it is not the job creation plan itself.”
However, there is something more ominous and potentially more disastrous that could come out of the leading economies’ slowing orders to the Chinese factory floors. It would spell disaster for not only the United States economy but the world’s economies as well and usher in a recession. Unless the Obama administration comes up with a national job creation plan ( http://www.Jobcreationnow.com ) this lurking disaster will come upon us, with increasing unemployment rates in its wake. You yourself can logically project and conclude this will happen. Slowing factory orders suggest that corporations will report less profits going forward. Lower profits mean falling stock prices. Therefore, how is a CEO or President of a corporation to continue reporting increasing profits that would protect him and his job? You got it. He will attempt to push through price increases. When you push through price increases without corresponding improvements in product quality, it is called inflation. In other words, the corporation is inflating the price of its product just to make more money or profits without improving the quality of the product.
When product prices increase on a large scale, it is not long after that, that increase wage demands follow. The Fed then has to withdraw or abandon its easy and cheap money activities altogether to fight inflation! Fighting inflation will increase interest rates. Increased interest rates will cause the unemployment rate to rise and a possible recession. Moreover, you know what that means,… here we go again with high black unemployment! That is why I say, “Tough Economic Times Ahead … and Not Just For Blacks!” And so it goes…
Staff Writer; James Davis
More information about JD and his Deficit Neutral Stimulus Plan Can be founded at http://www.sslumpsum.com.
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