Tag Archives | US

Tapering

The most talked about piece of ‘financial tailoring’ ever began on the 18th of December when the Federal Reserve announced that it was reducing the size of bond purchases by $10 Billion from $85 Billion per month to $75 Billion. What does all this mean?

The Federal Reserve is tasked with trying to ensure that the economy runs in a sweet spot without overheating or slowing down too much. It measures how over or under heated the economy is doing primarily by monitoring inflation and employment data. Traditionally it has controlled the economy  primarily by adjusting interest rates, when an economy is going too fast it raises interest rates to slow it down and vice versa. During the financial crisis the Federal Reserve dropped interest rates from around 5% to eventually a range of 0-0.25% in December 2008 exactly 5 years ago. Using the traditional tool of interest rates this was as low as it could go. But in 2008 the economy was still in dire straights with unemployment rocketing and the share market plummeting so what could they do?

So the Federal came up with a plan known as quantitative easing which means that it essentially prints money to buying US government Bonds and mortgage securities which will increase the supply of money flowing around and hopefully stimulate the economy in the process. This program is what earned Mr Bernanke the nickname of Helicopter Ben sending piles of money down from above onto the US economy. The last of these programs QE3 was implemented in September 2012 and rather than setting a fixed amount of asset purchases set a target of $85 Billion each month that was contingent on economic data improving. In June, Bernanke mentioned that the data was looking better and that it was a possibility that the Fed might scale back, or taper,  their QE3 purchases later in the year. This sent the market down about 4% in 3 days, however it quickly recovered. The news of the actual tapering beginning in January was in contrast greeted positively by the market, perhaps caught in a good mood in the leadup to Christmas.

 

The good news behind the taper is that the Fed, which has been conservative in its assessment of the American economy, now has the confidence to essentially take their foot slightly off the accelerator. In other words they are positive about the prospects for the economy going forward.

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Never having to pay back your debts

If you are a government, you never have to pay back your debt, and this is a fundamental difference between individuals and governments. When worries over how the US Government is ever going to pay back its huge debt the answer appears to be, from history, that it won’t. An article in the Atlantic magazine looks at US government debt and how it has been reduced in the past. The main method for paying it down is not to pay back the debt but to increase growth and make the debt a smaller proportion of the economy. Some are arguing for spending now, with debt increases, to stimulate the economy, as has happened in the past. This is Classic Keynesian economics , when governments spend more when economies are slow and less when they are good, something some economist such as Paul Krugman are currently arguing for (and most Republican are against!). Click here to have a look at this issue in more detail http://bit.ly/WFXkmS

NeverPayBackDebt

Source: The Atlantic Magazine

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Change in the Global Energy Landscape

Burning Shale Rock

Burning Shale Rock

There are two new forms of energy that arrived in a big way in the last few years to potentially transform global energy. They are Shale oil and gas. These reserves have only become commercially viable within  the last
decade, following some technological breakthroughs which allow the recovery of gas and oil from these large rock formations,  sometimes many kilometres underground. This is a recovery of oil and gas from what is essentially a rock by a process known as fracking. Fracking itself has been around for a number of years but there are several innovations in the process that allowed both Shale oil and gas to be extracted in viable quantities. Add to this a significant amount of new exploration and these new reserves are truly game changing.

In America alone it has doubled the reserves of gas that are available for extraction from within continental America. It has seen the price of gas drop from $12 a unit to around three dollars a unit for the last few years. Shale Gas is simply a massive game changer that could well see the US grow very strongly in the next decade as it substantially reduces its reliance on Middle Eastern oil and provides the US cheap energy. Some predict that the US could, in the next 15 to 20 years  go from importing about 15 million barrels a day from the rest of the world to only a importing about 3 million barrels a day – this at a time when the overall energy needs of the country will increase along with general growth in the economy. These massive reserves which are found in great basins under huge swathes of America are waiting, essentially untapped, to replace a significant amount of the US oil and other energy needs at potentially a much lower cost. It is also good for global warming as the carbon emissions from burning gas for energy are about half those of coal and oil.
Like wise oil reserves from these unconventional sources known as Shale or tight oil could create a paradigm shift in the oil world. Not only are new reserves being found but previously unrecoverable oil from traditional reserves could be commercially recovered thereby substantially increasing global oil reserves. One report says the US could produce 11.6 million barrels per day of crude oil and natural gas liquids by 2020, making the country the second largest oil producer in the world after Saudi Arabia, overtaking the other powerhouse of global energy, Russia. This is without doubt great news for the world’s largest energy consumer. These large increases in potential energy reserves could potentially put off peak oil but due to increases in demand for energy coming from developing countries the price of oil is likely to remain reasonably high.
Breaking the shackles of dependence on the Middle East for its energy needs will be very liberating for America both economically and Geo-politically. It will also be a paradigm shift for global geopolitics as the importance of the Middle East decreases commensurate with production increases with in the Western Hemisphere.

 

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