Night of the Living Fed: Jeremy Grantham

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Oct 26, 2010
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Jeremy Grantham of GMO with some humor about the Fed.


Jeremy Grantham's 3Q Letter summarizes what he believes to be the effects that the policies of the Fed, under the direction of both Alan Greenspan and Ben Bernanke, have had on the U.S. and global economies.


Grantham summarizes his article in eighteen points before getting into heavy detail. I tend to agree with most of the main points Grantham makes in this letter, and do not understand how quantitative easing will help the economy. If we want to take drastic measures to stimulate the economy IMHO a stimulus with heavy infrastructure spending would be the way to go. Of course, that is in the hands of the President and Congress and not the Feds'.


Below are the first five:


1)Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.


2) Therefore, lowering rates to encourage more debt is useless at the second derivative level.


3) Lower rates, however, certainly do encourage speculation in markets and produce higher-priced

and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.


4) Our new Presidential Cycle data also shows no measurable economic benefi ts in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.


5) It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.


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Night of the Living Fed Jeremy Grantham


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