Limits to growth

And so, I was right and wrong. Or perhaps, it is wrong and right.

The FOMC has decided against a new round of QE. However, it has also signaled that it will do something, presumably another round of QE.

Global equities bounced anyway from their extremely oversold condition and enjoyed a melt-up into the close. Far more importantly, commodities were down significantly then reversed and charged into the close after the FOMC statement.

And that, my friends, captures the conundrum faced by the FOMC. Take a look at the Statement, it basically says, growth sucks but we can’t cut rates because of temporary inflation caused by commodity prices, especially food and oil.

That’s it. No great mystery. But one giant conundrum. Because the moment they ease further, commodities are going to the moon.

Which is what they hinted they will do, the Statement also contained this:

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Which the US market has clearly read as a green light for impending QE3.

The FOMC’s problem is pretty straight forward. As well as trudging through an interminable balance-sheet recession, the US economy now confronts global limits to growth. Recall Jeremy Grantham’s table of Chinese commodity consumption:

There isn’t enough room on this earth for the US and China to grow together without inflation. Sadly for the US, stuck in its balance sheet recession as well, and trapped as it is with the reserve currency and relative pricing mechanism for commodities, there isn’t enough room for it to not grow without inflation either.

The FOMC has no good choices. It has come to a fork in the road and taken it. For today at least, stagflation cometh.

Houses and Holes
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    • So this is essentially jawboning QE……

      The problem is though, the Fed has lifted its skirt and the market caught a glimpse of the drawers and now if they continue the tease without losing some garments, it will be a bloodbath. Do you reckon they’ve painted themselves into a corner much?

      • I think the map is lost, the compass is smashed, and nobody, including policymakers, has a clue where the car is going.

    • Without having read the full statement, what they have signalled they “might” do in the past is use any income from previous rounds of asset purchases (QE1 and QE2) to inject further liquidity into the market. Technically this is not quantitative easing as the Fed’s balance sheet isn’t expanding, but does provide further liquidity and allows rates to stay lower for longer.

  1. The inflation due to food and oil will be temporary only if world population growth is temporary…

  2. The root caus of all these financial dilemmas seems to me to be quite simple and obvious. The financial system is based on perpetual growth. Nothing on this planet grows forever, including our economy. We seem to have the same attitude with the enviroment, that we can take ,take ,take and not give back. The basic laws of nature apply to our financial system as they do to our natural enviroment. You can only manipulate them for so long before they say that enough is enough. To me they are saying that enough is enough on many fronts.
    The only answer I can see to these financial dilemmas we are in is for a financial system to evolve not based on growth. How you do that and if it can be done I dont know.
    Until then these problems that we are having will occur time and time again and why are we so surprised when they do ? Look at history, not much has changed!

    • Sandgroper Sceptic

      This is the correct take on why our financial problems will continue. Money, permagrowth and the way society allocates resources all need to change.

      • Well I don’t quite agree with this.

        On the surface perennial growth sounds impossible. But the fractional reserve system should or rather COULD lead to sustainable growth – a win-win situation for all – but only provided credit is used to fund new or increased goods and services.
        The problem is that the vast majority of lending actually funds speculation not production.
        Two supporting factoids that come to mind:
        – over 90% of housing lending in Australia is for speculation (i.e. not construction or improvements)
        – Global derivatives markets are many times greater than the underlying asset markets.

        This doesn’t at all take into account unsustainable use of finite resources. However the problem there is not with growth per se, it is with the true cost of our productive endeavours, such as mining, logging etc. Note that the “Carbon Tax” is more or less an attempt to remedy this.

        • How would bankers earn their big bonuses if credit was only used for growth? The problem is caused by financial institutions running amok.

    • With unlimited energy you can create unlimited everything. Water, food, materials, whatever. Pseudo-unlimited energy is possible and thus pseudo-unlimited growth is possible.

      However, the former is dependent on technological advancement which is not currently moving at a sufficient rate to sustain our rate of growth. It will get there eventually but there will be a lot of damage in the interim.

  3. “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”

    Personally I think this sentence can be left in there in every Statement for the next few years and it’s not a QE3 announcement. Could not be more vague! I think stocks went up because there is no where else for money to go, and the markets are oversold.

    • well initially the US market dropped a fair bit (as you’d expect when the Fed announces that the economy sucks for at least 2 years), then staged an amazing turn around. Bond yields did the same thing.

      Long or short, timing is everything at the moment!

  4. Jeremy Grantham gets perpetual growth, he wrote a nice article on it. GDP yoy is compounding, eventually it has to stop. Why? Because we live in a finite world. He also mentioned China’s growth and indicated that at present growth rates in the not to distant future China will be consumng all of the worlds resources. Sometime the compound growth has to reset, we may be seeing that. Best wishes cos you will need them.