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Just when the shopping spree for the Fed had ended, there's talk that they could start spending up again. All in the name of saving the economy.
James Bullard, the president of the Federal Reserve Bank of St Louis has suggested that the Fed resume purchasing Treasury securities if the economy slows. This is interesting timing, as the US will release its GDP numbers Saturday morning our time, and many economists are expecting the number to be quite low.
And a low GDP number is one way of saying the economy is slowing down.
Basically Bullard is terrified of Japanese style deflation. Japan which has basically seen its economy contract rather than expand over the past twenty years has quickly become a 'how not to' guide to running - or ruining - an economy.
So in order to avoid what happened to Japan, he'd like the Fed to flood the financial system with more money. Yeah, that should fix the problems.
'A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.' Said Mr Bullard.
One of the main reasons he's worried about deflation is falling house prices. He's said previously that declining home values 'undermine financial contracts', like your mortgage.
It's interesting that he believes further stimulus will help deflation. Just over a month ago, he visited Japan and had commented on how central banking officials had been unsuccessful with 'aggressive fiscal expansion'.
And, this news is likely to add to Bullard's troubles. Economists that have spent more than a decade studying the Japanese economy and they've been forced to admit something: They actually don't understand how deflation works!
Rather than Japan suffering a traditional, depression like period of deflation, the country's experience has been completely different in this case.
Consumer prices in Japan have slowly fallen about 2% each year for the past fifteen years. Prices haven't fallen in the drastic way that economists predicted, or the way prices fall during a depression.
What this could mean to the US is rather than being hit with rapid deflation, the US economy may just end up stuck in a deflationary cycle much like Japan.
Now that's something to look forward to!
Now let's have a look what happened on the market's yesterday...
The S&P/ASX 200 closed lower by 5 points, to 4,524.10.
The Dow Jones Industrial Average had a volatile trading sessions today. The Dow still ended the day in the red, down by 30 points to close at 10,467.16.
Coming out tonight our time will be a second quarter report of gross domestic product (GDP). It's widely tipped that the report will show economic growth was slower in the second quarter. The US has had several weak economic reports in recent weeks, and lower GDP numbers may bring back talk of a double dip recession.
The FTSE dropped 5 points to end at 5,313.95.
The Footsie had a relatively flat day of trading, despite companies like Reed Elsevier [LON: REL] and AstraZenca [LON: AZN] with better than expected earnings, the market was still subdued ahead of the GDP numbers coming from the States.
The Nikkei closed at 9,696.02, lower by 57 points.
The price of spot gold in Australian dollars is trading at $1,294.74 while in US Dollars it is trading 1,166.96. The price of silver in Aussie dollars is $19.44 and in US Dollars it is $17.52.
The Aussie dollar versus the US dollar was USD$0.9014, and gained against the Japanese Yen JPY78.13
Crude Oil closed at USD$78.30.
For the biggest movers on the market yesterday click here...
That's all I have you this Friday, have a great weekend.
Shae Smith.
[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]
Number of companies reaching a 52 week high previous day: 16
Number of companies reaching a 52 week low previous day: 18
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