There’s an old saying in the Wall Street that advises its participants not to fight the Fed. The axiom makes a fundamental assumption that there may be times when the Wall Street finds it appropriate to fight the Federal Reserves (Fed.).

Over last many years, since Greenspan ‘put’ era and now with Bernanke’s super-easy monetary policies; many see that the Wall Street has rather been well protected by the Fed. In the present context, Greenspan said that the best economic stimulus is rising market. Bernanke et al. obliged, overtly and/or covertly. Bernanke may not get an ‘A’ when it comes to employment generation or its protection; however he would surely get one if the objective of the Fed. would have been protecting the Wall Street.

So obvious question is – why should the Wall Street ever think about fighting the Fed.? A rising market, at all times, even beyond the bubbles, is in obvious interest of the Wall Street. Unless, of course, one has been having contrarian views like being a short-seller in a mad bull market, or an optimist in times of crash by going long. Problem here too is, markets can remain irrational (‘irrationally exuberant’ as Greenspan put it) for much longer to drive this minority contrarian views out of the market.

There is now ample credible literature that proves that markets are not rational. People however expected that Central Bankers would behave rationally and would thereby try to bring some rationality to the irrational markets. However, when the mother of all Central Bankers, the Federal Reserves itself aided by the BOJ and alike start aiding the Wall Street irrationally; it is polyannish to expect rationality to return in global financial markets due to more rational actions from the Central Bankers from the BRIC community, or from the rest.

In this era of higher degree of financial globalization than physical globalization (for trade or services), the Fed. therefore exerts a significant influence in global financial markets, beyond the borders of the U.S. 

We no longer live in a free market, we rather live in a ‘Fed.’ market. And main street globally is fed-up with it.

It essentially devalues currency and drives the price of other assets higher, creating a speculative atmosphere. Gold has been a classic example of it. It also fosters inflation. Problem with inflation is, there isn’t a single measure of inflation as with cost of capital, that is interest rate. Coming from India, it has been hard for me to believe that Japan had negative inflation for majority of the time over the last decade or the U.S. is now worried about same deflation hitting it.

It took me some time to realize that unlike developing nations like China, Brazil or India where food prices may have a significant weigh in the inflation figure; it is not so in the U.S. or Japan. It goes also true for energy related prices. Studies show that a significant majority of people around the world spend a significant part of their earning on these two components (energy inclusive of transportation costs as well).

So inflation is there, felt by many of us, but is not measured due to reasons best known to developed nations Central Bankers. And although inflation may be a single word, it does not mean a single thing across people from different income groups. Literature also explains how inflation acts as a tax to the poor.

So what is it that the Fed. is trying to achieve?

A look at global media highlights the confusion analysts and economists have on the road-map taken by the Fed. in dealing with the crisis so far. Many may even think that they actually have no road-map due to their repeated misreadings of the economy, documented from past meetings. If there was a road-map in 2008, one would have by now exited the stimulus and headed for higher interest rates.

That view may have its limitations as road-map is not something static. One may argue that the Fed. is rather following a ‘sense-and-response’ strategy.

My biggest concern here too is – what has been the response so far to the various unprecedented Fed. actions since 2008? The few answers I can offer is S&P 500 at 1180 level, unemployment at nearly 10%, and dollar index at 77 or so with addition of $2 trillion in the balance sheet of the Fed (and another few trillion addition of Federal debt). Growth is practically insignificant. I accept the employment figure as a better indicator for growth than the GDP figures.

One may argue that the success lies with unemployment figure itself as unemployment is not yet up to levels seen by many European counterparts. The critics of the Fed. would accede this point. However the concern now is, where would one see S&P 500 going forward, if at all employment level improves to normal? So either it is priced in or not priced in? Isn’t the market running ahead and creating other asset bubbles? What about commodities or gold? What about economic stability in emerging nations? What about the interest of the people who save and don’t speculate? What about a stable investment horizon to investors who can sense where dollar is likely to be over the next years with what likely interest rates?

China could create factories because investors knew the value of Yuan is not likely to go down over the years. Yuan appreciated by 25% or so since 2005 against dollar. Can the U.S. provide this stability to an investor with ongoing unstable environment?

A higher interest rate may offer more money to the consumers in a sustainable manner than zero interest rate which acts as a viagra to the Wall Street. Main Street benefits are more and sustainable when one has a stable interest rate policy and stable currencies. Bringing down cost of capital to zero or negative is like insulting capital, an essential economic resource. Printing more capital with zero interest rates will not serve the desired purpose but create undesired consequences. It may at most shift the problem from the U.S. to the rest of the world, and dilute it a bit within the U.S.

And that’s where China needs to be concerned. Because it has the ability to affect stability of inflation and asset price outlook in China as well. Even if China is able to isolate itself, many of its trading partners may get affected, leading to loss of further stability.

Essentially that’s what China has been asking since ages. China wants stability in values of global currencies. This will lead to stability in asset prices globally, stability in planning horizon for investors to create real assets and not paper assets, stability in employment and finally stability in growth.

It is time to chose one between stability or a series of shock-therapies that lead to a plethora of uncertainties globally. It is time to prioritize the interest of the main street than that of the Wall Street. Stability helps everyone, without repeated creation of asset bubbles and bursts and economic slow downs. Japan paid a severe price as stability in currency prices were disturbed. The old people, rising in population in developed world, will get more sound sleep with stable return of their life’s savings in stable financial products with stable interest rates.

Let us all give a chance to China as we have given to the U.S. over the last seven decades, when it comes to economic policies. China has achieved more sustainable growth, accumulated less debt, and acted as a lender to the developed world in spite of being a middle income nation. Let us not write down economic policies originating from China because of our individual biases. China is not evil. There may be bad policies in China in other areas as we have seen with Google or now with Liu Xiaobo, as we have seen same for the U.S. with Iraq. However China is the only country that achieved what the West preached in terms of removal of poverty and bringing properity to the underprivileged populace more than that of the U.S., Europe and Japan put together, in barely two decades. And they did it in spite of all the odds, in a sustianble manner (financial sustainability, not necessarily environmental one…but they have been working aggressively on the later as well).

The Fed. is now acting to destabilize that growth in China by creating an unstable currency value era globally leading to currency war like situations.

No one can fight the Fed., the old saying goes. China has proved many such beliefs wrong. It is time that China takes on the Fed. in the interest of stability, within China and also for the rest of the world. Europe realizes a strong dollar is in the interest of the world, but would not chastise Fed. (or treasury) openly as the U.S. has been making a joke about a strong dollar for last few years. Japan seems to be in an endless pit of unstable currency values leading to zero interest rates.

China so far remains the exception. Stability is not a bad word afterall, excessive volatility is. It is indeed time to chose between a stable dollar or another stable global currency. It is time for China to accept it and work on it, with ‘Chinese’ speed of implementation.

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