Monday, February 01, 2010

Double-Blip Expansion

As we all know, the Fed has taken unprecedented measures to “rescue” the economy from the “brink” of destruction but while the latest efforts have been truly extraordinary, it was only some six years ago that the Fed embarked on a similar operation in the wake of the dot-com collapse.

It’s been well reported that the low (below 2%) interest rates that the Fed set between 2001 and 2004 along with its embrace of affordability mortgage products and lax oversight greatly contributed to the most intense years of the housing/credit bubble and associated macroeconomic effects.

As I have noted before, regardless of the Feds handiwork, both stocks and employment trended down throughout the entirety of the 2000s.

In some sense the technical recovery engineered by the Fed in the wake of the dot-com crash more or less resembles a “blip” within the context of an otherwise down trending economy.

But this “blip” was artificial, fragile and fraught with malinvestment on the part of both firms and households so eventually, it relented to the overarching declining trend, giving way to our latest crisis and an even more substantial economic engineering experiment on the part of the Federal Reserve and the federal government.

So, now that the Fed has held rates below 2% for well over a year and the federal government has embarked on all forms of economic gimmickry, one has to wonder how much better an outcome will come of this round of economic engineering.

Looking at the chart below (click for full-screen dynamic version) you can see that while the Fed has effectively reached the zero bound for interest rates and likely inspired a sense of confidence among the investment community, unemployment will likely continue to trend up and stay elevated for some time begging the question, are we simply witnessing a second engineered “blip”?