As expected in my earlier post on QE(Click here), today FED has kept policy rates unchanged. I was really expecting this as USA growth rate is still far away from any stability, Global economic turmoil especially China pose a serious risk to the growth stability in USA. Falling oil prices can seriously take the gas out of huge USA shale investments. Inflation rate is also very low; so there is no fear of high inflation due to easy money. Although I have explained earlier also that 80% of this easy money has not left FED (it is with FED as Bank reserves), much of the balance has left USA in search of better investment options not only in stock markets but also as FDI in countries like India and China. I am having no data with me at present, but I would like to see gross investments made in USA during this period. I think these may not be very high relative to QE money released except for Shale Gas investments.
Most importantly as detailed earlier I have serious doubts on the impact of QE on USA growth. QE was meant to encourage the demand and investment equation in USA but now they are watching global scenario to revisit it. If USA has corrected their local equation then why they need to look out of USA for symptoms? Because now global lower demand can hit their exports.
Actually problem of USA is not their investments and consumption level, but cleaning the mess of Real estate Bubble and looking for growth avenues beyond consumption. There is a continuous fight among economists regarding limits to growth. As our earth is a “Finite” sphere with Finite sources (like oil, iron etc) so humanity can not grow forever. Finite sources will make them stand still one day and after that they will fall out of their own weight. So there are talks of sustainability. Although I agree to it but only partially. New technical innovations can open new avenues of growth. Like Aeroplanes opened the new revenue source by making intercontinental travel very fast. Now in future, high tech Rockets can make space travel very easy and so a new growth avenue will emerge. Same thing happened with the emergence of faster internet and smartphones.
But it is always a bad idea to drag “Future Consumption” into present that too with debt. So USA is going through a phase of Finite source growth limitation. Here sources are people and consumption articles. Instead of promoting people to over consume, USA can supply this excess to third world countries where animals and humans eat and drink from the same source. USA can do this by developing infrastructure, mining and agriculture in these countries by giving employment to locals. This will benefit both. Shale gas investments are an example for new technological innovation promoting new growth variable. Most of the World has entered into the 2nd generation of innovation. 1st stage was about bringing the speed and ease to our work life. But this 2nd generation is about changing the world and universe as per our requirements. USA as always is the leader in this transition and we can see new openings soon.
Although I wanted the FED to raise the rates and stop this prolonged guess work and volatility in global markets. I also think that most of the markets are already ready for any hike. A recovered and growing USA is a darling for the world. Growing USA can provide relief to exporting countries like China and India which can spur growth in these countries. Fed rate hike is only a testimony to the growing USA. Stocks markets can fall due to the plight of FII’s but with growth coming back or faster growth will ultimately force local investor or genuine FII’s to invest the money back.
So markets may enjoy the ride again. There are so many ifs and buts in this post because I am not a big supporter of current practice of consumption led economic growth. Our problem is only of misallocation of resources and we need to absorb the pain of realignment of this misallocation; because pain is not always bad. You can ask a Mother about pain; she will only smile while looking at her baby.