Money does not grow on trees!!! Or does it in this current economy? Stimulus, A.K.A. tree money made its debut in Europe last week.
Back Story
Truly the rest of the world appears to have found the money tree the U.S. has been using for the last 5 years. The U.S. found themselves zero bound at the start of 2009. This took away the most effective weapon the Federal Reserve Board (FRB) had to further stimulate the economy, which sorely needed it.
In search of a viable way to stimulate the economy, investments, and decreased cost of on-going government debt payments, the FRB launched Quantitative Easing (QE). A program where the FRB was purchasing Treasury instruments at a high quantity. This ballooned the FRB balance sheet and created added demand on the treasury market driving long term interest rates down. This developed a very favorable borrowing environment, which spurred on spending, fixed income investing, and a weaker dollar.
A weaker dollar was beneficial to domestic companies that produce a good sum of their revenue abroad. As they converted it back to U.S. dollars they were generating profits not only on goods solid but the weakening dollar providing more dollars on exchange of the foreign currency.
2015
Now, 5 years later QE 3 has come to a close and is now setting up the unwinding of all the monetary easing that occurred over the years. To the contrary, several other countries are just recently embracing this methodology that, in turn, is reversing the recent trend of a falling dollar.
Due to various monetary easing policies in China, Japan, Europe, and beyond their currencies are now weakening. A much needed process to prevent those economies from stalling, and in some cases it may help regions emerge from a recessionary conditions.
The emergence of these other global economies, however, may be at the expense of what has been the strongest economy as of late, the U.S. The strengthening dollar is expected to cut profit margins for domestic companies invested abroad. The trade balance gap has widened as US goods become less affordable overseas.
As oil remains weak, and the dollar strengthens, corporate profits in the U.S. will soften, inflation will stay well at bay, and emerging economies will continue to struggle. Given the weak pressure on inflation, it becomes less likely that a rate hike by the FRB is imminent. Many are projecting June, but we will see on the 18th as there is hope that revisions in FRB language will give us an indication of their intent.
To those nations that found our money tree, enjoy it, just do not ruin the party for the rest of us!
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