Financial transactions are zero NPV and do not have direct effect on the GDP growth

The released Federal Reserve’s decision on the 21th of September to purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell the same amount of Treasury securities with remaining maturities of 3 years or less by the end of June 2012, called as operational twist shrank equity markets, dropped market value of corporations and slashed wealth of investors. The Federal Open Market Committee intended to support stronger economy growth by pushing down long term interest rates those could stimulate borrowing. In the judgement of the stock markets, the Committee approved economic recession. However, do slumped stocks markets equivalent to the state of economy?


A yield curve which is a benchmark for banks to determine interest rates on loans is a prime indicator in financial decisions. If it is expected that the term structure of the US interest rates become more flat and long term interest rates fall in the future companies will not be willing to take long term loans at the present. Borrowers would better choose a short term loans and take new loans only after the long term rates fall down. Moreover, yields of the US Treasury securities are already relatively low.

In general financial transactions are zero NPV and additional value is created by the choice of assets’ allocation but not by the choice of financial recourses or financial securities. Thus, the decision to change the portfolio of the Federal Reserves’ assets and the meltdown of the stock markets do not have direct effect on the GDP growth.

Coordinated quantitative easing – will intended actions lead to expected outcomes?

Coordinated actions were agreed by the European Central Bank, the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to save the European banking system from the US dollar liquidity crisis on Thursday, September 15. Three fixed rate tenders to repurchase eligible collateral with a maturity of approximately three months will be organized to provide dollar liquidity. Is this decision a strong signal to stop lending in the US dollars, or otherwise – incentive to provide more loans denominated in the US dollars?

European banks need the US dollars to fund dollar-denominated loans and other obligations. So, here we come to the QE3, the monetary policy to stimulate economy by additional injection of money. In this particular case, the agreement is achieved by the five major central banks. The coordinative actions to increase the US dollar liquidity in the markets set the depreciation trend of the US dollar. Moreover, this fact combined with the US Federal Reserve’s promises to keep low interest rates until 2013 creates a huge stimulus for investors to borrow further in the US dollars. According to that demand, banks may have great incentives to provide loans denominated by the US dollars and a closed cycle when more and more liquidity is required to sustain stability of the banking system may be established.

However, how much those decisions stimulate domestic economies? The depreciated US dollar should ease the US export while domestic economies of the rest parties are driven by domestic businesses conducted in their own domestic currencies. So, most likely provided the US dollar liquidity will not stimulate the other parties’ domestic economies.

Hence, once the US dollar liquidity issue is solved by the quantitative easing decision mentioned above, shouldn’t it be imposed restrictions to engage in new obligations denominated by the US dollars in the rest parties at the same time so, that the intended actions led to expected outcomes?

Stagnation in the financial markets is a cure for experienced recession

Economic growth is supported by well functioning financial markets. So, coordinated measures to restore the stability of the international financial markets remains the main subject for the G7 finance ministers and central bank governors to discuss on the annual summit in September 9-11, Marseille. However, could the current economic climate be recovered in recent turmoil in financial markets and insufficient liquidity? I guess that it is possible and is already underway.

Market values are driven by public expectations. So, according to the recent excessive volatility, market self regulation mechanism come into play.  Investors those consider that market value does not reflect the true value of assets, avoid possible lost by investing in mistrusted financial markets.  It follows that the crash of stock markets should encourage investors to seek investment opportunities those are independent from market valuations. Consequently, investments in private equities should increase.  

Even though, investment in private companies is illiquid, direct investment in business development, participation in business management and control of business performance might be an attractive option. Investors may expect reliable and steady returns related to cash flows generated from invested capital and avoid market risks due to undervaluation of assets.

As a result, stagnation in the financial markets might become a cure for current economy recession when the attention of investors is focused on direct control and improved management of attractive investment opportunities.