September 24, 2010
I have been asked recently about my failure to blurt out my observations of life, the economy and the financial markets recently, but frankly, I have been puzzled. No more; often wrong but never in doubt! I will title this issue, The Great Disconnect.
The economy and the fate of most Americans is about to diverge from financial markets. Let's start by examining the economic realities, (as I see them). To plagerize shamelessly from PIMCO, we are entering the new normal, at best: low growth, deflation, deleveraging, high unemployment, falling home prices and mindaltering levels of debt. Many thought that I was insane, several years ago when I said that we were heading the way of Japan. We should be so lucky. Remember that when the shit hit the fan in 1990, Japan had a huge current account surplus,(we have an enormous deficit), personal savings,(the American public is pathetically insolvent), and a strong global economy to support it's export driven economy, (Americans consume and do not produce). The majority of Americans naively assume that the federal government holds the keys to reverse this process, if only we could elect the right guys to implement the correct policies.
As I have stated previously, revisionist history leads to widely accepted misconceptions which leads to failed policies. Americans hold FDR, the New Deal, John Maynard Keynes in high regard for ending the Great Depression. For the most part, these policies were abject failures and we owe our recovery to the policies of Adolph Hitler. Nonethless, the Keynsians reign in DC,(as opposed to Europe where they have run out of money), and we await with baited breath, our next stimulus and more quantitative easing. Heaven forbid that markets be allowed to function, to clear the debris of bad debt and overvalued assets.
Americans, a profoundly illiterate group, know nothing of the Great Depression, let alone the economic history of the nineteenth century. We had economic calamities in the 1820's, 1830's 1870's 1890's and early 1900's. Why don't most people know of these events? Because they were relatively short. Why were they short? Because the government did not interfere in the economy. An interesting historical tidbit: Martin VanBuren lost the 1840 election because he refused to intevene in the downturn of the 1830's. Shortly after his loss, the economy returned to vigor. We operated under the principles of Australian economics in the nineteenth century, experienced several viscious short term economic downturns, but were able to create in aggregate, enormous economic growth, employment and a general increase the standard of living for the citizens of the country.
Many of our ancestors, including my grandfather immigrated to the US because it was a global source of jobs. These ramblings are irrelevant; our politicians,(don't doubt that Bernanke is a politician) don't subscribe to free markets and will intervene. Additional stimulus is uncertain given the Nov. elections rendering the Fed more central to the government's push to reinvigorate our economy. The consensus is that they will purchase another trillion bucks worth of Treasuries come November. What effect will this risky strategy accomplish? Sure didn't work in Japan. Conceptually, forcing interest rates down another 25 basis points will allow those who qualify to refinance, improving their monthly cash flow. Theorectically, the cost of capital will decrease for business. The reality is that printing $ will decrease the purchasing power of the $. Will that alleviate our deflationary concerns? Probably not. There will be no wage increases in the face of a glut of labor. The prices of consumer goods will continue to decline given the oversupply of productive capacity. Housing will continue to decline in value,(rental rates, under pressure, make up 1/3 of core CPI.)
What will go up in price as the $ falls? Stuff. Gold, silver, but more importantly, oil, gasoline,copper, iron ore, wheat, soybeans, etc. In short, with high unemployment, stagnant wage growth, the cost of survival, ie. the cost of food and energy, will rise. Conveniently the Fed doesn't include food and oil in their calculations of core CPI. Americans are going to get poorer. Interestingly, the financial markets will do well. If I am completely wrong, the economy takes off, the Fed doesn't intervene, the equity markets will do well.
If I am correct, all financial markets will prosper. The Greenspan put has been replaced by the Bernanke put. Hence the title, the Great Disconect; financial markets will do fine while the American public will suffer.
-Guga
Subscribe To
Posts
All Comments
Showing posts with label Japan. Show all posts
Showing posts with label Japan. Show all posts
Thursday, April 28, 2011
Wednesday, April 27, 2011
OPM (Other's People Money)
July 21, 2010
These are fascinating times for noneconomists to observe the battle of economic philosophies. We love John Maynard Keynes here in the states. No fiscal stimulus, no matter how inept or costly is to be maligned. Deficits don't matter. Markets are erratic and corrupt; trust in your elected politicians and their desgnated hacks, I mean regulators. No pain for the electorate is tolerable. The Europeans and particularly the British have had it with John Maynard. Dutifully following his precepts have lead to insolvency. Screw stimulus! For that matter, screw entittlements. These fools are going to start paying their bills!
Severe austerity is the word on the eastern shores of the Atlantic. Socialism is being decomissioned. As noted previously, Socialism doesn't work; it fails when you run out of other people's money. Horrors say our esteemed Keynsian economists like Paul Krugman. Paying your bills in the face of a recession is countercylical. This deplorable strategy will lead from recession to depression. Instead say they, these brilliant academics, the solution to a debt-induced delevering economic slowdown is to borrow and spend your way to prosperity. I guess we'll see who's right. The US will borrow and spend and the Europeans will cut and save. Interestingly, this is not the only time when countries in distress have adopted different solutions to their problems. In the early 90', Japan was entering it's eternal deflationary depresssion. Non other than our very own Ben Bernanke jetted across the Pacific to tell them exactly what to do: quantitative easing,(money printing), and fiscal stimulus. They followed his advice to the letter, over and over again. Consequence: deflationary depression. The Canadians were in deep dodo at the same time; bad economy and burgeoning public debt. They took the European approach; cut spending, reduced entittlements and endured the subsequent pain. They got a hell of a recession, significant unemployment but inabout 3 years the lights went on and with their fiscal situation solid, have emerged arguably the best economy of the G7.
Gentle Ben hates deflation! Back in 2003, with the CPI at 1.8%, while riding shotgun for Greenspan,(The Maestro), they took the discount rate to 1% for fear of deflation following the busting of the tech bubble. Net result: the housing bubble. Now, the CPI is 1% less than that prior alarming number, you can bet that old Ben is having some sleepless nights. Cann't lower interest rates because they're already zero. What to do? Quantitative easing!
Not so fast say I. Why not? Because it won't work. It won't work because the US has entered a liquidity trap. Remember the IS curve from your Econ 101? A downward sloping curve with interest rates as the independent variable and output as the dependent variable. The point is that declining interest rates lead to rising production. Alas, what happens when interest rates are zero and so is production/employment/housing/etc. At that point, the Fed is pushing on the proverbial string; it's out of bullets. The Japs repeatedly tried it; it didn't work. What's left; more fiscal stimulus from a bankrupt federal government? I say that the bond market has got it right; ever declining yields strongly suggest minimal economic growth and the spectre of deflation. The equity market will join the party, on the downside in time. This country, unfortunately has a flawed economic model. It's based on consumption fueled by credit(debt). We are in a multiyear process of delevering debt, liquidation of bad debt and contraction of credit. We can take the hit quickly or draw it out but wecann't escape it. The Fed controls short term interest rates; the market controls long term rates. The Fed controls the monetary base(M1) but the credit markets control M2 and M3, both of which are shrinking. Galactic levels of bad debt are in essance, the black hole of $.
-Guga
These are fascinating times for noneconomists to observe the battle of economic philosophies. We love John Maynard Keynes here in the states. No fiscal stimulus, no matter how inept or costly is to be maligned. Deficits don't matter. Markets are erratic and corrupt; trust in your elected politicians and their desgnated hacks, I mean regulators. No pain for the electorate is tolerable. The Europeans and particularly the British have had it with John Maynard. Dutifully following his precepts have lead to insolvency. Screw stimulus! For that matter, screw entittlements. These fools are going to start paying their bills!
Severe austerity is the word on the eastern shores of the Atlantic. Socialism is being decomissioned. As noted previously, Socialism doesn't work; it fails when you run out of other people's money. Horrors say our esteemed Keynsian economists like Paul Krugman. Paying your bills in the face of a recession is countercylical. This deplorable strategy will lead from recession to depression. Instead say they, these brilliant academics, the solution to a debt-induced delevering economic slowdown is to borrow and spend your way to prosperity. I guess we'll see who's right. The US will borrow and spend and the Europeans will cut and save. Interestingly, this is not the only time when countries in distress have adopted different solutions to their problems. In the early 90', Japan was entering it's eternal deflationary depresssion. Non other than our very own Ben Bernanke jetted across the Pacific to tell them exactly what to do: quantitative easing,(money printing), and fiscal stimulus. They followed his advice to the letter, over and over again. Consequence: deflationary depression. The Canadians were in deep dodo at the same time; bad economy and burgeoning public debt. They took the European approach; cut spending, reduced entittlements and endured the subsequent pain. They got a hell of a recession, significant unemployment but inabout 3 years the lights went on and with their fiscal situation solid, have emerged arguably the best economy of the G7.
Gentle Ben hates deflation! Back in 2003, with the CPI at 1.8%, while riding shotgun for Greenspan,(The Maestro), they took the discount rate to 1% for fear of deflation following the busting of the tech bubble. Net result: the housing bubble. Now, the CPI is 1% less than that prior alarming number, you can bet that old Ben is having some sleepless nights. Cann't lower interest rates because they're already zero. What to do? Quantitative easing!
Not so fast say I. Why not? Because it won't work. It won't work because the US has entered a liquidity trap. Remember the IS curve from your Econ 101? A downward sloping curve with interest rates as the independent variable and output as the dependent variable. The point is that declining interest rates lead to rising production. Alas, what happens when interest rates are zero and so is production/employment/housing/etc. At that point, the Fed is pushing on the proverbial string; it's out of bullets. The Japs repeatedly tried it; it didn't work. What's left; more fiscal stimulus from a bankrupt federal government? I say that the bond market has got it right; ever declining yields strongly suggest minimal economic growth and the spectre of deflation. The equity market will join the party, on the downside in time. This country, unfortunately has a flawed economic model. It's based on consumption fueled by credit(debt). We are in a multiyear process of delevering debt, liquidation of bad debt and contraction of credit. We can take the hit quickly or draw it out but wecann't escape it. The Fed controls short term interest rates; the market controls long term rates. The Fed controls the monetary base(M1) but the credit markets control M2 and M3, both of which are shrinking. Galactic levels of bad debt are in essance, the black hole of $.
-Guga
Subscribe to:
Posts (Atom)