In the wonky world of central banking, the Rx for reviving an economy comes down to reducing the cost of credit so that borrowers are tempted to borrow and spend. These notions, taught in central banking academies called graduate schools, are well-learned but not applied wisely. Negative interest rates put lenders on the road to extinction with profound consequences.Continue reading—>
In the early days of open global capital markets, capital was attracted from the developed economies to the low-wage emerging markets with the promise of building a manufacturing base to export to the developed world. This capital surge was short-lived as capital plunged in at a faster rate than the new facilities could be up and flow revenues. It all came to a screeching halt when capital sought to repatriate. This was knowns as Asian Contagion. The year was 1997. The recent commodity, currency and stock market plunge are all related and known as Asian Contagion II, with the differences only in the details.Continue reading—>
At the moment, the question of whether or not the Fed should be raising interest rates has become a much ballyhooed event for which every investor, financial writer, and taxi cab driver has an opinion. It’s supposedly based on the best estimates of what money variables need to be in order to align aggregate spending with the upper supply side level that won’t trip off too much inflation. While the Fed would like to be scientific about it, the dramatic effects of globalism places the decision more in the realm of art than science and the Fed is not comfortable with art.Continue reading—>
We can chastise the Federal Reserve for being unable to get itself to move off of a zero interest rate (because doing so has harmful side effects), but the Fed has no other way to influence the economic growth machine. Only Congress and a President do, and the Fed would be doing us a service to state so publicly.Continue reading—>
In 1993, there was a great debate carried live on national TV between then-Vice President Al Gore and Dallas entrepreneur Ross Perot. The issue was the pros and cons of going global. Equally unusual in terms of today’s political alignment was the right-leaning Perot (as the Donald Trump of his time) arguing against globalism. His position was that the lower wages abroad would result in a “giant sucking sound” of jobs lost to lower-wage countries. Well two decades later, there is no doubt who got it right.Continue reading—>
For a country with little penchant to tax and a greater penchant to spend, financing its fiscal deficit is an ongoing chore. When it comes to financing its deficits, governments have tricks up their collective sleeves – not available to the private sector. What makes it easy to finance a deeply indebted country is that its debt is placed — not sold and doesn’t meet a market test. Hence yields are not a deterrent to further indebtedness.Continue reading—>
Driving the economy to fuller employment is a macroeconomic policy success. But it comes at a cost of higher employee costs and generally reduced profit and stock returns. Some firms, in this global economy, produce with foreign labor and benefit from weaker foreign currencies. Hence, there will be both purring cats and offsetting dogs in diversified portfolios. Investment returns call for targeting those firms gaining cost advantages via foreign labor.Continue reading—>
Baby Boomer entitlements are now upon us with an acceleration in the government debt overhang. In a novel approach to debt containment, the European Central Bank pays high enough prices for existing debt to create a cash bonus to issuers of debt but with adverse incentives and unfortunate side effects.
We must conclude, the rules of propriety have changed regarding debt. We were naïve to believe that when governments borrowed they intended to tax in the future and retire debt. Instead reliance is being placed on the central banks to not just neutralize debtor governments’ debt but award governments a monetary subsidy to keep on issuing debt.
The developed world economies have high government debt loads and as a result retard economic growth. The adoption of central bank quantitative ease (QE) is billed as a monetary policy but in reality is a fiscal policy of debt service reduction. QE creates microscopic bond market yield that in turn creates capital flight. This further lowers income and raises the debt ratio. So efforts to do “Whatever it takes” to save the sovereign are too late and counterproductive.Continue reading—>
It’s long been in the DNA of market observers that when money growth outpaces the economy’s growth, booms are created and so are busts. The latest is the oil boombustology with greater impact than is commonly understood. This raises the question of what is left of growth in the US economy without oil expansion.Continue reading—>