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I Have a Very Bad Feeling About This

August 21, 2023

I Have a Very Bad Feeling About This

Unexpected things tend to happen when the real source of problems are papered over and then suddenly reality intrudes.

What an interesting juncture we’ve reached. We’re constantly assured all is well with what matters–the economy–as the all-powerful Federal Reserve has managed not just the hoped-for “soft landing” but a resurgence of growth: yowza, no recession.

The list of good things is striking: unemployment is low, wages are rising, the wealth effect from explosive increases in housing prices has fattened the home equity of households and the soaring stock market has pushed the economy to giddy heights of wealth and confidence.

The spot of bother with inflation has receded and everyone anticipates interest rates will soon follow inflation back towards zero. China has entered a rough patch but it won’t affect us. And so on.

Despite all this uniformly good news, something about the situation is setting off alarms: I have a very bad feeling about this.

Perhaps the root of the feeling that danger is far closer than we discern is the universal confidence that finance can always fix any and all real-world problems. Whatever the problem, central banks can solve it by lowering interest rates and flooding the financial / banking system with liquidity, i.e. monetary easing, making it easier and cheaper for enterprises and households to borrow more money.

On the government-spending side, the central state can fix any and all problems by borrowing and spending however many trillions are needed–fiscal stimulus.

In other words, we don’t need to suffer any inconvenient sacrifices or systemic changes, we simply need to borrow more and spend more. This is certainly a tidy solution to all problems: borrow more and spend more. Everything in the real world can be fixed with monetary and fiscal easing and stimulus.

…click on the above link to read the rest…

Central Banks Are Out Of Ammo – UN Head Demands Immediate Fiscal Stimulus To Save World From Crisis

October 20, 2019

Central Banks Are Out Of Ammo – UN Head Demands Immediate Fiscal Stimulus To Save World From Crisis

More and more global leaders sound the alarm that the world economy is headed for a difficult period in 2020. 

Unlike several years ago, leaders across the world are now calling for immediate deployment of fiscal stimulus, but not monetary stimulus, a sign that central banks are out of ammunition to combat the next economic crisis. 

UN Secretary-General António Guterres warned that the global economic outlook is facing severe headwinds, and the international community must quickly act to “do everything possible” to prevent the world from “fracturing,” mostly due to the US and China trade war.

Guterres spoke on Saturday at the World Bank Group and IMF Annual Meetings in Washington, DC. 

He said that “during tense and testing times,” he “fears the possibility of a Great Fracture – with the two largest economies splitting the globe in two – each with its own dominant currency, trade and financial rules, its own internet and artificial intelligence capacities and its own zero-sum geopolitical and military strategies.” 

He told international bankers that “it is not too late to avoid” this fracturing of the world, but “we must do everything possible to avert this…and maintain a universal economy with universal respect for international law; a multipolar world with strong multilateral institutions, such as the World Bank and IMF.” 

 …click on the above link to read the rest of the article…

Fiscal Stimulus and Economic Growth–Are They Related?

September 3, 2018

FISCAL STIMULUS AND ECONOMIC GROWTH – ARE THEY RELATED?

For most experts a key factor that policy makers should be watching is the gap between the actual real output and the potential real output. The potential output is the maximum output that the economy could attain if all the resources are used efficiently.

The gap is labelled as the output gap. In June this year the output gap – expressed in percentage terms – stood at 3.8% against 3.25% in March and 2.75% in June last year.

A strong positive output gap can be of concern because according to experts it can set in motion inflationary pressures. To prevent the possible escalation of inflation, experts tend to recommend tighter monetary and fiscal policies.

Their preferential outcome would be to soften the aggregate demand, which is considered as the key driving factor behind the positive output gap.

However, of greater concern to most experts is a negative output gap, which is associated with a severe recession.

The output gap was in the negative area between November 2008 and June 2013. Note that in June 2009 it had plunged to minus 3.34% (see chart).

Most commentators are of the view that with the emergence of a negative output gap the most effective policy to erase this gap is aggressive fiscal stimulus i.e. the lowering of taxes and increasing government outlays – a policy of large government deficit.

This way of thinking follows the ideas of John Maynard Keynes.

Briefly, Keynes held that one could not have complete trust in a market economy, which is inherently unstable. If left free the market economy could lead to self-destruction.

Hence, there is the need for governments and central banks to manage the economy.

Successful management in the Keynesian framework can be achieved by influencing the overall spending in an economy.

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Low Interest Rates Subsidize Wealthy Households

October 30, 2017

LOW INTEREST RATES SUBSIDIZE WEALTHY HOUSEHOLDS 

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.

Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”

While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.

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Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.

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Doomed to Failure

October 8, 2016

Doomed to Failure 

Larded Up and Larded Over

We’ve been waiting for the U.S. economy to reach escape velocity for the last six years.  What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out.  Unfortunately, this may not be possible the way things are going.

fischersAs Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went downhill quickly” (his other grandfather drowned in a bowl of cheerios). A similar fate may await the larded up US economy.

In short, the U.S. economy may never reach “escape velocity” unless it is first allowed to crash.  It has been too larded up and larded over with debt for any real sustainable growth to take root.  More evidence, to this effect, was revealed this week.

For example, the International Monetary Fund (IMF) anticipates the U.S. economy will expand by just 1.6 percent this year.  That’s about one percent less than last year’s estimated growth.  In other words, the rate of economic growth in the United States isn’t increasing; rather, it’s decreasing.

According to the IMF, “the slower-than-expected activity comes out of the ongoing oil industry slump, depressed business investment and a persistent surplus in business inventories.”  Could this be the twilight of the weakest economic recovery in the post-World War II era?  Only time will tell, for sure.

But anyone with an ear to the ground and a nose to the grindstone knows the answer to that question.  Business ain’t booming.  Moreover, it has become near impossible for corporations to grow their earnings.

…click on the above link to read the rest of the article…

China’s Rolling Boom-Bust Cycle

May 18, 2016

China’s Rolling Boom-Bust Cycle 

Sweet Authoritative Nothings

There is a mysterious figure making regular appearances in China’s government mouthpiece “People’s Daily”, which simply goes by the name “authoritative person” (AP). This unnamed entity always tends to show up with bad news for assorted speculators, by suggesting that various scenarios associated with monetary and/ or fiscal stimulus are actually not in China’s immediate future (the details of AP’s latest pronouncements can be found here and here).

people's dailyThe People’s Daily. “Authoritative Person” may be hiding somewhere in the picture to the left.

Some observers seem to believe that this represents a “renewed shift in policy” – Bloomberg e.g. quotes an economist with Mizuho Securities as follows:

“It is very significant and may signal a shift in China’s policies,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Each time they publish this, it is normally a warning.” 

Others are more careful – after all, this seems to be a case of “we’re saying one thing and doing another”, given a credit expansion of 4.6 trillion yuan in just the first quarter, which has sent narrow money supply growth soaring to more than 22% annualized.

The more measured argument is that it could be a sign that the debate about future economic policy is ongoing, resp. has been revived. No-one really knows – it is basically the Chinese version of Kremlinology.

1-China - M1,M2 growthAt the end of March, China’s narrow money supply measure M1 was growing at more than 22% y/y – click to enlarge.

Although the extension of new yuan loans has slowed significantly in April from January’s heady pace (555 bn. vs. 2.5 trn.), there has still been enough pumping in the system to push M1 up again in March-April from a brief dip in February – in other words, if there is indeed a change in policy, it is not really visible yet.

…click on the above link to read the rest of the article…

Deficit Spending is Not the Answer

March 28, 2016

Deficit Spending is Not the Answer 

The Growing Chorus for Fiscal Stimulus

Central bankers and monetary adherents the world over are united in the common grouse that fiscal policy is lacking.  Grander programs of direct stimulation are needed, they grumble.  Monetary policy alone won’t cut the mustard, they gripe.

1-global debtGlobal debt-to-GDP ratios (excl. financial debt). Obviously, it is not enough. More debt is needed, so we may “stimulate” ourselves back to prosperity.

Hardly a week goes by where the monetary side of the house isn’t heaving grievances at the fiscal side of the house.  The government spenders aren’t doing their part to boost the GDP, proclaim the money printers.  Greater outlays and ‘structural reforms’ are needed to spur aggregate demand, they moan.

For example, last month, just prior to the G20 gala, the Organization for Economic Cooperation and Development (OECD) asserted that “Getting back to healthy and inclusive growth calls for urgent policy response, drawing on monetary, fiscal, and structural policies working together.”

The OECD report also stated that “The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation.”

4295203312_1ec36291bc_bThe Chateau de la Muette in Paris – this magnificent building that once housed members of France’s nobility nowadays ironically serves as the headquarters of the socialistic central planning bureaucracy known as the OECD. This parasitic carbuncle is high up on the list of globalist institutions that must be considered an extreme threat to economic freedom and progress.     Photo via oecd.org

Several weeks later, on March 10, European Central Bank President Mario Draghi offered a similar refrain.  At the ECB press conference Draghi remarked that “all [Eurozone] countries should strive for a more growth-friendly composition of fiscal policies.”

Then, wouldn’t you know it, former Fed Chairman Ben Bernanke also added his alto vocals to the chorus.  Last week, in his Brookings Institution blog, he wrote:

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