The Dow was flat yesterday… Gold went nowhere, too. The yellow metal trades at $1,235 an ounce at writing.
Let’s see what Larry Summers has to say. We always appreciate Summers. His mind is razor-sharp – always cutting straight to the wrong conclusion.
“Why stagnation might prove to be the new normal,” is the headline of his piece in Monday’s Financial Times.
Summers has done it again. Whatever may be said about today’s cockeyed economies, there is nothing “normal” about them.
What’s normal about a government that runs up as much debt as it had in World War II – with no war… no national emergency… and no way to pay the money back?
What’s normal about an economy that depends on the lowest interest rates in three generations… and a central bank that holds them down like a crooked butcher with his finger on the meat scale?
And what’s normal about an advanced capitalist country where the typical man earns less than he did 43 years ago?
Alright… let’s give Summers a chance…
It might be the “new normal” because the Fed’s tools – EZ money wrenches and interest rate hammers – no longer fix an economy, he says.
At best, they “drive only moderate growth.” And even an interest rate of zero isn’t adequate “to spur enough investment to lead to full employment.”
You’re caught, in other words, in the trap you laid yourself!
When they get in that situation, consumers and investors see prices falling and they decide to sit tight.
Why buy now when you can get more for less later?
‘Look at Japan’
“Look at Japan,” suggests Summers.
After its bubble burst in 1990, growth over the next five years was stronger than in the US following the busted bubble of 2008. Then, instead of returning to a booming economy, Japan remained in an on-again, off-again deflationary slump.
Yes – several times it appeared that the Japanese economy had reached “escape velocity.” And each time it quickly fell back to Earth.
Why couldn’t the Japanese feds – who did just about everything the US feds have done – get their economy to pick up some speed? Nobody really knows.
Summers suggests it may be a combination of things… which now affects the US economy as well as Japan.
First, the labor force is growing more slowly than before.
Second, productivity growth is harder to come by.
Third, consumption may be declining “due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital.”
Unlike the poor, rich people do not upgrade their living standards when they earn more money. They are already enjoying the lifestyles they want; more money is merely saved or invested in other projects.
Uncharacteristically, Summers offers no solution to this morass. He merely tells us that “secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned.”
How do we protect ourselves?
“Pre-empting structural stagnation is so profoundly important,” he argues, because the standard treatment for it – EZ money – drives “investors to take greater risks, making bubbles more likely.”
How to Stop the Stagnation
Summers offers more insights into why the US may face a Japanese-style slump, but misses the only one that really explains it.
The Japanese bubble burst. The Japanese feds came to the rescue with the typical tricks and treatments of modern macroeconomic meddling.
Result: a long stagnation.
Go forward 18 years. The US bubble burst. The US feds came to the rescue… again, with the typical tricks and treatments of modern macroeconomic management.
In Japan as in the US, the authorities, bailed, bullied and boondoggled their way to a makeshift “stability.” In each country, they avoided a quick, painful correction.
Banks and other companies that should have gone broke were saved. Investments that should have gone belly-up were spared. The rich – at least in the US – who should have seen their wealth substantially reduced, got even richer.
And both countries got a long period of stagnation. It has gone on for 23 years in Japan. In the US, we will soon enter our seventh year of slumpy, crisis-prone ‘recovery.’
Want to stop the stagnation?
Easy-peasy. Just stop meddling.
The Truth about Stocks and Economic Growth
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Whether or not the Fed tapers now, or next quarter, will have little real impact on the market – other than the possible psychological damage of investors believing the Fed is taking away the proverbial “punchbowl.”
But here’s the thing: Even if the Fed tapers, it’s still keeping its foot firmly on the monetary stimulus pedal.
That’s because the federal budget deficit is shrinking… and Treasury issuance is shrinking with it. That means all a taper will achieve is to stop the Fed buying an even greater share of government debt.
The budget deficit measures how much government spending exceeds tax revenues. The larger the deficit, the more the government has to borrow to balance its books.
As you can see from the chart below, four years ago, the budget deficit was running 10% of GDP. Last year, it fell to 7% of GDP. And according to the Congressional Budget Office’s projection, it will reach 4% of GDP next year.
With the government issuing less Treasurys to balance its books, a modest tapering by the Fed will merely keep its monetary stimulus about level.
Don’t forget that the Bank of Japan is easing, too. The Fed is buying $45 billion of Treasurys every month (and another $40 billion of government-backed mortgage bonds). But since July, the BoJ has started buying an additional $25 billion of Treasurys a month.
As former Merrill Lynch economist David Rosenberg put it yesterday, the Fed “taking the Maserati from 160 mph to 140 mph is hardly a game changer.”
The bottom line: Global QE is here to stay – no matter what the Fed announces today.