Just completed reading an article on Bloomberg titled, “Fed Officials Challenge Decades of Accepted Wisdom on Inflation.” When people say they enjoyed a book so much they couldn’t put it down, I was getting so annoyed by this article I couldn’t wait for it to finish. That Fed Officials apparently think they know what they are doing when it is so obvious they are clueless. So perhaps my title might be more apt. This group-think led reckless rate setting by central banks is now supposedly being sold to the rest of we stupid folk as a victory in so far as “run away inflation risk is slight.” Inflation is so far away from target setting even if central banks halved their aspirations they’d still be a country mile away.
Lesson #1- Businesses invest in cycles not because interest rates are low
OK so while central banks have been dousing the lawn in hi-octane fuel, the clogged filter of business confidence is the missing link. Businesses and people invest because “THEY CAN SEE A CYCLE” not because “INTEREST RATES ARE LOW.” So until these supposed 180 IQ people realise that the confidence filter is clogged no amount of fuel mix and turbo charging will influence outcomes much. Why can’t they realise this?
Lesson #2 – Poverty is growing and growing
While interest rates have been at ZIRP, NIRP or near as makes no difference those that have had financial assets have benefitted while those without have fared worse, widening the gap between rich and poor. This is why we’re seeing so much disruption amongst voters – Brexit and the rise of characters like Trump confirm it. Poverty is on the rise.
Lesson #3 – Real wages aren’t growing
Look at the hard data central banks – it is pretty telling! Growth is slowing down in US, EU, China, Australia etc etc, over capacity clogs the system and real wages aren’t going up! If consumers aren’t feeling warm and fuzzy with their pocket books they will not feel like going out and shopping til they drop.
Lesson #4 – Corporate credit is worsening
In the last decade, rating agencies have seen a marked shift from corporates with top rated credit toward non-investment grade credit. All the while $15 trillion in sovereign debt has negative yields. Most pensioners aren’t buying for capital growth but the income stream. Now they are forced to buy riskier assets with paltry (but better than nothing) yields which could see them wiped out.
Lesson #5 – time to admit you need to have central banks cooperate with governments
Milton Friedman said he didn’t believe in central bank independence. Too many governments are ceding decisions to the central banks. Turning a blind eye to the clear and present danger of over indebtedness on all levels – private, corporate and government- can’t continue. Over reliance on central banks patrolling the swell is madness. Governments are clueless. Most think raising taxes is the only way to cut debt. Burying tapped out consumers in higher taxes is absolutely guaranteed to knock the much needed confidence to get us out of this mess. Control must be put back into the hands of the consumer. It won’t happen because there is too much group think and populist governments won’t inflict pain on the people to save their own hides. Such short termism will have an even more negative impact on the global economy than the rates that are set.
Whether we like it or not we have no choice but to rely on governments to set policy and central banks to set rates. It might require a radical shift and changes at the top but if they don’t do it proactively let me assure you the markets will force the change on them.