Unintended Consequences – Of economic policy – Part One
The butterfly has wings
The role of an economist – Art of predicting the cause and effect – in an economy.
I am standing at the edge of the abyss!
I don’t like the feeling one little bit!
We missed the global defining moment on the financial collapse – through the postponement of the interest rate increases – by not only the U.S. through Yellen – but also the UK with Carney and the Bank of England dribbling on the subject – both postponing increases – as both countries indulged with spending more.
So – who would have thought?
If one looks at the external influences on Yellen over the past 12 months – one sees a myriad of comments – all designed to forestall the misadventures of all countries in their quagmire of debts.
The ‘wicked witch’ let her feelings be known in June, July, August, September, October, November, December 2015 and January 2016.
From the Guardian June 2015 On Tuesday, the IMF said “growth could be significantly debilitated” by another rise in the dollar. Barring a major change in circumstances, the organisation urged keeping rates at the current 0.25% “into the first half of 2016 with a gradual rise in the federal funds rate thereafter”.
Well – June was the perfect opportunity to increase the interest rates and I assume that China and Saudi Arabia – during their visit to the U.S. in September – were as vocal in their private meetings with the Fed.
Then we have World Banks intervention in September 2015
From the FT. The US Federal Reserve risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.
And we still have authorities in the global economy dictating U.S. policy visa vee the geni-arse on monetary authority trying to set policy.
Larry Summers on CBNC “I’ve thought consistently that it was not a confident bet that the economy could withstand four rate increases this year, and continue to growth robustly and continue to provide support for a very weak global economy,” Summers said. “Certainly the way markets have moved this year has done nothing but support the view.”
So everyone (in the know) are fully aware of what ‘will’ happen should the increase in interest rates continue to be implemented in the U.S. and to a lesser extent in the U.K.
Yet has any country actually addressed their problems?
We all know the answer – and we know the reason for the delay that has forestalled emerging countries grief for the short term – and a sovereign debt collapse through rising interest rates – however the pressure behind the financial tsunami is exerting far greater force now – in concert with additional global problems surfacing rapidly since September.
Bloomberg has reported that – “Federal Reserve officials left interest rates unchanged and said they still expect to raise borrowing costs at a “gradual” pace while watching to see how the global economy and markets impact the U.S. outlook.”
Now can no one see the problems that have developed – through the Fed Reserves procrastinations?
“The Federal Open Market Committee is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” the central bank said in a statement Wednesday following a two-day meeting in Washington.
We are turning Japanese – globally.
Debt has its boundaries – if the world leaders are content with continuing with the low interest rate policies – then the history of Japan’s economic malaise – for the last 25 years – will be future.
Japan has been stagnant since 1989 – deflation has gripped the economy through the inane debt policies associated with crony capitalism – insider dealing – and an elite – that serves itself and its friends first and foremost – these actions were assumed by the U.S. Federal Reserve with Bernanke’s actions – in 2007 – and then perpetuated by the global central bankers thereafter.
Consumers were the ultimate beneficiary of low interest rates – to gorge themselves on debt – the problem is deflation and stagnant wages – a saturation point on debts – which must be repaid which only compounds the problem further.
Foreign investors have lost faith in Abenomics and the bastardized Keynesian policy implemented and favored by Krugman – Abe has no strategy – other than to roll out more stimulus plans and hand more money to Japanese banks and corporations – and have the Bank of Japan buy all of the debt supporting these plans – while buying stocks in Japan and the bonds in the U.S. for good measure.
Foreign investors are fleeing.
Now the butterfly does have wings – the global capital investment – needs to earn income – all countries globally have a huge problem of – deflation – ‘negative inflation’ – this happens when prices fall because the supply of goods is higher than the demand for those goods.
The cause is usually attributed to the reduction of money – credit or consumer spending.
In this instance the fall into negative inflation by countries can be attributed to debt.
So where will capital flee to avoid negative interest rates – currency debasement – and a deflationary environment?
No guessing – USD – U.S. assets.
And the impact on the United States Dollar?
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises
We missed the global financial reset – the consequences now are a prolonged period of deflation – until the USD collapses under its own value – due to capital flight to safety.
Now – who would have thought this?
The problem is with unintended consequences though – it can have multi-dimensions.
Part Two on further unintended consequences coming soon.
Edit: 29th January 2015
Japan’s final battle within the currency wars.
The BoJ has only one bullet left in the arsenal – it appears they are using this with negative interest rates.
The Financial Times of London summarized the story below(excerpt):
We’re still waiting for official word from the Bank of Japan, but ahead of its impending policy decision, the yen has lurched lower. As of 11.27am Hong Kong time, the central bank is yet to release its policy statement, but there’s chatter on the wires and on Twitter that the BoJ has discussed/is discussing negative interest rates policy. That’s according to reports in the Nikkei.
The impact on the Yen:USD is self explanatory – and where Japan goes – the world will follows.
Even I am amazed by my timing on this article.
Turning Japanese – The butterfly has wings.