Monday, 21 September 2015

So How Close To Collapse Is The US Economy?

In 1930, after the 1929 Wall Street Crash, and well into the the Depression that hit the United States, the Federal Reserve's Discount Rate stood at 2.5%. In fact, the Depression had begun, in Europe, a decade earlier, in the 1920's. Alongside it, went global political turmoil. The aftermath of the Russian Revolution, and the revolutions in other parts of Europe, was still being felt; the German Revolution, of 1923, occurred; the Chinese Revolution took place; in Britain, the 1926 General Strike happened. By the late 1920's, the Nazis had become a powerful force, taking power, in the early 1930's, in Germany, fascists having taken power, in the 1920's, in Italy. In the 1930's, the fascists also took power in Spain, as Hitler undertook a dry run, for the start of World War II. Between 1940 and 1947, the Federal Reserve's Discount Rate stood at 1%.

At its last meeting, the US Federal Reserve, kept its Discount Rate at zero. This is now six years after the global financial panic of 2008. The reason the Fed gave was that, although the US economy is growing currently at around 2.5% - 3%, despite the fact that the unemployment rate has continually fallen, and is now way below the level at which it said that a rise in interest rates would be warranted, and jobs are increasing at twice the rate required for stable employment; despite the fact that labour shortages are being reported in various areas and so on, they do not feel that the US economy could yet withstand even a quarter point interest rate! They claim that a further factor is the extent of global uncertainty.

Yet, its hard to see how the current state of the US economy is worse that it was in 1930, as it was in the midst of the Depression, when its official interest rate stood at 2.5%; its also hard to see how global uncertainty today is greater than it was in the 1930's, as wars and revolutions were racking major countries, or the period of the 1940's, when the globe was ablaze with World War II, when interest rates were at 1%.

The other argument made by the Federal Reserve for keeping official interest rates at zero is that US CPI is below its 2% target level. That is true, but the core CPI is much higher than the headline figure, and has been rising. Moreover, the CPI figure, as in the UK, does not take into account all prices. It does not take into account the price of houses, or pensions, for example. As I've indicated recently, the prices of financial assets and property has been in a massive bubble, in the US as in the UK, and this increases the cost of houses to workers, and the cost of providing pensions. Moreover, with monetary policy having around a 2 year lag, before its affects actual market prices, it is unwise to wait until the nominal inflation figure reaches the target before taking action, because by that time its too late, and as was seen in 1963, a price-wage spiral can quickly accelerate to high levels, once it begins. Given that the US Federal Reserve has an unprecedented $4 trillion of assets on its own balance sheet, the equivalent of the money it has put into circulation, the potential for this turning into hyper inflation, once such a price-wage spiral begins is fairly obvious.

But, also the US, at the moment does not have deflation. It has low, but rising levels of inflation. In the 1930's, by contrast, it actually did have deflation. In 1930, prices fell 3.96%; in 1931, 10%; in 1932 11.38%; and in 1933 2.96%. That gave real rates of interest in those years of 7.87%, 14.04%, 15.92% and 4.54%. So, its hard to see on the basis of the information that the Federal Reserve and the US Government provides how the situation today justifies interest rates of zero, compared with the interest rates levied in the 1930's, or 1940's. Still less is it clear why such emergency levels of interest, and monetary stimulus are required seven years after the financial panic of 2008.

If I were asking a question at the Federal Reserve's press conference, after its last meeting, and wanted to be mischievous, therefore, I would have asked, “Just how close is the US economy to collapse, then?” Because, the Fed's policy would suggest that there is something very nasty, lurking in the woodpile of the data that it is not telling us about. How else could such policies be justified for this long, compared with the conditions of war, revolution, depression and deflation that existed in the 1930's and 1940's?

That may have been one reason that after the Fed's decision, the US stock market sold off, followed by a 300 point drop on the Dow Jones Index, the following day. If, the US economy cannot withstand even an official interest rate of 0.25%, which would mean a real rate of – 1.25%, then it must, indeed be close to collapse, if only the truth were told. In that case, why wouldn't speculators try to get their money out now. That could also be one reason that in the UK, the Bank of England says that around £3 billion is being hoarded by households, or around £350 per person. It is one reason that around £1,000 in banknotes, per person has now to be put into circulation in the UK, despite the fact that, the UK's modern banking system, essentially makes the use of notes and coins redundant.

Nearly everyone in the UK is paid directly into their bank account, and most payments are now paid by electronic bank transfer, or by credit and debit cards. People are hoarding actual notes and coins, because the near zero rate of interest on savings means there is no reason to keep money in the bank, and savers have seen what happened in Cyprus and Greece, where, despite the supposed Deposit Guarantee Scheme, people's savings were simply expropriated by the government, or limits on withdrawals were put in place. Everyone knows that the European banks are bankrupt, and that another financial crash is inevitable, and possibly imminent, so why wouldn't they want to hang on to cash, despite the risks of theft, when they face the open theft of their money, by the banks and the government themselves?

As even the Bank of England admits, such hoarding was once the preserve of criminals, and those anxious to avoid the tax man, but now, it has become common for anyone with a bit of cash who has lost faith in governments and the banking system. That impression can only be strengthened, when we see exercises such as the Bank Stress Tests that are a clear publicity exercise, which is normally followed by the failure of several of those banks that were cleared by the tests. It can only be strengthened when seven years after the financial crisis central banks claim that interest rates have to be kept at zero. Things must be much, much worse than they are letting on, indeed much, much worse than during the 1930's Depression or during WWII!!!

But, in fact, they are not. The real reason for the US Federal Reserve keeping interest rates at zero, for keeping $4 Trillion of paper on its balance sheet, for the Bank of England, keeping its official interest rates near zero, and £375 billion of paper on its balance sheet, and the central banks in Japan and the Eurozone doing something similar is not because the real global economy is that bad, and global uncertainty is nothing like it was in the 1920's – 1940's. In fact, all of the money printing, and near zero interest rates, if anything, have actually damaged the real economy, for the reasons described in previous posts, that they have drained liquidity out of the real economy, away from productive investment, in order to fuel speculation, and the maintenance of massive asset price bubbles, in shares, bonds, property and any other speculative asset that people could put their money into, not for the purpose of obtaining yield, but only in the hope of obtaining quick, large capital gains.

A glaring example of that is London. It has seen a massive amount of speculation in property, often from those same Chinese and Asian investors who have been losing their shirts in search of quick and illusory capital gains on the Chinese stock market, having also lost their shirts on collapsing property markets in those countries. Most of these high value properties that have been constructed in London remain unoccupied. Average occupancy in them is around 20%! But, the speculators that have bought into them, did not do so to obtain rents. They assumed that the prices of these properties would continue to rise by 20% or more a year, so why be bothered about making a measly 5% in rent?

There are currently, 54,000 properties, of around £1 million each, either being built or planned, in these expensive parts of London, according to the FT. Yet, how many properties of that type were sold in London last year? Just 3,900. This is just like the situation that has been seen with oil, and other commodities. Prices go through the roof, there is then a splurge of investment and then a collapse of prices, followed by crises and panic.

According to Rightmove, the average number of properties in the expensive SW8 area of London coming on to the market, is around 350 per month. This month, the figure is around 2,000! A graph of the change, this year, over previous years, shows the same kind of parabolic rise that is always seen with any kind of bubble ahead of it bursting.

Central banks are not keeping official interest rates at zero, and maintaining huge amounts of monetary accommodation for the benefit of the real economy. If they were interested in the real economy, and preventing deflation they would be wholeheartedly behind Jeremy Corbyn's proposals for “People's Q.E”, which would use such liquidity for effective investment in all of those things that the real economy needs, to make it more productive and efficient. Instead, the same people who defend QE, and monetary intervention on the basis of the need to fight deflation, attack “People's QE”, on the basis that it would cause inflation!!!!!

No, the real reason for “Bankers QE”, of the kind that has been undertaken for the last 30 years, is not to protect the real economy, but to protect the illusory wealth of the owners of fictitious capital, to keep the prices of shares, bonds and property propped up, at the expense of the real economy, and of the majority of the population.

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