Oct 20 18 SIT
EC y POL
ND denounce Global-neoliberal debacle y propone State-Social
+ Capit-compet in Econ
ZERO HEDGE ECONOMICS
Neoliberal globalization is over. Financiers know it, they
documented with graphics
Readings above 70 have found us in
recession 92.11% of the time (1970 to present)...
See Chart:
Conclusion
China, Europe and
Emerging Markets economic growth
is already rolling over, and if US continues to raise rates into
the year end, we might even see US growth taking a hit by first quarter of next
year.
That is when the chances are that the global economy enters into
recession.
….
SOURCE:
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WHY YOU
SHOULD EXPECT THE UNEXPECTED
End of
the Road
The confluence of factors that influence market prices are
vast and variable. One
moment patterns and relationships are so pronounced you can set a cornerstone
by them. The next moment they vanish like smoke in the wind. One
thing that makes trading stocks so confounding is that the buy and sell points
appear so obvious in hindsight. When examining a
stock’s price chart over a multi-year duration the wave movements appear to be
almost predictable.
See Chart:
One
fallacy that has gained popularity over the last decade is the zealot belief
that the Fed disappears risk from markets. … But what if the Fed’s adventures
in fabricating a market without risk are approaching the end of the road?
Let’s explore…
White On Rice
The
mechanics of the Greenspan put are extraordinarily simple. When the stock
market drops by about 20 percent, the Fed intervenes by lowering the federal
funds rate. This typically results in a real negative yield, and an
abundance of cheap credit.
Of course,
Wall Street money managers took to the symbiotic forgiveness of the Greenspan
put like white on rice. With
this new brand of central planning firmly in place, market uncertainty was
largely mitigated. The workings of the Greenspan put made markets behave
in more or less predictable ways.
A portfolio manager
could smile in the face of the occasional and inevitable stock market crash
because it meant their bond holdings were rising. Then, after a pleasant
dip buying opportunity, their stocks would be running back up to new
highs. This was the story of U.S. financial
markets and money management from 1987 to 2016.
See Chart:
Why You
Should Expect the Unexpected
Over the decades, risk management strategies were invented
that advocated the virtues of a 60/40 stock-to-bond allocation portfolio.
And why not? The Greenspan put brought a comforting certainty to the
market. When stocks go down, bonds go up. Somewhere along the lines
the flow of funds from stocks to bonds during a market panic became regarded as
a flight to safety. But what if, in the year 2018, this flight is no
longer to safety; but, to danger?
What may come as a great big surprise in the next market
downturn is that this relationship between stocks and bonds is not set in
stone. In fact, over the next decade we suspect this relationship will be
revealed to have been an aberration. An artifact
of a now defunct disinflationary world.
We haven’t done a thorough analysis. But we have an
inkling that prior to the Greenspan put, the ‘stocks down bonds up’
relationship of the last 30 years was far less certain. What we mean is that during the prior decade, the 1970s,
there were occurrences where both stocks and bonds went down in unison.
Such occurrences could happen again.
See Chart:
You
see, the conditions that made the Greenspan put possible are the opposite of
the conditions that exist today. Rates
are low and are moving higher. The world is oversaturated with
debt. Policies of mass money debasement have bubbled stocks and
treasuries out to extremes well beyond what was honestly fathomable.
Yes, the doom and gloom of an epic stock and bond market meltdown are
approaching. At the moment, Fed Chair Powell’s even determined to bring
it on. We applaud his efforts.
Yet when push comes to shove, and the Fed lowers the federal
funds rate, expect the unexpected to happen. The Greenspan put – the
market savior – will be mowed over like a ground squirrel beneath a tractor
rotary tiller. The
market carnage left in its wake will be grotesque and unrecognizable.
….
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"It has only been buried,
because manufacturing has become a minor part of the modern economy. The saver is euthanised, and private
sector wealth has become overly-dependent on financial speculation... It will not end well."
This
paper is a follow-up on my white paper of October 2015. In that paper I
explained why, based on over two-hundred years of statistics, long-term
interest rates correlated with the general price level, and not with the rate
of inflation. I now take the analysis further, explaining why the paradox
appears to no longer apply.
The two
charts which illustrate the pre-seventies position are Chart 1 and Chart 2
reproduced below.
See Charts:
The
evidence from the charts is clear. Gibson’s paradox showed that the general price
level correlated with long-term interest rates, which equate to the borrowing
costs faced by entrepreneurial businessmen. It did not correlate with the rate
of change in the general price level, otherwise known today as the rate of
price inflation. It contradicts the monetary theories prevalent
over the period from David Ricardo onwards. In other words, there is no
empirical evidence that using interest rates as the means of regulating demand
for debt, and therefore economic activity, actually works. And that should
worry us.
So, money is
demanded by the manufacturer. Mises’s view of the setting of
interest rates, which Keynes in his General Theory professed
to not understand, overturns longstanding religious and socialist prejudices
about the role of the saver. According to von Mises, the saver provides a
service to businessmen by making capital available for production, for which
the businessman readily pays. Going back a page in von Mises’s Theory
of Money and Credit, we find that he also held that:
Capital goods or production goods derive their value from the value of
their prospective products, but as a rule remain somewhat below it. The margin
by which the value of capital goods falls short of that of their expected
products constitutes interest; its origin lies in the natural difference
between present goods and future goods.
This being the case,
clearly the rate of interest is set by what the
borrower will pay to secure profitable production of future goods, not what a
usurious rentier, as Keynes and others had it, will demand.
Clearly, the
businessman sets interest rates by bidding them up to the point where savings
match his plan, so long as borrowing to fund his production promises to yield
an acceptable profit. This tells us something we should have known all along: consumers would rather spend than save and, all else being
equal, have to be tempted to save.
Therefore,
we can say that before 1975 changes in interest rates did not lead to changes
in the overall quantity of money, demolishing a keystone of monetarist
assumptions concerning the use of interest rates to manage demand. The supposed link between a central bank’s
management of interest rates and control of economic demand does not actually
exist, except when raised to destructive levels.
After
1975
Charts 1 and 2 took us from 1730 to 1975, compared with1730
- 1930 in my original paper on Gibson’s paradox. After that date, the charts
show something different. These are Charts 3 and 4 below.
See Charts:
It is as
if the North and South poles have flipped. Since 1975, the bond yield no longer
correlates with the composite price index, while there has developed a closer
correlation with the rate of inflation.
The
errors in monetary policy are still there
We know that before the seventies, Gibson’s paradox applied. We also know that post-seventies, it has no longer
been apparent, and the reasons why are described in the preceding section. But
this leaves a question: does the evolution of economic
factors, so that there is now a correlation between interest rates and the
general price level, mean that interest rate management by central banks is a
justifiable policy?
Central
banks assume there is enough of a causal link between interest rates and demand
for credit to control aggregate demand in the economy. The facts suggest otherwise, illustrated by Chart 5.
Spikes in interest rates have had
little or no effect on the relentless growth of private sector debt in the US
economy since 1980. The only slight wobble in the rate of debt growth
was on the Lehman crisis. But it was that, and no more. But things have changed
over the last forty years, with debt also being taken up by governments (not
included in Chart 5), the finance sector and consumers in increasing amounts.
This means that a downturn in one category, even in a credit crisis, merely
leads to an upturn in another, particularly so because a downturn in the
private sector leads to an increase in government borrowing.
Conclusions
Now that we have an understanding of the how and the why
Gibson’s paradox no longer applies, we can assess its importance in a new
light. A central point in understanding what the paradox tells us is that monetary policy will never achieve its objective, if that
objective is to somehow manage aggregate demand by varying interest rates.
The
function of interest rates is misunderstood. They
cannot be used to regulate overall demand for money, they only regulate its
use. In this way, monetary policy distorts the economy. Suppressed interest
rates encourage businesses to invest in projects that cannot be sustained when
interest rates are normalised. Raising rates
shifts the businessman’s calculations, forcing him to
abandon projects that appeared profitable at lower rates. In theory,
raising and lowering interest rates only leads to shifts in productive
processes, whose profitability is measured against known factors, including the
general level of prices and current borrowing costs.
But by setting a credit cycle in motion, central banks end
up having to raise rates to economically destructive levels when price
inflation accelerates. This is why credit cycles have always ended in crisis.
It is as if by using interest rates as a tool of economic management central
banks only have an on-off switch, not a rheostat that can vary the current
applied.
Since 1975, manufacturing has become a diminishing component
of credit-driven economies. Debt is now taken up by governments, consumers, and
a financial sector that feeds on monetary expansion.
Gibson’s
paradox is now explained and is no longer a paradox. The relationship between bond yields and the
general price level in the context of manufacturing still exists. It has only been buried, because
manufacturing has become a minor part of the modern economy. The saver is
euthanised, and private sector wealth has become overly-dependent
on financial speculation.
It will not end well.
….
….
SOURCE: https://www.zerohedge.com/news/2018-10-20/it-will-not-end-well-how-gibsons-paradox-has-been-buried
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"The
Fed needs to generate a significant tightening in financial conditions to slow
the economy to its potential growth pace sooner rather than later, and that
this will require delivering significantly more hikes than priced in the
curve."
See chart:
SEE more charts at
….
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US
DOMESTIC POLITICS
Seudo democ duopolico in US is obsolete; it’s full of frauds
& corruption. Urge cambio
"We’re
not going to let them violate a nuclear agreement,” Trump said Saturday after a
campaign rally in Elko, Nevada. “We’re going to terminate the agreement."
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El Nino is a massive ocean-atmosphere climate event...
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US-WW ISSUES (Geo Econ, Geo Pol
& global Wars)
Global depression is on…China, RU, Iran search for State
socialis+K-, D rest in limbo
"Until the current 'bubble
economy' is deflated and savings and investment become the
foundation of American economic life, trade
deficits will continueand the
ensuing trade wars may then escalate into actual shooting ones..."
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SPUTNIK and RT SHOWS
GEO-POL n GEO-ECO
..Focus on neoliberal expansion via wars & danger of WW3
'Major Blow' to Global Stability System:
Russian Lawmakers React to Trump's INF Pullout Decision INF: INTERMEDIATE
NUCLEAR FORCES alleging RU violations of the agreement?
It is obvious that the U S has no evidence proving Russia’s violation
of treaty’s provisions. For RU this in a simple evidence that Trump is
looking for WW3.
…
RELATED 1: “US announced withdrawal of Intermediate-Range Nuclear Forces Treaty
since 1987. If the United States
withdraws that will be the second major blow to the whole global system
of strategic stability. The first blow was the US [decision on] exit
from the ABM Treaty
in 2001. Once again the United States is an initiator of the treaty's
denouncement,"
…
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He wants to make Dems accomplices of crimes against
humanity. Will they step on this T
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RT SHOWS
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NOTICIAS IN SPANISH
Lat Am search f alternatives to neo-fascist regimes &
terrorist imperial chaos
REBELION
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RT EN
ESPAÑOL
En peligro la Segur Mund: US puede atacar donde quiera e inic WW3
Keiser Report "Nos dirigimos a un invierno
nuclear de bonos"
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GLOBAL RESEARCH
Geopolitics & Econ-Pol crisis that leads to more
business-wars from US-NATO allies
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PRESS TV
Resume of Global News described by Iranian observers..
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Sanders
starts midterm elections campaign Indep senator get Dem support
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