Sizing Up the Global Economy
Size matter in the financial markets.
Super-size August movements in global stocks are but one sign that something may be amiss in the global economy itself – China notwithstanding. There’s the timing and the eventual “size” of the Fed’s “tightening” cycle that I have long advocated but which now seems to be destined to be labeled “too little, too late.” The “too late” refers to the fact that they may have missed their window of opportunity in early 2015, and the “too little” speaks to my concept of a new neutral policy rate which should be closer to 2% nominal, but now cannot be approached without spooking markets further and creating self-inflicted “financial instability.” The Fed, however, seems intent on raising FF if only to prove that they can begin the journey to “normalization.” They should, but their September
meeting language must be so careful, that “one and done” represents an increasing possibility – at least for the next six months. The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin – investment – and with it, long term productivity – the decline of which we have seen not just in the U.S. but worldwide.
But this imbalance between savings/investment and consumption is not the only Frankenstein creation that zero percent yields have created. Over the past 6 years and perhaps on average since the beginning of the 21st century, artificially low yields have propelled financial markets and have impacted the real economy in numerous ways which are not well discussed in the financial press nor certainly in Washington, London, Brussels, or Tokyo. I list them below without further elaboration if only because of space constraints. Keeping it short in this case is the right policy