At this moment, there’s a somewhat quiet economic revolution occurring in most of the developed world. The reason this revolution appears quiet is because the economics field uses technical language often difficult to understand. However, as we’ve seen with both long lines at Greek banks, and the eyes of the world now fixated on stock markets, seemingly abstract economics policy has real world consequences.
Although hard to say at this point, this quiet revolution could possibly prove as pivotal in economic history as the fall of communism. Only time will tell as to its complete impact. To underscore how the paradigm shift is real, one can note that the head of The International Monetary Fund recently advised the head of America’s Federal Reserve Bank to hold off on raising interest rates.
In a nutshell, the economic revolution sweeping the developed world is the record-low interest rates they’ve had since the Great Recession of 2008. Because the prevailing rate of interest is one of the most important factors economically, it’s accurate to say that the repercussions of record-low interest rates are strong. Historically, record-low interest rates have usually been advocated for only a temporary basis to stimulate slumping economies. Needless to say, many economic experts are shocked that we’ve have had to constantly stimulate much of the developed world’s economies for seven years. Obviously, many experts are surprised our economic gains haven’t been stronger over this time.
The fact that international stock markets are now beginning to slump has many economists and experts quite worried. That’s because the stock market has been the main success story since 2008. In light of the fact that parts of the developed world still suffer from effects of recession-hampered growth, underemployment, growing debt problems, and low personal savings rates, the bright spot has been robust stock markets.
Currently, many economists are worried that if the world economy is now hit with stock market downturns, they’ll have little ammunition left to battle another recession. This is because the main tool for stimulating developed economies has been record-low interest rates. With interest rates currently near rock bottom levels for seven years, there’s really nowhere to go to stimulate.
The Great Recession of 2008 was an incredible turning point economically. This is because what worked well in the past to jumpstart weak economies, didn’t work as well this time. Prior to this time, it was common for Central Banks to resort to low interest rates only until the economy started showing growth.
Currently, there’s a school of economic thinkers that says economic stimulus policies need to be rethought. They fear that if low interest rates are used as stimulus too long, a new sense of economic normal will make an economy somewhat immune to stimulus. These experts feel that trying to constantly stimulate the economy is analogous to a person building up a large tolerance to drugs. After a while, a person can become immune to the drugs’ effects if used too often. Likewise, record-low interest rates on a temporary basis have now begun to morph into almost permanent policy.
Because of the recent stock market situation, there are experts who feel that America’s Federal Reserve Bank may now hold off on their first official interest rate hike in years. The fear is that raising interest rates now will further drop the stock market.
What Greece’s situation represents is the fact that if wealthier countries now respond weakly to economic stimulus, then less stable countries like Greece may prove too weak to respond well to stimulus. Since there are other countries similar to Greece, there is concern that Greece’s problem could become a kind of economic contagion that may spread.
Ironically, economic stimulus policy can actually depress certain sectors of the population. This is because wealth generation and savings have traditionally been acquired through a combination of Stocks, Bonds, Bank Savings, and Real Estate. As is well known, record-low interest rates hurt senior citizens and middle class savings accounts. In addition, low interest rates weaken the bond market. In turn, the weakened bond market hurts pension plans since bonds are often used as a safe investment for pensions. Therefore, stimulus policies on a long-term scale can have the effect of reducing investment choices available for the population at large.
At a time when many western governments are instituting austerity measures to deal with extreme government debt, it’s become clear that austerity cuts often target retirement benefits. Therefore, many retirees are alarmed that their ability to both save and plan for their future, are hampered by the very policies being used to stimulate the economy.
Interestingly, it needs to be noted that many economists reluctantly admit that record-low interest rates, by supercharging the stock market, may be leading to an increase in wealth inequality. This is because the wealthy own a high proportion of stocks. Also, it should be noted that the wealthy are often adept at periodically cashing in their stock gains and reinvesting in the stock market.
A healthy economy stands on several pillars for investment, savings, growth, and security. Although the short-term gains of low interest rates on the stock market have been clear, the other economic pillars of savings through banks and bonds have been weakened. In the long-term, many experts feel that the developed world needs to return to strengthening all pillars of the economy.
In light of the fact that many recent political problems are related to the paradigm shift occurring economically, it’s advisable that we all try to do our part to be proactive with our economic situations. That way, whether the current economic revolution underway is only temporary, or proves to be permanent, we’ll all be better able to plan and adapt for our future.
Politics and Economics 
So what kind of proactive stance are you recommending? Invest in stocks? Invest in brass and lead?
The main thing I’d advocate, since our current environment’s reduced the amount of investment-savings options available, is for someone to find their comfort zone investment-wise. Being diversified + picking strong individual stocks, as well as investing in metals are definitely options. Since it appears that the world’s major economies are changing, being educated + open to many ideas is really key. In line with that, being able to live on a budget, either for an individual or family, is a great start too. The bottom line is that things have changed a lot the past 7 years. How much things return to where they were before The Great Recession of 2008, is anybody’s guess. Only time will tell.
Why have record low interest rates not contributed to economic growth?
Simple answer, really. Who are the targeted borrowers? Financial banks and firms (especially on Wall Street – are there anymore elsewhere these days?), businesses across the country, and the average person on Main Street. And what have these three groups done with this financial opportunity?
Wall Street has been provided free money to speculate with higher leverage, running up markets beyond any real sense of rational valuations, and reaping extraordinary profits from increased transactions and newly minted instruments.
Business has taken on even greater corporate debt but instead of investing it in capital for business expansion they have used it for stock buybacks, also driving up the markets to satisfy shareholders, and in the process have fluffed up the compensation of their CEOs, the real purpose of the exercise in the first place.
And Main Street? They got tapped out at maximum debt during the last cycle, so no borrowing from them, no increased spending and consumption, since they are trying, generally unsuccessfully, to climb out of the hole they already dug for themselves.
Is it noted anywhere above that low interest rates have driven up real world growth, productivity, and economic prosperity (other than for the money managers and CEOs)? Not a bit. Where we are at is the decadent end result of Keynesian economics played out and exposed as the massive fraud it has always been. It was built on and fueled by debt. The only sane advice is to reduce that same debt, on a societal level certainly (and there may be no real cure for that), but most critically, on an individual level. Become self-reliant and associate with others who think the same. End speculation and invest in future business models that promote independence. Safeguard capital in gold. Otherwise, one will be swept away in the melt down to come.
Yes…economic growth resulting from record low interest rates has been admittedly weak. However, there has been some growth. And it’s this growth that supports the narrative echoed that we’re slowly on an upward trajectory that needs to be sustained by keeping interest rates low.
Regarding Wall Street + major banks being main beneficiaries of the record low Federal Funds Rate of the Federal Reserve, this is without a doubt. And although simple to see, the difficult part of the equation is the way economic issues play out in the public square. As you know, once there’s “buy-in” to a mindset by many, it’s hard to change. Since the deregulation phase that began in the 80’s + 90’s, a plethora of economic policies + business practices have evolved that led to our current situation.
Ironically, when these deregulation policies were being debated, many supporters of deregulation felt that a truer free market would emerge out of it. In hindsight, it appears that some of these policies have actually gone against traditional free market theory.
I agree with you that without Keynes, there would probably not be an economic theory at hand that would give support for such a large amount of public + private debt. However, Keynes never advocated stimulus policies to this extent. What’s evolved is a kind of Keynes in over-drive that’s been aided + abetted by politicians the past 25 years. After all, till the late 80’s, the debt levels + interest rate policies of the developed world were more in line with true market conditions + a prudent mindset.
You’re so right to be concerned. This amount of buy-in to all high debt, public + private, is not sustainable without major problems. Although most governments since the Romans have leveraged high debt at times, there is a tipping point that’s experienced from time to time. In addition to modern-day Greece, France in the 1700’s experienced a major debt crisis that led to much instability.
As for investing in tangible assets + being self-reliant, I agree. In addition, there are many creative methods to employ, some traditional, some not, that’ll enable us to look out for ourselves + our families in the time ahead.
Anonymous has it right. Low interest and manufactured money only helped those who already had it. Least we forget that all monitary systems are contrived. The human race should turn in words itself and review natural systems. Not to reinvent the wheel but to re-imagine it.
I tend to be goal oriented, So that would be my first priority to lay out preferred and achievable goals. Though some might argue that we have become stupid overnight, I believe there are still plenty of very smart people with good ideas. We as a species need to convene a conference and unselfishly (that’s the real catch) imagine a new paridgm. I venture to guess it will mimic natural systems. Like it or not we’re stuck on this little dirt ball. And the name of the game here is stop loss (survival) not profit.
Hey Tom…you’re so right to realize we all need to get involved in the discussion about economics. And yes, we haven’t become stupid overnight. As you say, there are many amazing people who can help us make the system more stable. However…we need to be vocal in a way that truly adds to the dialogue.
Unfortunately, many people have become amazingly complacent about the economic issues which affect us all.
As for how low interest rates + easy money have helped mostly the wealthy, that’s recognized by many economists. However, the difficulty with the easy money factor is that although it’s a boon to the wealthy since they own a high portion of stocks, there has been buy-in by many in the upper middle + even middle class range. After all, many of us who have 401k’s + 403B’s have seen the benefit of these rates. In a sense, we’re seeing a rekindling of the supply-side mindset with these latest developments.
Tom…keep thinking of ways to help us discover or modify a new paradigm to help us all out. You’re right…whether in small groups or large, people need to meet + talk these issues.
Sorry for the cryptic comment I know were talking “Real” dollars and cents. I was unconsciously I guess, referring to Pope Francis’s statement encyclical on the environment in which he gave some great starting points for this very change. “Adopt a circular model of production capable of preserving resources for present and future generations”. He points to natural systems efficiency and productivity as healthier and more sustainable than our current best efforts. He fails to reveal natural systems intrinsically low, low rate of return. That being said, a return of two or three percent seemed pretty good in 2009. That may have seemed like the darkest days for the stock market, but may have been our wake up call. We just pressed the snooze alarm,
That’s okay for the cryptic comment Tom. 🙂 I appreciate the sincere dialogue. Regarding Pope Francis’s statement about a circular model of production, it needs to be considered. The one thing I’d caution with his statement is that it doesn’t get interpreted as promoting large-scale socialism. Although a certain amount of socialism is unavoidable in modern life, we all know large-scale socialism is problematic.
Probably the oddest thing about modern economics is that a lot of issues go beyond Capitalism vs Socialism. As for our economy today, it’s hard to avoid that we live in a predominately Corporatism culture combining Capitalism + Socialism. In line with that, one of the big criticisms of large-scale corporations is how they use psychological studies to shape consumer behavior.
If Pope Francis’ ideas about a circular flow means he’s embracing small business, I agree with him. As ya know, small business often uses more straight-forward methods to achieve sometimes modest goals. Countless small business owners operate in a almost communitarian fashion. Since their goals are sometimes modest, small business often doesn’t employ the type of marketing large corporations do since they don’t seek large growth + profits. Often, they operate on a word of mouth basis + are happy to achieve a modest level of growth.
Since we all know the obsticals (Fear and greed top the list) I won’t belabor them. Capitalism must embrace reality. While nature is necessarily self intrested in survival, it is not typical for living things to live in constant fear or be primarily motivated by greed. Just getting by will do. The insatiable economies of scale are unhealthy and unsustainable.
Desire for what? Afraid of what? Those questions need review. I think that is what the Pope is addressing. Without a larger sence of purpose and responsibility, bad things happen. Everyone decries the lack of morals and values in modern sociaty. What good is it to have “In God we trust” printed on our money if we behave like godless heathens in pursuit of that money? I also like Pope Frances statement that all things being from God, thus all things posess a moral compass, specifically Gods moral compass. We’re
Not lost, just distracted.
Hey Tom…you make valid points. Since the beginning of time greed has been a constant. That’s why I addressed the communitarian nature of small businesses. After all, we’ve all known small business owners who rely on fine quality work, word of mouth advertising, + the pursuit of an amount of profit commensurate with ensuring not only a nice modest lifestyle…but the ability to work independently. As we all know, these type of small businesses are not what many think of when they think of greed.
Although money in + of itself gets lumped in with greed, in reality, money is just a means of exchange. Just imagine a world where we get rid of money. That type of world could become quite tyrannical since we’d have to rely on some kind of superstructure to divvy out the goods + services that they feel we deserve.
Historically, the rise of the middle class + a life with less want + more freedom, also coincided with the advent of modern money. After all…many of us enjoy spending our money as we see fit somewhat. That’s what makes unique.
However…you’re so right to be concerned about greed + fear. They are unfortunate constants to the human condition + yes, the study of these traits falls more in the religious, psychological-philosophical, spiritual realm. This is why the Pope is addressing them.
Let’s keep discussing these issues Tom. It’s the only way to bring positive change. And yes, the Pope brings up many valid points needing discussion.
Francis is an enigma to the US as he cannot be defined by our standard Left/Right dichotomy. Criticism of unfettered capitalism has the Left cheering while the pro life stance is a balm for the Right. Just heard some of his address to Congress and the defense of the right to life almost had the Right up in applause until he segued adroitly into the plea to end capital punishment, which slammed them down in their seats with their hands underneath them.
This method of discourse is a masterful illustration of taking into account the full depth of the issue (and any issue he takes up he discusses like this). It does not consider only a convenient portion of it so as to pander to a particular constituency. Francis rises above politics and focuses on the person. What he brings to global discourse is a powerful moral authority with great empathy for everyone. As he just recently said “Service is never ideological, for we do not serve ideas, we serve people.” We would all do well to heed those words.
Thx for the fascinating interpretation of the impact of Pope Francis.