Tag Archives: interest rates

Greece, the Stock Market, and Today’s Economic Revolution

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.

 

 

 

 

Towards a More Practical View of Economics

When some people hear the term economic theory, they often act indifferent or roll their eyes. This is because for years, many have equated it with a type of intellectual game playing.

Unfortunately, few modern theories have as much day-to-day impact on people’s lives as economics. Also, since economics is the silent partner of politics, few issues escape its grasp. In fact, when one applies a follow-the-money approach to political topics, they often find that across the spectrum, many issues have their origin in economic theory.

Because economics is misunderstood, it can be hard to discuss beyond the usual clichés. Therefore, when anyone mentions the possibility it can become more practical, many shrug and say, “Here we go again.” This confusion is compounded by how some theorists seem to setup axioms out of premises before all data is collected. As a result, economics is sometimes viewed as a statistical mishmash of competing ideas arranged in an arbitrary fashion.

But is economics really just a game? How can it be just a game when so much of what we do in life revolves around some kind of monetary exchange?

One of the reasons modern economic theory puzzles many is that much of it seems counter-intuitive. The abstract nature of modern economics, just like the abstract nature of modern physics, proves to be a barrier.

For instance, to the average American who’s struggling to pay down debt, the fact that our government can seem to function with a large amount of growing debt appears somewhat illogical. When politicians and economic experts talk about Debt-to-GDP ratios, and favorable levels of debt, many average Americans shrug as if it’s yet another example of political-economic gamesmanship.

In addition, to the average American that looks upon their family as a self-enclosed economic entity, the ever-present concept of globalism seems confusing. To many, the American nation is still the largest economic entity we envision. Therefore, getting used to the whole globe as an economic entity can appear abstract. Yes, most Americans understand globalist trade concepts and the importance of global trade. After all, since the days of Marco Polo and the Silk Road, individuals and countries have enriched themselves through trade. However, that’s not what creates confusion for many.

What puzzles many about globalism is how some American-based multinational corporations pursue loopholes to drastically lower their taxes. On occasion, these companies hint at the fact that such tax practices are a necessary part of globalist trade. Although the American corporate tax rate is high on paper, they often pay much less than what the official rate implies. Unfortunately, the reputation of corporations that pay taxes fairly is damaged by the tax avoidance pursued by some.

Adding to the bewilderment many have with modern economics is the fact that corporations are now viewed as people in legal terms. Therefore, many think that as people, corporations could pay a fair share for the roads, bridges, ports, and airports they use to conduct trade.

Probably the most confusing part of economic theory is how it’s used in the political arena. As is well known, both parties have economic experts and economists at their disposal who polish the rhetoric politicians employ. As most Americans attest to, there’s a tug-of-war between the Republican embrace of the more Free-Market approach of the Supply-Side revolution starting in 1980, and the more socialist Democratic approach of government-based Keynesian ideas used to maintain economic demand. 

In reality, although America has swung between Republican and Democratic directions the past 30 years, the economic dogma espoused by both seems to have resulted in the system that some call Corporatism. In a sense, Corporatism, as reflected in the political talk of Public-Private partnerships, has arisen since implementing the economic views of both parties in total has proven difficult. Therefore, the political-economic theorists that predicted Corporatism are correct to say this system could grow out of modern political rivalries. Although some say Corporatism resembles Socialism insofar as there’s a strong government hand in the economy, it differs by leaving the means of production in private hands.

As for developing a more practical economic view if indeed we’re living in the age of Corporatism, there are many proposals.

First off, since the post-Keynesian economic model has allowed for large amounts of unstable debt to accumulate in many advanced countries, there’s a need for debt limits that are achieved transitionally without imposing high levels of austerity. In line with keeping debt lower, the debt-risk posed by those wanting more finance deregulation needs to be recognized. After all, if another finance crash creates a freezing of liquidity assets similar to what we had in 2008, billions of dollars of outstanding derivatives contracts may trigger the need for another bank bailout. Obviously, another bailout would be added to our nation’s debt again.

Regarding debt reduction, we could actually increase tax revenue from corporations by both cutting their official tax rate, and then closing certain loopholes. This policy could help reduce debt, while also improving the negative public image many have of corporations due to how some pursue tax avoidance.

In addition, since many central banks have been pushing for lower interest rates the past 15 years as a means to stimulate certain areas of the business cycle, there needs to be recognition that we need to slowly allow interest rates to return to historic levels so the natural ebb and flow between saving and spending can be restored. As many economists note, such unnaturally low levels of interest rates, if continued, will make it hard for us to not only stimulate the economy for future growth, it’ll make it hard to stimulate the economy to reduce the chronically high levels of underemployment we now have.

Since chronic underemployment has become an outgrowth of globalism in many advanced countries, it’s apparent that relying on historically low interest rates as the main way to boost employment has led to a situation begging for creative solutions. As many have said, America could deal with its high level of underemployment by borrowing ideas from both right and left of the political-economic spectrum. These ideas include creating infrastructure improvement jobs and streamlining small business regulations to encourage true entrepreneurship. 

And finally, although globalism’s here to stay and has benefits, it’s obvious that although recent trade pacts reinforce large multinational entities, that the most important entity for each nation… remains that nation. Therefore, if politicians can honestly find ways to look out for all aspects of our nation more, America’s economic outlook could improve. 

Hopefully, with more involvement from ordinary citizens, economics will start to lose its reputation as a confusing line of thought, and become more an everyday part of everyone’s lives.

 

 

 

 

Wealth Inequality and the Middle Class

Few issues get as much press as wealth inequality. Since the dawn of civilization and days of the monarchies, this has been a hot-button issue. As we’re seeing lately, with wealth inequality increasing in America, this issue won’t go away.

Although it’s tempting to advocate decreasing wealth inequality by just raising taxes, it’s well known that successfully raising taxes free of loopholes is very difficult to do. In addition, there are other surprising variables involved with this issue.

As noted by many, the economic strength and stability of America’s middle class, has declined the past twenty years. Obviously, factors such as globalism have played a role in this. In addition, the middle class has been strongly hampered by the Great Recession of 2008.

Our tentative recovery from the Great Recession of 2008 is shown by the fact that America’s unemployment rate is high, with many skilled workers unable to get work in their fields. Although our employment situation has definitely improved, there’s still caution about it due to the fact there now appears to be an under-reporting of unemployment. Under-reporting can arise when people give up on finding work and are no longer claimed as unemployed. When these factors combine with how record low interest rates have reduced the middle class’s ability to earn interest at banks, we see frustration.

The fact that interest accrued at banks is now so low is one reason polls have shown many Americans are thinking of putting off retirement. This is because many senior citizens are known to augment their fixed income Social Security with money earned off bank CDs. For example, if a retired couple now has a $100,000 bank CD, they’re faced with making only around $1,000 interest per year. In the past, a $100,000 CD often could generate $5,000 per year or more in interest. To senior citizens living on a fixed income, America’s record low interest rates have hampered their ability to support themselves.

Another way record-low interest rates hurt senior citizens is the fact that a primary source of revenue for pension plans has been various types of bonds. America’s current public employee pension crisis has been worsened by how low interest rates weaken bond yields. A weakened bond market adds to pension funds being depleted quicker.

In terms of economic success, the main area our economic recovery from the Great Recession of 2008 has worked is with the stock market and corporate earnings. And yes…this is good news. The reason it’s good is since many Americans work for corporations, and because much retirement wealth is in 401K-type accounts, many hope their job is secure, and another downturn doesn’t occur before they cash in their retirement.

Although average Americans are grateful the economic recovery in corporate America has helped them, there’s still controversy. Why, they ask, has middle class stability stagnated while the power of the elite has grown?

Ironically, many claim the very same policies that sparked an economic revival for the stock market have resulted in a rise of inequality. Since 2009, America’s Federal Reserve Bank, with the tacit approval of most politicians, has embarked on an unprecedented run of record-low interest rates while pursuing the debt buy-back process-QE. QE, otherwise known as Quantitative easing, is accomplished best with low interest rates. Basically, since America’s buying back it’s own debt with QE, the debt we purchase from ourselves is cheaper when interest rates are low.

QE is controversial since it can be a last ditch resort used by governments to stimulate a slumping economy. Ironically, low interest rates and QE, while effective at jump-starting the stock market, can also make the elite wealthier. Therefore, while many see rising wealth inequality as just a result of the Free Market, there’s evidence that some rise in wealth inequality is actually due to government-set economic policies that run counter to Free Market theory.

The wealthy can benefit from QE and low interest rates because they own a large portion of stocks, stimulated by these policies. In addition, low interest rates make it easier for the wealthy to borrow and profit from large sums of capital now. Although middle class house, auto, and student loans are more affordable with low interest rates, the middle class often can’t embark on the lucrative capital-growing process that low interest rates offer the wealthy.

As a result of these recent economic trends, there’s now an understandable push to raise the minimum wage. In addition, there’s rebirth of the idea that government should enforce a maximum wage. Although a maximum wage is a stretch for attainability, it goes without saying a minimum wage raise may occur soon.

In light of all this, it’s now obvious that a stable and large middle class is sustained when there’s a balance, as well as a separation, of market and government interests. Although political dogma creates an either/or mindset on economics, the reality seems more complex. Just as there’s proof that some government involvement in the economy has helped the middle class, there are also recent indicators that government-mandated economic policy can hamper average Americans. To restore America’s middle class, the elusive balance of power that used to exist between the marketplace and government needs to be considered again.