[Outcast_Searcher]

The Fed's Low Interest Rates Are Increasing Inequality

It is a commonly held belief that the Fed’s low interest rates have been responsible for inflating stock market values. Because people with more wealth tend to own more stock, to the extent that the Fed has been the cause of higher stock prices, it has worsened wealth inequality. Similarly, low interest rates have meant low borrowing costs for large corporations with direct access to capital markets (through corporate bonds). This cheap money helps to boost corporate profits which, again, flow mostly to the wealthy.

Middle class conservative (re personal finance, not politically) retirees living on social security and a relatively modest retirement nest egg planned on getting perhaps 5%ish on their conservative savings, like CD's, money market accounts, etc.

Now, they get essentially zero. Or if they hunt around for various "high yield savings accounts", they can get perhaps 0.8%, and they need to watch the FDIC limits. One of my friends is in precisely this spot. He lives frugally and is very angry that his efforts to be responsible are being "rewarded" this way in his retirement.

Such people after working for, say, 40 years are wealthier than younger middle class people with essentially no savings -- but super low interest rates have hurt MANY such people BADLY.

They can greatly increase their risk and chase yields through bonds (yuck at these rates) or stocks (not for those who don't like volatility), or they can continue to draw down their savings and try to survive.

Not a pretty picture either way.

The deci-millionaires and billionaires with megabucks in the stock market are doing great -- sure. But assuming that anyone with moderate savings is "rolling in it" is a VERY bad assumption.

[Outcast_Searcher]

Yes, and one of those bubbles was---oil speculation in 2008!

But that's something people (like pstarr) wouldn't want to concede happened.

I do concede the $147 peak was an overshoot, a momentary consequence of short-term arbitrage. I will never ever concede that $100 oil did not kill the world's economies.

The only thing energizing the corpse was tight-oil and QE. But those have run their course and the body is starting to drag.

So in your mind the whole real estate bubble/debacle, which caused the banks to implode, and then the whole financial world (and economy) seized up globally in fear was what?

A hoax?
A minor side event?
Something else?

No question that once oil got above $120, with gasoline at $4 and above, it started to change lower middle class behavior. I knew people who parked their SUV's, bought a small fuel efficient car, and drove THAT to work. (Nothing like financial incentives to promote changing behavior).

It wasn't just oil that was soaring in mid 2008 -- it was commodities overall, and yes, that has consequences. However, once real estate imploded, the impact simply dwarfed everything else.

Oil plunged from the $130's (average price during the few weeks near the peak) all the way to the low $40's in early 2009, as investors feared a possible global DEPRESSION. Are you really going to try to say real estate had little or nothing to do with that?

The mainstream economic view (example in the following Wiki link) is that commodities like oil were a secondary contributing factor. I think their case is good.

And, if $100 oil was the root cause -- explain this simple fact. Oil stayed at roughly $100 on average over time from 2011 through the summer of 2014. So why didn't nearly 4 YEARS of "global economy killer" $100 oil prevent generally very solid overall global economic growth then? (The "killer" price spike ending in late summer 2008 only lasted roughly a year).

http://en.wikipedia.org/wiki/Causes_of_ ... _Recession

[kublikhan]

Ah, digging into old posts. Reminds me of some of my old debates on this subject. Here's one of my earlier posts:

I'm new here, maybe someone can clear some things up for me.

Why do people keep posting data not relevant to peak oil here as being caused by peak oil? Or are there people here who really believe the US housing bubble was caused by peak oil? It seems to me that people are so eager to find proof we have peaked they are taking any negative news they can get their hands on and saying "SEE? We've peaked!"
...
In my opinion, this recession would have happened if we found another 10 Saudi Arabia's worth of oil. We were living on borrowing ever larger amounts of credit, and this trend was doomed to reverse with or without high oil prices. I believe the origins of this economic funk we are in were in the financial sector, not the oil sector.

But Lighthouse said it better:

PS: Its really funny how everything is now peak oil related.

Joe: "My wife does not sleep with me anymore"

Jim: "Yep, As free energy wains so does industry and jobs, prices rise, your wife will lock you out of the bedroom more often"

[GoghGoner]

Yeah, those that have to depend on interest rates for income have been screwed. I think the bankers are getting sick of low interest rates, too. Pressure is building for a rate hike.

Europe is looking better right now but China is still slowing. Copper is a leading indicator for China and it has been up the last month, could just be speculative froth, we will see soon enough.

China economy loses more steam in April, further stimulus on the cards

China's money supply grew at its slowest pace on record and investment growth sank to its lowest in nearly 15 years as April data showed the world's second-largest economy was still losing momentum despite a concentrated burst of policy easing.

[Outcast_Searcher]

Copper is a leading indicator for China and it has been up the last month, could just be speculative froth, we will see soon enough.

Copper is actually a good indicator for overall global economic growth, given its role in building (plumbing, electric wiring, and electric motors, for example).

The reason it has correlated so strongly with rapid China growth is that China is just so darn big, and China has done so much stimulus via actually building stuff (including some cities that ended up empty) instead of just printing money.

Given what oil has done the past year, it COULD be that copper is starting to sniff out faster global economic growth. As you said, we'll have to see (I have NO ability to do short term market timing.)

[kublikhan]

pstarr, that adhom and "10 Saudi Arabia" post was mine not Outcast's. And it was not directed at you, it was from 7-8 years ago. I was just me digging through some of my old stuff on a nostalgia trip.

As for here and now, I agree with you about the debt service problem and the riots in Egypt. But I still think the US financial/real estate market would have blown up even with another 10 Saudi Arabia's found. Bubbles can still form even with cheap and abundant oil.

[GoghGoner]

Looks like some anti-stimulus movement is building in Japan, too. With all of this stimulus, commodity prices took a huge nose-dive because it never ended up in our hands.

Abenomics Heads Toward Debt Meltdown, Reflation Enemies Warn

“BOJ policy is making it painless for the government to borrow more money and discouraging the government from cutting spending,” Kono said.

Renewed declines in the yen could trigger greater unease about the BOJ’s approach. The currency, which on Thursday tumbled to a 12-year low against the dollar, has become an issue for importers and smaller companies that face higher costs without the benefit of export-earning gains.

“The only way to change the current policy framework is for the public to raise its voice and say ‘no more weak yen,’” said Yukio Noguchi, a former Ministry of Finance official who is now an adviser at Waseda University’s Financial Research Institute in Tokyo.

Some members of the public may indeed be worried where things are heading. The No. 6 best-selling economics book on Amazon’s Japan website is “The End of Capitalism and the Crisis of History,” by Kazuo Mizuho. It argues that money-pumping will just cause asset bubbles that will burst and hurt jobs.

[onlooker]

all this fiat money and money printing is just delaying the days of reckoning when scarcity is the overriding matter and no amount of money can create resources where their are none. In the meantime, look how the TPTB are trying to pass the burden on the masses. Greece is just one prime example at this time. Also, these bubbles and ponzi schemes are just creating great risk and flight of liquidity which makes businesses and normal people wary of investing or starting up businesses. So Quantum Easing has some drawbacks which also hinder its efficacy. Looks to me that at some point a perfect storm of bubble bursting or lack of new bubbles will create a huge world-wide depression or stagflation.

[GoghGoner]

Europe questions stimulus and China is expected to go full bore. Good/bad news has the opposite effect on the stock markets.

'Unprecedented' volatility in bond markets: Goldman

He added that the scaling back of the ECB's QE program over time would be a "good sign."

"Europe's economy is picking up, we've seen dramatically better data in some countries -- I hope they withdraw so we get back to a more normal savings and investment pattern," he said.

Low-yielding bonds have given rise to concerns about returns for institutional investors, such as European pension funds, and Sherwood agreed that it posed a challenge.

"The pension time bomb in Europe is one of the biggest challenges that faces us," he added. "Pension and insurance companies have to be more creative. They have to think about new ways to invest in the bond market."

Slide in China's May imports signal need for more stimulus

[GoghGoner]

Opinion: Here’s the real reason the Fed wants to raise rates

And oil is just part of the story. If the Fed is looking for a reason to hold off on a September rate increase, it can look no further than commodities markets. The CRB BLS spot raw industrial price index, which includes economy-sensitive materials such as scrap metals (copper, steel and lead), rubber and zinc, has taken a dive to levels last seen in late 2009. The decline in raw materials prices will feed into the prices of finished goods. So the Fed’s confidence in inflation heading higher may be dashed once again.

The Fed scrapped its intended June lift-off because of concerns about the decline in first-quarter U.S. growth. Broad-based weakness in commodity prices is generally symptomatic of weak global demand. If the Fed is at all uncertain about its decision to start normalizing rates, it already has the excuse it needs.

[GoghGoner]

Not sure I agree with this at all. Many shale companies were triple-B or higher and they obviously used the free money to subsidize their growth. I do like the term zombie corporations, though!

Bill Gross says Fed recognizing zero percent rates causing harm to U.S.

"If a central bank could lower the cost of debt and equity closer and closer to zero, then inevitably the private sector would take the bait - investing in cheap plant and equipment, technology, innovation - you name it. 'Money for nothing - get your clicks for free', I suppose," Gross wrote. "But no. Not so."

What was equally troubling, Gross said, is that because double-B and single-B rated and in some cases triple-C rated companies have been able to borrow at less than 5 percent, "a host of zombie and future zombie corporations now roam the real economy."

[GoghGoner]

Yes, and the markets are also more leveraged. That is an obvious result of stimulus measures.

Citigroup: Something Big and Fundamental Has Changed in Markets

The crux of this argument is that markets used to be self-limiting. Prices of securities would move up to a point where their yields would become unattractive, at which time investors would trim some of their positions, causing prices to go down and yields to recover. Now the intense search for returns has altered that dynamic, with investors chasing inflows as a means of getting higher prices and higher profits.

While the notion that value investing is disappearing in a market that has moved ever upward for the past five years is not exactly new, King's presentation here is stark. Investors have been moving in tandem, he says, making markets far more homogenous. The chart below shows investor positioning in credit markets, where the number of longs has vastly outnumbered the shorts, along with the International Monetary Fund's herding metric. In short, investors across a number of asset classes are going mooo as one-way positioning dominates.

[GoghGoner]

Abe Aide Says Japan Needs 3.5-Trillion Yen Economic Package

The world’s third-biggest economy shrank an annualized 1.6 percent in the three months through June as households and businesses cut spending and exports tumbled. While the tailwind from the weaker yen and the Bank of Japan’s unprecedented monetary stimulus have helped propel stocks to an eight-year high, consumer confidence has slumped.

Honda said a package of 3-3.5 trillion yen is needed to help lower-income households and pensioners. He suggested it should be delivered as subsidies such as child-care support or coupons, rather than spending on public works.

[GoghGoner]

My take, nobody understands anything.

http://www.cnbc.com/2015/08/18/st-louis-fed-official-no-evidence-qe-boosted-economy.html

In Williamson's view, that's a product of policymakers wed to the Taylor rule, which dictates the level of interest rates in regard to economic conditions. The thinking essentially is that low rates beget low inflation, trapping central banks in zero interest rate policies (or ZIRP).

"With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely," Williamson said. "This idea seems to fit nicely with the recent observed behavior of the world's central banks."

[Outcast_Searcher]

[quote="GoghGoner"]My take, nobody understands anything.

Actually, re macroeconomics (and what "good" policy should be), religion (i.e. supernatural entities humans like to worship), and politics (i.e. people saying their group knows what's best for everybody else), this sounds about right.

However, without these things, the world would be such a different place that I can't get my head around what admitting this and ignoring these things would result in. For one thing, I wouldn't want to risk going back to the frequent booms/busts of the US in the 19th century, though we seem to be doing that anyway, even with all the "productive" economic policies.

[GoghGoner]

Asia in deflation and the banks say more stimulus is needed (juxtapose that against that last article). Cool graph alert.

Perhaps more concerning than the scale of deflation is the slow, tepid, and reactionary response by central banks across the region to address the continued falls.

Morgan Stanley, in a note released earlier today, pick up on that point, suggesting that policymakers across the region need to borrow a leaf out of the central bank playbook from developed nations and ease monetary conditions further.

Read more: http://uk.businessinsider.com/china-is- ... z3jMkEOPtX

[GoghGoner]

My guess is that there was really no right answer back in 2009, in the long term, everything will come out the same.

Central bank interventions: Drunks searching by the light …

Given the negative demographics, the best way for boosting consumption in major economies could be counter-intuitively, tightening monetary policy. Increased interest rates would shift the balance of power to savers from borrowers; such savers have a sure footing on their financial futures and are more likely to spend over time as they see enough stability in their income profiles to warrant a splurge here and there. Today’s borrowers in contrast have to curtail their consumption, and rebalance the books; eventually emerging as savers who can spend with a stronger balance sheet.

Asset prices will adjust downwards and sharply under these circumstances, but once they start recovering, would be a on a sure footing as against currently where the foundations of any market rally appear to be made of tofu.

Preaching normalized interest rates to the faux-Keynesian crowd isn’t easy; and indeed there isn’t much of a point to it. Already, there is a lot of clamour for the US Fed to delays its planned rate hike in September while other central banks from the ECB to the Bank of Japan are being asked to do “more”. How one does “more” than zero interest rates and willy-nilly buying of all government debt is beyond the purpose of any reasonable mind to enquire.

Instead of using the current bout of market volatility as an opportunity to re-examine the monetary policy failures of the past 5 years, central banks are likely instead to double down and loosen the purse strings once more.

[GoghGoner]

Another "nobody understands anything" post.

Jackson Hole Questions Inflation Mastery Sought by Draghi & Co.

Less than six months into a stimulus program that the European Central Bank president promised would revive consumer-price growth, the euro area is facing renewed disinflationary pressure as China’s economy slows and commodity prices slump. This week, Draghi may have to admit as much, and downgrade the institution’s inflation forecasts.