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“So lending is great and we can see how it further enhances the progress of the human ant-farm, but how do we decide who gets to use the money that is saved? It should be obvious to realize that it is in society’s best interest that superior ideas and productive plans be paired with the resources needed to implement them. Societies that lend their saved resources to good ideas like Joe’s will grow more prosperous and powerful compared to societies that squander their resources by making them available to someone like Bob so they can implement their silly and less beneficial or destructive ideas. The efficient pairing of savings and socially beneficial ideas is where interest rates play a key role ...” –Jorge Besada
FX Trading – Reader Mailbag: Who’s missing something here?
After my Thursday piece where I discussed how the social environment in China might threaten the Communist Party’s rule, I received this comment:
“Amazing, how we see other systems potential weakness and vulnerability but not our own here and now 'rot and ruin'”
I was so confused by that observation that I didn’t even take the time to write back ... because my prior two issues of Currency Currents did exactly that – highlighted potential weakness and vulnerability of my own system.
But in case that’s not enough, I’ll see if I can examine potential vulnerability again today. But first ...
On Friday we received a well-formulated thought from a reader; here’s a piece of it:
“With recent price moves going against “conventional” wisdom (EUR/USD) could the change in sentiment be driven by the divergence of fiscal policy between Europe & US where US plans to keep pumping out cash leading to deflation whereas Europe plans to rein in spending.”
It goes to the point we made a couple times last week after the G-20 confirmed the recent positions toward additional stimulus measures in the US and austerity in Europe.
We explained to our members on Friday how this dynamic could impact currencies going forward. But besides that, our criticism has laid squarely on the US government for their inclination to take on greater debt and run even larger budget deficits.
Some will argue that the public sector needs to run these budget deficits when the private sector – consumers and corporations – is deleveraging and saving. One such piece I recently read touches upon the fact that long before the 2008 credit-crunch-induced market collapse, corporations were already saving, rather than investing.
The theory is that public companies are so focused on earnings that they’ve been gravitating away from real investment that might pay long-term growth dividends for a company’s operations despite a short-term reduction in earnings. Plus they’ve become more willing to “play the casino” – derivative markets et al ... looking for returns.
There was some evidence cited to back up this claim, and it may be indicative of the majority of public companies who’ve been looking to support their shares at priority number one.
I sometimes read the reader comments at the end of articles ... to get a feel for others’ reactions. Here is a piece I grabbed from one such comment responding to the piece I briefly mentioned above:
Lietaer and others point to usury as the property of our money systems which drives growth. Interest means money is always scarce mathematically speaking, a fact which fosters ever increasing competition, which means winners and losers, rich and poor and so on. This is not bad in and of itself, in isolation so to speak (though nothing exists in isolation), but because of the background scarcity, the inherent tendency over time is for the ‘victors’ to cement their positions and thwart competition and money-flow. That is, there can be no healthily functioning Invisible Hand and interest. Isn’t interest ultimately counter-productive, looking at economics and economies as systemically as we can?
For one, I would like to know how the ‘victors’ thwart competition and money-flow, assuming the victors are truly private entities without corrupt connections to the public sector.
I would argue that interest is not ultimately counter-productive, but rather productive in an appropriately functioning economy. That, of course, assumes the rate of interest is set at appropriate levels when and where applicable i.e. left unhampered by artificial means.
Let’s look at a monthly chart of the Fed Funds Rate (inverted Fed Fund Futures):
I bring your attention to the area circled in red, 2002-2004. This is when public corporations were noted to have begun saving and, in turn, sacrificed investing. See the year-over-year change in Corporate Profits during that same period, below:
Corporate profits did indeed climb sharply. And here is the change in Personal Consumption Expenditures over that same period of time:
Consumer spending steadily increased to regain the dot-com bubble high mark.
It’s not hard to draw the correlation here ==> consumers were empowered to spend more because they were able to borrow at extremely low interest. Additionally, where’s the incentive to save, to sock away this money in a bank when the money will be earning measly interest?
Likewise, businesses were happy to rest on their earnings rather than compete in an environment where the most valuable investments were drowned out by the malinvestments brought to fruition through low interest rates.
It’s clear there is no easy way out of this recession ... and there may not be a way of avoiding a double dip. But more than likely there is a way to emerge in a better place than where we entered. That’s the debate.
Jörg Guido Hülsmann points out in book, Deflation & Liberty: "it [deflation] fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation."
…Deflation is a "great liberating force," writes Hülsmann, "because it destroys the economic basis of the social engineers, spin doctors, and brain washers."
It just seems like the powers-that-be are prolonging potential long-term pain so as to reduce obvious short-term pain. Politically, that’s the logical move (as oxymoronic as that sounds), but realistically it could be a nightmare for the US economy.
We ought to look at reforming fiscal and monetary policy before we start putting all the blame on corporations and consumers for not investing.
- "Going forward it is very important that this support is provided so that contraction in state employment is not a drag on overall growth," the U.S. Treasury's chief economist, Alan Krueger, said after the jobs data was released. (Reuters)
- Swiss consumer price inflation dropped sharply in June, undershooting forecasts and giving fresh impetus to a debate on whether the country's central bank might resume currency interventions. (Reuters)
“So lending is great and we can see how it further enhances the progress of the human ant-farm, but how do we decide who gets to use the money that is saved? It should be obvious to realize that it is in society’s best interest that superior ideas and productive plans be paired with the resources needed to implement them. Societies that lend their saved resources to good ideas like Joe’s will grow more prosperous and powerful compared to societies that squander their resources by making them available to someone like Bob so they can implement their silly and less beneficial or destructive ideas. The efficient pairing of savings and socially beneficial ideas is where interest rates play a key role ...” –Jorge Besada
FX Trading – Reader Mailbag: Who’s missing something here?
After my Thursday piece where I discussed how the social environment in China might threaten the Communist Party’s rule, I received this comment:
“Amazing, how we see other systems potential weakness and vulnerability but not our own here and now 'rot and ruin'”
I was so confused by that observation that I didn’t even take the time to write back ... because my prior two issues of Currency Currents did exactly that – highlighted potential weakness and vulnerability of my own system.
But in case that’s not enough, I’ll see if I can examine potential vulnerability again today. But first ...
On Friday we received a well-formulated thought from a reader; here’s a piece of it:
“With recent price moves going against “conventional” wisdom (EUR/USD) could the change in sentiment be driven by the divergence of fiscal policy between Europe & US where US plans to keep pumping out cash leading to deflation whereas Europe plans to rein in spending.”
It goes to the point we made a couple times last week after the G-20 confirmed the recent positions toward additional stimulus measures in the US and austerity in Europe.
We explained to our members on Friday how this dynamic could impact currencies going forward. But besides that, our criticism has laid squarely on the US government for their inclination to take on greater debt and run even larger budget deficits.
Some will argue that the public sector needs to run these budget deficits when the private sector – consumers and corporations – is deleveraging and saving. One such piece I recently read touches upon the fact that long before the 2008 credit-crunch-induced market collapse, corporations were already saving, rather than investing.
The theory is that public companies are so focused on earnings that they’ve been gravitating away from real investment that might pay long-term growth dividends for a company’s operations despite a short-term reduction in earnings. Plus they’ve become more willing to “play the casino” – derivative markets et al ... looking for returns.
There was some evidence cited to back up this claim, and it may be indicative of the majority of public companies who’ve been looking to support their shares at priority number one.
I sometimes read the reader comments at the end of articles ... to get a feel for others’ reactions. Here is a piece I grabbed from one such comment responding to the piece I briefly mentioned above:
Lietaer and others point to usury as the property of our money systems which drives growth. Interest means money is always scarce mathematically speaking, a fact which fosters ever increasing competition, which means winners and losers, rich and poor and so on. This is not bad in and of itself, in isolation so to speak (though nothing exists in isolation), but because of the background scarcity, the inherent tendency over time is for the ‘victors’ to cement their positions and thwart competition and money-flow. That is, there can be no healthily functioning Invisible Hand and interest. Isn’t interest ultimately counter-productive, looking at economics and economies as systemically as we can?
For one, I would like to know how the ‘victors’ thwart competition and money-flow, assuming the victors are truly private entities without corrupt connections to the public sector.
I would argue that interest is not ultimately counter-productive, but rather productive in an appropriately functioning economy. That, of course, assumes the rate of interest is set at appropriate levels when and where applicable i.e. left unhampered by artificial means.
Let’s look at a monthly chart of the Fed Funds Rate (inverted Fed Fund Futures):
I bring your attention to the area circled in red, 2002-2004. This is when public corporations were noted to have begun saving and, in turn, sacrificed investing. See the year-over-year change in Corporate Profits during that same period, below:
Corporate profits did indeed climb sharply. And here is the change in Personal Consumption Expenditures over that same period of time:
Consumer spending steadily increased to regain the dot-com bubble high mark.
It’s not hard to draw the correlation here ==> consumers were empowered to spend more because they were able to borrow at extremely low interest. Additionally, where’s the incentive to save, to sock away this money in a bank when the money will be earning measly interest?
Likewise, businesses were happy to rest on their earnings rather than compete in an environment where the most valuable investments were drowned out by the malinvestments brought to fruition through low interest rates.
It’s clear there is no easy way out of this recession ... and there may not be a way of avoiding a double dip. But more than likely there is a way to emerge in a better place than where we entered. That’s the debate.
Jörg Guido Hülsmann points out in book, Deflation & Liberty: "it [deflation] fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation."
…Deflation is a "great liberating force," writes Hülsmann, "because it destroys the economic basis of the social engineers, spin doctors, and brain washers."
It just seems like the powers-that-be are prolonging potential long-term pain so as to reduce obvious short-term pain. Politically, that’s the logical move (as oxymoronic as that sounds), but realistically it could be a nightmare for the US economy.
We ought to look at reforming fiscal and monetary policy before we start putting all the blame on corporations and consumers for not investing.
