Central Bank Failure
Since the Brexit vote, panicking Central Banks have flooded the world with more money in attempt to stabilize the financial system. Over thirteen trillion dollars of bonds around the world are yielding negative interest rates, which means nearly 30% of all worldwide government debt is at negative rates.
This is a historical first. I believe that the policy of the money kings of the global central banks is starting to fail. Over the last ten years, the United States has averaged 1.8% GDP growth, the worst in US history. The only success the Federal Reserve and other Central Bankers can point to is an artificially high stock market. Underneath the glow of record highs lies a ticking time bomb of over-extended consumers, decreased industrial production, European-banking problems, Brexit, a massive debt bubble in China, ISIS, deflation and a contentious US presidential election.
If there is a recession in the United States, the Federal Reserve will have a very difficult time cutting rates. It is this reason that a Fed rate hike could be in the cards. It would at least give The Fed some room to maneuver back down if recession strikes. The Fed should have raised rates over two years ago. At zero rates leading into a recession, The Fed only really has three options: fiscal spending, deregulation or currency depreciation.
Fiscal spending has been an emphasized topic from both US Presidential candidates, particularly infrastructure spending in the United States. Both candidates agree that the United States has lacked infrastructure spending and is in need of a big build-out. This will be one of the big themes in the stock market over the next couple of years. One positive aspect about potential infrastructure spending is that current record low interest rates allow for cheap borrowing. I believe we should require infrastructure bonds to be established as mortgage bonds that pay down the debt at the end. This will eliminate the open-ended borrowing where debt spirals even higher. Instead the projects will be paid off in thirty years just like a home.
The final way for a central bank to control inflation at zero interest rates is currency depreciation. I am expecting a major currency problem in the next 6-18 months that will likely lead to higher inflation. Evidence of the transition from deflation to inflation appears as central banks overplay their hand and currencies begin to fall. Over time, this will be good for gold and hard assets.
Long time readers of the MaxOut Savings Report know that I believe Stanley Fischer, the Vice Chairman of the Federal Reserve, is the most respected member of the Fed. Over the weekend, Fischer delivered an influential speech at the Aspin Institute laying out some important points on US economic standing. First, he made the case that over the last two years the United States has weathered a number of economic shocks. The events in China, a 20% rise in dollar value, and the Brexit vote have had little effect on the US economy and the labor market. I believe this could translate to a more hands off Fed. The next time the stock market falls, don’t expect the Fed to rush in and talk it up.
Regarding negative interest rates Fischer stated that it is “something that the Fed has no plans to introduce”. That was a clear statement.
Stanley Fischer also commented on the “exceptionally slow labor productivity growth….Business productivity growth is reported to have declined for the last three quarters, its worst performance since 1979”. Negative productivity is potentially a result of incorrect measurement or poor business investment. Stanley stated the key to boosting the productivity growth and long run potential of the economy is likely found in effective fiscal and “more-effective regulatory policy.” This statement hints the Federal Reserve is concerned that government regulation has become over reaching and is now negatively affecting economic growth.
Regulatory Policy is an area that the United States can make tremendous headway. The beauty of deregulating the economy is in the resulting increase in growth and hiring. Deregulation and regulation efficiency are low cost compared to big ticket deficits such as tax cuts and infrastructure spending. Remember deregulation will grow the economy at no cost!
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Jason Stapleton over at JasonStapleton.com released his long-awaited Recommended Reading List on the 4th of July. It spans fiction and non-fiction and covers libertarian philosophy, economy and culture as well.
Check out the episode below (57minutes):
The Revolution: A Manifesto by Ron Paul
Don't Hurt People and Don't Take Their Stuff: A Libertarian Manifesto by Matt Kibbe
American Contempt for Libertyby Walter E. Williams
Liberty and Tyranny: A Conservative Manifestoby Mark R. Levin
Real Dissent: A Libertarian Sets Fire to the Index Card of Allowable Opinion by Thomas E. Woods
Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economicsby Henry Hazlitt
Basic Economics 5th Editionby Thomas Sowell
Battlefield America: The War On The American Peopleby John W. Whitehead
Stonewalled: My Fight for Truth Against the Forces of Obstruction, Intimidation, and Harassment in Obama's Washington by Sharyl Attkisson
The Count of Monte Cristoby Alexandre Dumas père
Atlas Shrugged by Ayn Rand
The Richest Man in Babylonby George S. Clason
Nero Wolfe (or anything) by Rex Stout
Psychology and Markets
The Gift of Fear and Other Survival Signals that Protect Us From Violenceby Gavin de Becker
The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg
Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisionsby Dan Ariely
Influence: The Psychology of Persuasionby Robert B. Cialdini
The 48 Laws of Power by Greene, Robert
The cliffnotes version "Summary, Key Takeaways & Analysis "is free with kindleunlimited.
Ready, Fire, Aim: Zero to $100 Million in No Time Flatby Michael Masterson
How to Get Rich: One of the World's Greatest Entrepreneurs Shares His Secrets by Felix Dennis
Reminiscences of a Stock Operator by Edwin Lefèvre
One Good Trade: Inside the Highly Competitive World of Proprietary Tradingby Mike Bellafiore
Market Wizards, Updated: Interviews With Top Tradersby Jack D. Schwager
Andrew Carnegieby David Nasaw
Titan: The Life of John D. Rockefeller, Sr.by Ron Chernow
The First Tycoon: The Epic Life of Cornelius Vanderbiltby T.J. Stiles
Anything by Joseph J Ellis specifically:
Founding Brothers: The Revolutionary Generation
His Excellency: George Washington
The Quartet: Orchestrating the Second American Revolution, 1783-1789
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