Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘interest rates’

•Ben Bernanke and Milton Friedman Were Right: Helicopter Money or Qualitative Easing?

Posted by Ron Robins on June 21, 2016

“Central banks are forced into more attempts to push money into their real economies to stimulate aggregate demand.  While conventional QE efforts create asset bubbles and over-valued currency, Qualitative Easing could be directed to future needs: revitalizing infrastructure, education and growing greener, more efficient renewable energy deployment.”
Ben Bernanke and Milton Friedman Were Right: Helicopter Money or Qualitative Easing? June 8, 2016, Ethical Markets, USA.

Commentary: Ron Robins
The funds required to deal with climate change are immense! The idea to use Quantitative Easing (QE) as an ‘easy’ source of funds for that purpose (re ‘Qualitative’ Easing) is highly attractive. However, I believe that government incentives and actions such as carbon taxes, depletion costing of resources, regulations favouring environmental business activities, and massive investment in environmentally supportive infrastructure and other projects at these ultra low rates (while available), are better ways to go.

The facts are that QE of any nature is highly market distorting both in the short and the long-term and does not fit with my belief that ‘nature’ (i.e. the ‘invisible hand’ of Adam Smith) ultimately knows best with regard to optimal market and economic efficiency and effectiveness.

It’ll probably be many years before we know the real outcomes of today’s central bank behaviors. What many market observers are saying now is that at the beginning of the financial crises, such actions were necessary. However, now, some eight years after the crises, central bank policies are continuing or even enlarging the scope of such measures. And almost everyone is beginning to question their efficacy in improving economic conditions. My guess is that we’ll soon see these policies backfiring and possible market chaos ensue.

Though I have much sympathy with the concept of Qualitative Easing, fiddling with the ‘invisible hand’ of markets — or the way nature functions — is not the way forward. It is not enlightened economics.

Posted in Economics, Environment, Monetary Policy | Tagged: , , , , , | Leave a Comment »

• Should we print money to fund green investments?

Posted by Ron Robins on January 13, 2015

“GQE [Green Quantitative Easing] builds on the logic of QE, but fundamentally changes its objectives. In a GQE programme, new money is created – literally out of thin air – and used to buy bonds, but in this case they would be bonds issued by [UK] government-owned Green Investment Bank, local authorities, housing associations and other similar organisations, such as drainage boards.”
— Why we should print money to fund green investments, by Richard Murphy, January 12, 2015, Finance, Guardian Sustainable Business, U.K.

Commentary: Ron Robins
What a provocative idea! It sounds wonderful in theory. But would it work in practice? So far, the effects of QE in the U.K. and the U.S.A. have been to save the financial system from an immediate collapse (though probably putting it off for a while) while spurring modest growth–if you can believe the weird changes in their statistical methodologies and seasonal adjustments. Furthermore, it’s probably only because of the massive debt in the system that has stopped it from galloping into an inflationary frenzy.

No numbers are mentioned in this article but I believe adding this GQE to the already existent QE could create a real danger of galloping inflation. For starters, most of the services and products required for such a massive increase in green development would be strained and could very easily develop significant inflationary pressures, impacting many other sectors of the economy.

Also, if GQE were to happen there would be many other groups (the National Health Service for one) demanding the same QE programme. So where would it stop? I can understand the feelings behind this move. We would all like to see a greener and sustainable world. But I believe the risks of the process getting out-of-control are too great. It could lead to another Weimar (German hyperinflation of the 1920s) experience. The German leaders of that period also believed they could control the inflationary process!

Additionally, also not considered in this article are the knock-on effects on exchange rates and interest rates. Effects, many known and unknown would rampage through the economy. In short, it’s a fascinating idea worthy of discussion. But, I for one, believe the risks are too great to adopt such a scheme on a large-scale.

Posted in Economics, Ethical Investing, Finance & Investing, Monetary Policy | Tagged: , , , , , , , , | Leave a Comment »

• Positive ‘Spin’ Grows U.S. Economy… But For How Long?

Posted by Ron Robins on November 9, 2014

‘Spin’ — “Political hyperbole, especially when intentionally misleading” — The Online Slang Dictionary

American political and economic elites are forever spinning the idea that self-sustaining economic growth is imminent. And this time the spin might be working — but only for a while.

Underpinning the spin are U.S. government economic statistics. Unfortunately — and it seems unknown to even most economists — there are huge methodological and philosophical issues with these statistics, some of which I detailed in Dubious Positive Biases in Revised U.S. Economic Statistics.

In that post I investigated how unemployment rates, payroll numbers, the consumer price index (CPI), savings rates, and gross domestic product (GDP), have seen their statistical philosophical and methodological foundations changed. And these changes almost always make the economy appear in better shape than it would have been by using prior statistical methodologies.

Furthermore, these changed methodologies have not occurred by only wanting to make the statistics more honest. No. In fact, political interference (documented by Shadowstats) is behind most of the major changes so that the government of the day appeared in a better light.

The spin of this ‘growing’ economy has been taken to heart by the richest 20% of families — those who have been able to borrow for next to nothing and invest in foreclosed homes, stock and bond markets. They have invested and seen their investments rise markedly. They are happy.

But for most people — the other 80% — they are neither happy nor convinced of the efficacy of the present government’s economic spin. (See the exit polls of the November 4 midterm elections!) Truly illustrating the difference in economic well-being between the rich and everyone else are the results of a Gallup poll.

In August, Gallup found that, “Americans with an annual household income of $90,000 or more continue to have more economic confidence than those who live in households with less annual income. Upper-income Americans had an index score of -2 in August, up slightly from -5 the past two months. Lower and middle-income Americans, on the other hand, averaged -18, similar to -19 in July.” Recent data from multiple sources indicates this divergence continues to exist.

The difficulty for most working Americans is that according to the Bureau of Labor Statistics (BLS), workers incomes over the past few years are barely matching — if at all —  their rising cost of living as measured by BLS’s own (politically influenced) consumer price index (CPI). But ask most workers and they will tell you their living costs are up much more than the government’s CPI.

This is verified by independent inflation measures such as the Guild Basic Needs Index (GBNI) which includes only food, clothing, shelter and energy (thus covering most of the expenses for the majority of people). Using their latest data points from July 2009 to July 2014, the GBNI rose by a significant 22.8% compared to the 10.6% rise in the CPI over the same period.

Interestingly, while living costs have risen and left individuals with less disposable income, savings rates have increased. It seems the experience of financially difficult times for most people in recent years, including unemployment, severe losses in home equity, and for many the need to save for a fast approaching retirement, has convinced them to save more. Savings rates are now averaging above 5% says the Bureau of Economic Analysis (BEA).

But again, savings rates would be much less if previous methodologies were used. For instance, in 2006 and 2007, savings rates were about -2% but had become +3% after methodical revisions. Savings rates prior to 1985 were mostly above 10%.

Perhaps of even greater concern is that consumer debt is once again growing much faster than incomes indicating the U.S. is on the continuing treadmill to further financial crises. Between July 2011 and July 2014, Federal Reserve data show consumer debt grew from $2,722 billion to $3,233 billion, a rise of 18.8%, compared to personal income gains over the same period of just 11.8% ($13,294 billion and $14,860 billion.)

The real concern with consumer debt was highlighted by Constantine Van Hoffman, writing for CBS Moneywatch on September 11, 2014. She wrote that, “[quoting CardHub] ‘by the end of 2014 U.S. consumers [with about $7,000 each in credit card debt] will be roughly $1,300 away from the credit card debt tipping point, where minimum payments become unsustainable and delinquencies skyrocket.” And this is with ultra low-interest rates. What happens when they rise?

Rapid debt accumulation in excess of income growth indicates people demanding goods and services now no matter the eventual financial cost to themselves. To me, this suggests — barring extreme confidence about their future circumstances — the possibility of deep inner insecurity and lack of personal fulfillment among individuals. Unbeknownst to our political and economic leaders, this mental state is really the central issue that has to be resolved before lasting economic sustainability can be gained. (See, The Missing Ingredient in Economics — Consciousness.)

Government and financial institutions are aware of the harm caused by excessive and irresponsible debt growth and asset valuations. Alan Greenspan, former Chairman of the Federal Reserve, has remarked that central banks are afraid to ‘prick’ asset bubbles for fear of causing market chaos. So, our economic elites believe they must continue to spin the illusion of economic good times no-matter the reality. Eventually, as in 2008, the illusory good times end, and sadly, financial difficulties and ruin occurs for many.

As understanding grows about the spinning of government economic statistics, as increasing savings rates restrain consumer spending, and as consumer debt rises far faster than incomes, it is just a question of time before the spin stops working and a bust ensues. For now though, the spin is working for the 20%. And they are happy.

© Ron Robins 2014

Posted in Consciousness/Psychology, Economics, Monetary Policy, Statistics, Unethical Statistics | Tagged: , , , , , , , , , , , , , | Leave a Comment »

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