Here's my summary of the key news overnight in 90 seconds at 9 am, including news that S&P is threatening a number of smaller NZ banks with a downgrade.
Bernard Hickey has the details here, but the essence is that the ratings agency is worried how the growing current account deficit, high household debt and high house prices are compounding banking credit risks. Their concerns do not extend to the big four banks however.
Evidence is mounting that the US economy is slowing. As more regions report, factory activity is slipping, and construction of new housing is falling away too.
Consumer price inflation is falling in the US and has been just +1.1% over the past year. However, prices have fallen in the past two consecutive months and have been at zero (no change) or lower in five of the last six months. Deflation is a real risk in the US.
At the same time real average earnings are hanging in there, up +0.5% - take-home pay is buying a bit more. American hourly wages are rising slightly, but the number of hours worked is falling slightly.
The news is better from Japan. Its economy expanded the most in a year last quarter as consumer spending and export gains outweighed weaker business investment. GDP is growing at the rate of 3.5% pa, and that is faster than the US's 2.5% in its latest Q1 measure. Not everyone is applauding the Japanese strategy however.
The Dow is up, holding its recent gains, gold is falling, and industrial commodities like copper and aluminium are down in price by about 1% overnight.
The NZ dollar starts today quite a bit lower at 81.8 USc tracking the waning Aussie lower and its lowest level in 2013, 83.1 AUc, and our TWI now stands at 76.9, the first time it has been under 77 since March.
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4 Comments
Deflation is a real risk in the US.
When wasn't it ever thus?
The theoretical case for the gradual suppression of the rate of interest to near zero rests on the fact that it increases the present value of durable goods, thus providing incentives for investments – as opposed to paying down debt.
The theory of gradual reduction of interest rates as a way to stimulate economic activity is totally untenable. Businessmen will stay lethargic as long as the fall continues. They will refuse to take the loans offered. They know that what looks like a low rate today will be a rate too high tomorrow.
Entrepreneurs who finance their business today will have a hard time to compete with those who finance theirs tomorrow, who in turn will have a hard time to compete with those who finance theirs the day after tomorrow. The upshot is that no sound investments can be made as long as the fall of interest rates continues. Bernanke and his Fed think that they sow the seeds of inflation, but they will only reap deflation, lots of it. The tragic thing is that people are preparing for inflation whereas they should be preparing for deflation. They will be devastated when they find out that the leadership at the Fed and the Treasury didn’t know what the heck they were doing while they were ZIRPing.
Under a prolonged decline of interest rates capital is being eroded and, ultimately, destroyed. If this seems paradoxical, it is because of the reluctance of the mind to admit that a higher bond price represents a higher liquidation value of the underlying debt – an obvious proposition. In other words, a fall in the rate of interest, far from alleviating the burden of debt, aggravates it.
Here is what happens. The rate of interest falls. The liquidation value of debt, contracted earlier at higher rates, rises. Why? Well, because now the stream of amortization payments is being discounted at a lower rate. Therefore at maturity there appears a shortfall. This shortfall represents the impairment of capital.
Accountants may ignore it, but only at the peril of the firm that one day will wake up to find that, surreptitiously, it has been denuded of capital. All accountants and bank examiners in the world, aided and abetted by governments, overlook the impairment of capital due to the falling interest rate structure.Read article
SH, Agreed, very good. A major factor behind the no-growth era most of the West + Japan finds itself in is aging demographics and the communal psychology that flows from that. When/if the USA finally, seriously, tries to exit it's funny money the Dow will collapse and the response will be to quickly follow Japan. On the road to Hell. I'm not trying to make an argument for funny money here, it's just that the Fed has started something that there may be no way out of (black-hole?) As Das says, the US Fed (et al) have stepped on an economic land mine and it won't blow up until they try and step off!
Ergophobia
That is quite a read! Carried through to its logical conclusion the destruction of capital caused by the declining interest rate environment will (eventually) cause production to contract. Combined with money printing then you have lots of money chasing fewer goods, the ultimate result is that deflation will be followed by hyperinflation.
Would like to see Fekete explore the destructive effects of interest a bit more. His examples of the Real Bills Doctrine in work all point to phases of industrial expansion, ie: sufficient production to pay the interest. By my reckoning it isn't only the Quantity Theory of Money that doesn't work with interest, the Real Bill Doctrine falls over also. Interest will eventually destroy any money supply.
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