December has been a wild month so far. Markets have gone haywire. The DOW dropped 890 points before running back up 710. Oil prices have been slashed 26 percent to just $55 per barrel. Gold has gotten kicked in the chin.
But it could be much, much more erratic. Just ask Russian President Vladimir Putin. He’s got big problems. For instance, the Russian ruble has depreciated 50 percent this year against the dollar. What’s more, earlier this week, the Russian central bank had to jack its key interest rate up from 10.5 percent to 17 percent.
Could you imagine if the federal funds rate was at 17 percent? Nearly every asset bubble would pop overnight. Financial panic would follow and the economy would be flattened.
Certainly, economic prospects in the United States are much better than in Russia. For one thing, the United States is not solely dependent on oil revenue. The economy is much more robust and dynamic.
But that doesn’t mean the United States is immune to the consequences that come with being a poor custodian of one’s currency. Everyone eventually gets what they deserve. We are confident the chickens of prolificacy will one day come home to roost.
The Inevitable Rise of Poverty
However, at the moment, it’s Russia’s turn in the barrel. Here’s a brief summary of what the Russian populace has to look forward to…
“On Tuesday, top economic officials said, in effect, that Russians would simply have to get used to worsened living standards,” reported The Washington Post. “Deputy Prime Minister Olga Golodets said poverty would ‘inevitably rise’ because of inflation. Elvira Nabiullina, president of the central bank, said that ‘these new conditions demand a change in behavior,’ one that involves ‘getting rid of expensive imported goods’ and replacing them with cheaper Russian ones.”
At the moment, the Russian government anticipates inflation will rise above 10 percent and the economy will fall into a recession. If things continue the way they are, it won’t be long before store shelves go empty. That’s what happened during the Russian default of 1998, when consumers attempted to dump their currency for anything of real value.
Obviously, Putin’s calamity is being caused by the collapse in oil prices. Like many oil fracking ventures in the United States, the Russian government’s standing has been predicated upon expectations of perpetually high energy prices. Now that this premise has been disproven some adjustments must occur.
Mistakes must be written down. Bad debts must be purged. Unprofitable operations must be shelved until supply and demand relationships warrant higher prices.
Exactly When the Fed Will Raise Rates
As the world turns from east to west this week, the market’s reaction to Federal Reserve utterances is breathtaking. Janet Yellen let loose with a little drivel on Wednesday and the DOW jumped 288 points. Then on Thursday, the DOW spiked up another 421. Go figure?
“Janet L. Yellen, the Federal Reserve chairwoman, said on Wednesday that the Fed still expected to start raising interest rates next year, but that it would wait patiently for the right time and did not expect to begin any earlier than late April,” reported the New York Times.
“Ms. Yellen’s remarks, and a statement issued by the Fed’s policy-making committee, both emphasized that the nation’s central bank was not inclined to act more quickly in light of positive economic news, including stronger job growth and plummeting oil prices.
“The Fed removed from the latest policy statement the phrase that it would wait a ‘considerable time’ before starting to raise rates, widely interpreted as meaning at least six months. But at the same time, it said the Fed did not intend to signal a change in intentions.”
Here at the Economic Prism we do not think the Fed will ever raise the federal funds rate unless, like the Russian central bank, they are forced to. At the most, if the Fed does get to the point where they raise rates, it won’t be for long. For the United States can’t afford prosperity.
Stocks may have celebrated Yellen’s words with gusto on Wednesday and Thursday. No doubt, this will be short lived. Soon stocks will despise Yellen’s words…and her silly haircut. Then what will she do? Will she follow through with sustained rate increases?
Don’t make us laugh.
for Economic Prism