Salting the Economy to Death

Posted on November 27, 2015 by MN Gordon

One popular delusion that won’t seem to go away is the notion that policy makers can stimulate robust economic growth by setting interest rates artificially low.  The general theory is that cheap credit compels individuals and businesses to borrow more and consume more.  Before you know it, the good times are here again.

Profits increase.  Jobs are created.  Wages rise.  A new cycle of expansion takes root.  These are the supposed benefits to an economy that central bankers can impart with just a little extra liquidity.  Unfortunately, this policy antidote doesn’t always work out in practice.

Certainly cheap credit can have a stimulative influence on an economy with moderate debt levels.  But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy.  In fact, the additional credit, and its counterpart debt, actually strangles future growth.

Present monetary policy has landed the economy at the unfavorable place where more and more digital monetary credits are needed each month just to stand still.  After seven years of ZIRP, financial markets have been distorted to the point where a zero bound federal funds rate has become restrictive. Continue reading →

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From Here to Eternity

Posted on November 24, 2015 by MN Gordon

Gentlemen-rankers out on the spree,
Damned from here to Eternity,
God ha’ mercy on such as we,
Baa!  Yah!  Bah!

— Gentlemen-Rankers, Rudyard Kipling

Insults and Offenses

For the first time in 80 years, vast numbers of hardworking, industrious people are finding themselves up the creek without a paddle.  Buying a home, paying college tuition, and squirrelling away a few nuts for retirement has become discouragingly difficult.  What’s more, the presumed benefit of these endeavors has become ever more suspect.

These days there’s a trifecta of offenses debasing the rewards of hard work, saving money, and paying one’s way.  Quite frankly, it’s insulting.  There’s nothing less to make of it, particularly for those competing in the rat race for their family’s daily bread.

Plain and simple, central bank fiat money creation, multiplied by commercial banks through fractional-reserve banking, propagates financial and economic chaos.  The experience of long periods of money supply expansion punctuated by abrupt, episodic contractions, has the effect of whipsawing the working stiff’s labors to get ahead. Continue reading →

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The Long, Cold Winter Ahead

Posted on November 20, 2015 by MN Gordon

Cold winds of deflation gust across the autumn economic landscape.  Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost.  The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch.

If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the world’s other major economies – Japan, China, and Europe – are rolling over.  The U.S. economy would power through.  Moreover, stock prices had achieved a permanently high plateau.

But somewhere between collapsing oil prices, dollar strength, and consumer lethargy the economy’s narrative has drifted off plot.  The theme has transitioned from one of renewed growth and recovery to one of recurring sickness and stagnation.  Mass malinvestments in U.S. shale oil, Brazilian mines, and Chinese factories and real estate must be reckoned.

Price adjustments, bankruptcies, and debt restructuring must be painfully worked through like a strawberry picker hunkered over a seemingly endless furrow row of over ripening fruits. Continue reading →

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The Next Frauds to Come Down the Turnpike

Posted on November 17, 2015 by MN Gordon

The general suspicion that something just ain’t right with the economy has become an obvious reality.  Hope and optimism that somehow things will muddle along, or improve, are fading.  You can see it, feel it, and even smell it.

For example, several new data points were revealed Friday.  Each offered further confirmation that the economy’s not progressing.  Rather, it’s regressing.

According to the Bureau of Labor Statistics, producer prices dropped 0.4 percent last month and 1.6 percent on an annualized basis.  Naturally, wholesale prices go down when the dollar goes up.  They also go down when there’s weakening demand.

One would think that a strong dollar would encourage greater demand in the U.S. for imported goods.  Yet that’s not what’s happening at all.  “For the first time in at least a decade,” reports the Wall Street Journal, “imports fell in both September and October at each of the three busiest U.S. seaports.”

Reduced demand for doodads from China and other exporters likely translates into weaker U.S. retail sales.  Currently, this appears to be happening. Continue reading →

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