Constructive Simplicity for China’s Communist Party Plenum

Posted on October 27, 2015 by MN Gordon

The People’s Bank of China cut benchmark interest rates by 0.25 percent on Friday.  This was the sixth time they’ve lowered interest rates within a year.  Bank reserve requirements were also reduced by 0.5 percent.

Economic growth has gradually declined in China over the last several years.  The official rate of GDP is at 6.9 percent, though that number should be taken with a grain of salt.  Nonetheless, a 6.9 percent GDP isn’t quite up to Beijing’s edict.  Something must be done.

Stimulating demand with cheap credit is the expedient policy for central bankers.  This move may even propel government statistics in the direction they want.  But, given that China’s economy has already been stimulated to death, what is it that the People’s Bank of China is trying to achieve?

Beijing’s policies of mass credit creation have enticed the Middle Kingdom’s corporations to borrow gobs of money.  Naturally, how this borrowed money was spent hasn’t always penciled out a return.  In short, borrowed money has been invested in losing enterprises. Continue reading →

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Lost in Extrapolation

Posted on October 23, 2015 by MN Gordon

In the late 1970s the impossible happened.  Inflation and unemployment simultaneously went vertical.  The leading economists of the day were flummoxed.

The Phillips curve said there’s an inverse relationship between inflation and unemployment.  When unemployment goes down, inflation goes up.  Conversely, when unemployment goes up, inflation goes down.

How could it be that both were going up at once?  Weren’t they mutually exclusive?  Indeed, it took years of heavy handed government intervention to pull off such a feat.

When unemployment began creeping up in the 1970’s the U.S. Treasury, with backing from the Federal Reserve, did what Keynes had told them to do.  They spent money to stimulate the economy and spur jobs creation.  According to the Phillips curve, with rising unemployment the planners could have their cake and eat it too.  They could run large deficits without inflation.

Unfortunately, something unexpected happened. Continue reading →

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Economic Profanity

Posted on October 20, 2015 by MN Gordon

Significant changes are taking place.  As we noted several weeks ago, for the first time in 27 years wealth is not flowing into emerging markets.  It’s flowing out.

The global economy everyone has known since the late 1980s is being stood on its head.  Symbiotic relationships of production and consumption, of savings and debt, of eastern and western push and pull are backing up.  For 2015, net outflows from emerging markets are projected at $540 billion.

China, of course, is the major focal point.  From what we gather, $140 billion vacated China in August alone.  That amounts to over $1.6 trillion on an annualized basis.

Naturally, this is causing quite a disruption to international currency markets.  If you recall, Beijing had to execute a surprise devaluation of the Chinese yuan several months ago.  Too much steam had built up behind their dollar peg…they had to let some out before the top blew off.

At the same time, with all this money exiting its economy, China must support the yuan in the foreign exchange market. Continue reading →

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Abolish the Federal Debt Limit

Posted on October 16, 2015 by MN Gordon

One trouble with government programs is they mislead people.  Recipients believe they are getting a benefit when, in effect, they are unwittingly being placed in harm’s way.  Time and time again, under the influence of a benevolent hand of government, otherwise able and intelligent people are compelled out onto a crackling tree branch.

Take Social Security, for instance.  Several generations of hard working Americans have adjusted their saving and retirement planning because of this program.  Why save and invest for your golden years when Uncle Sam has your back?

The working populace has been promised monthly checks in retirement in exchange for compulsory wage garnishment.  For some, this promise is already coming up short…no COLA in 2016.  But, perhaps over the next decade or two, it will be entirely broken or, at the least, severely compromised.

“Benefits for older Americans — especially through Social Security and Medicare — account for the largest part of federal spending today and for the lion’s share of the spending growth that will occur in coming decades without changes in policies,” Continue reading →

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