Significant Yuan Devaluation Imminent

Posted on December 1, 2015 by MN Gordon

The Department of Commerce reported last week that U.S. gross domestic product grew at a 2.1 percent annual rate during the third quarter, not the 1.5 percent rate previously stated.  Apparently, private inventory investment was greater than initially estimated.  Nonetheless, GDP is significantly down from the 3.9 percent growth during the second quarter.

The more remarkable data point, however, was reported for corporate profits.  In particular, profits from current production decreased $22.7 billion in the third quarter.  This followed a $70.4 billion increase in the second quarter.

“Profits”, as reported by Reuters, “were down 8.1 percent from a year ago, the biggest decline since the fourth quarter of 2008.”  No doubt, a decline in profits that recalls Great Recession era weakness is not what executives are after.  Moreover, it’s likely a signal that business isn’t as strong as policy makers would have you believe.

The strong dollar seems to be the most popular culprit for declining corporate profits.  Certainly, the strong dollar makes U.S. companies less competitive globally.  It also exacerbates the U.S. trade imbalance. Continue reading →

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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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