Category Archives: markets

Panicky Central Planners

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…and maybe pundits, too.

For the Federal Reserve, the aftershocks threaten to set back its path to interest-rate normality yet again….

That’s how Alex Frangos and Justin Lahart opened their Wall Street Journal piece Monday, writing of the People’s Republic of China’s (second in a month) “market” meltdown last week and with it the demonstration by the PRC’s economic central planners and their panicky twitchings with interest rates, bank reserve requirements, market interventions, and the like that, once again, central planning cannot seriously impact economies for longer than the moment.

Never mind that the PRC has little impact on the global economy—as Frangos and Lahart themselves note, PRC imports from the US run to 1% of our GDP and all of 2% of the S&P500 companies’ revenue are PRC-related. The situation is little different for Europe: most of those nations’ economic interactions with the PRC represent roughly 1% of their GDPs as well.

They added this to their fandango:

September is still on the table for the Fed, but markets will need to calm before then.

No, they don’t. The markets aren’t the underlying economy. The markets are tied to the economy by a stout rope, but that rope has large and nearly randomly variable slack. The underlying economy, slow as the Obama recovery has been, nevertheless is in solid territory, and as Frangos and Lahart themselves concede, “a US recession led by China doesn’t look to be in the cards.”

The Fed needs to move on the longer-term state of the economy, not on the short-term, animal spirit vagaries of the markets. The Fed needs to stick to a plan—any plan—and move interest rates up on schedule, which means in September. Or better, loosen and then release controls, letting interest rates float in those same markets—which for all their animal spirits influence still are better at “managing” a free market economy than any central planners, including those at the Fed—determine the appropriate interest rate levels.

And this:

[T]he Fed’s problem with China is what it will do to a pace of US inflation that already isn’t anywhere close to its 2% target.

No, again. The Fed’s problem has nothing to do with the PRC. The Fed’s problem is that US inflation isn’t anywhere close to its 2% target, and it’s not going to get there anytime soon. Interest rates are intrinsically inflationary; the only way to move our present inflation rate to 2% is to raise/let rise interest rates to levels consistent with 2% inflation rather than continuing to suppress the one (and so the other) to artificially low levels.

There’s a Hint Here

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Boeing Co is scrambling to renegotiate an about $85 million satellite contract that became the first big casualty of the US Export-Import Bank’s loss of its operating charter due to congressional opposition.

Asia Broadcast Satellite last month terminated its order for a Boeing 702SP satellite, although the two say they are continuing to discuss the deal.

On the other hand,

SpaceX played down the threat, and said only two of the 50 launches in its current manifest were due to be backed by the bank.

And

Orbital ATK has recently relied on the bank for about one satellite deal a year, though doesn’t currently have any Ex-Im backed space business.

Hmm….

The Fed’s Error

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Many observers have called for the FOMC to tighten monetary policy by raising interest rates in the near term. But such a course would create profound economic risks for the US economy. Why would a near-term tightening of monetary policy be so problematic? Because given the prevailing economic conditions, higher interest rates would push the economy away from the FOMC’s economic goals, not toward them.

On the contrary. If the Fed’s target inflation rate for satisfying its statutorily imposed mandate of price stability is 2%, inflation rate is and has been since the Panic of 2008 substantially lower, and Fed-suppressed interest rates are artificially low—in the zero-to-not-much-more range—and have been over substantially the same time frame and longer, then the thing to do is to raise interest rates allow interest rates to float to levels historically consistent with an inflation rate of 2%.

After all, rising interest rates is intrinsically inflationary, and the Fed has (quite properly IMNSHO) said 2% inflation is the stable price inflation, not substantially less than 2%.

Continued interference in the free market, whether by the elected government or by the Federal Reserve Bank, is not just ineffective, it’s actively counterproductive.

Blunder or Opportunity?

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Russia has filed a claim for some 463,000 square miles of Arctic Sea “coastal” shelf, extending more than 350 nautical from Russia’s Arctic Sea shore. Russia intends to exploit the vast oil and natural gas deposits below the sea floor.

Senator Dan Sullivan (R, AK) thinks has demurred, thinking this in combination with Russian military force transfers into its northwest coupled with our own military drawdown is a “strategic blunder.”

Aside from Russia’s land claim and the military contrast not being particularly related to each other, Sullivan is badly overstating the implications of Russia’s seabed claim before the UN. In fact, this is a vast opportunity for us, did we have an administration astute enough to take advantage of it.

Certainly, we should oppose the claim itself, if only to retain the accesses to those deposits, along with the rest of the sea bed’s deposits, for ourselves and for our friends and allies. However, Russia’s Exclusive Economic Zone already extends for 200 of those 350 miles; reaching another 150 is significant, but if the territorial claim is blocked, it’s not that big a deal.

Now. Notice that phrase “vast…deposits.” Recall, too, that Russia’s economy is almost exclusively an extractive one, that is, the revenue Russia earns from trading with the world is almost exclusively from selling physical assets—and physical assets have finite supply. In his case, those Russian assets are oil and natural gas (much of it underneath Siberia and as yet undeveloped), and Siberian timber. Finally, recall that Russia needs oil prices to be above $110/barrel in order to balance its budget (as long as it’s as dependent on oil exports as it is), while oil prices following the shale and fracking boom in the US and Canada have been in the $50-$60 range for the last couple of years, and it will remain so for the foreseeable future.

While we should oppose the claim itself, we should be helping Russia develop and extract all that oil and natural gas (while retaining access to the technology itself. Russia already has played out most of the oil and gas that it can with its own technology; it needs western—or Chinese—technology in order to extract the rest, like that below Siberia, for which it’s working on a deal with the PRC). With that large increase in supply, the price of oil (and of natural gas) will remain depressed compared to what Russia needs to balance its budget if the price doesn’t fall further from this supply increase.

This could be a big win for us.