Tag Archives: economics

Market Timing

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Gerald Driscoll, Senior Fellow at the Cato Institute and former vice president at the Federal Reserve Bank of Dallas, thinks the Fed should engage in market timing regarding its planned short-term interest rate hike in September—a planned move that he actually calls a course change.

The world markets are in turmoil, he worries, and the Fed should delay its planned hike. Why raise rates now, he asks.

Why not now? Well, the inflation rate doesn’t justify a monetary tightening, he says.

Well, raising interest rates now—or in September as the Fed has said it’s ready to do—from their current suppressed-to-artificially-low rates, and bringing them closer to rates more consistent with the Fed’s price stability goal of 2% inflation isn’t monetary tightening. On the contrary, that would be controls loosening. Letting the market determine interest rates will spur economic growth and national—and individual citizen—prosperity.

Low interest rates were thought to be stimulative. But we have learned that financial intermediaries struggle with spreads in a low-interest-rate environment.

Indeed. Many of us have learned also—and the Fed should have learned this, too—that we all struggle with artificially low interest rates: they’re inconsistent with a robust economy.

The Fed isn’t any better at market timing—at predicting the actions of animal spirits—than any other institution or collection of skilled investors. The key to prosperity is discipline, sticking to a plan even when things seem momentarily uncomfortable.

The Fed should be disciplined and stick to its plan. It shouldn’t try timing the animal spirits.

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.

A Hot Hand

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As economic managers, Chinese leaders have been in a league of their own for the past quarter century.

They’re the product of a bureaucratic system that, at its best, weeds out underperformers, rewards achievement and prizes experience. By the time they reach the very top, most leaders have run provinces the size of whole countries. Their image of competence has been reassuring at home—and acknowledged abroad—at times of crisis. And they’ve delivered success: China’s economy grew faster, and for longer, than any in history.

That’s how Andrew Browne opened his recent piece in The Wall Street Journal. Then he added,

Now, as growth slows sharply and markets fear more bad news, the stewards of the world’s second-largest economy appear to be losing some of their golden touch.

No. There are some misapprehensions here. One is tacitly acknowledged, apparently without recognition, by Browne:

According to international economists who have been briefed at a high level in Beijing, it became clear that regulators didn’t have a clear picture of huge money flows from the banking system to the stock market that were inflating a bubble.

That’s just it: central planners never have a clear picture of huge money flows, whether from the banking system to the stock market (which is puny, in any event, relative to the PRC’s economy when it’s compared with, say, the DAX, or FTSE, or NYSE, or…), or to any place else, or from any place else. Central planners have no clear picture of any aspect of the economy they’re pleased to mess with regulate.

The PRC’s economy, though, grew faster and longer than any in history? It grew from very deep depths, a bottomed-out baseline that featured frequent famines and mass starvations, backyard iron mills, and the like. And it grew on the largest population in history. Against that basement-level baseline and that population on which to erect an economy, a high schooler learning to spell economics could have “regulated” the thing in that kind of growth.

The PRC’s economy, though, grew faster and longer than any in history? It grew from those depths in an era of unprecedented free trade and globalized and entangled economies. The PRC’s cheap labor, coupled with easy shipping and already developed manufacturing techniques coming in from outside the PRC potentiated the growth.

That bureaucratic system that has weeded out underperformers and rewarded achievement and experience—brought to the top guys who’ve run provinces the size of whole countries? Define “achievement” and “experience.” These guys have achieved a lot in the political game, in the game of rising to the top of economies, and of doing so where the cost of money—actual budgeting—has never been a factor. These guys have not achieved overmuch in business, much less in economics; their experience here is…low.

No, as any poker player can recognize, the PRC was just the guy at the table who got to play a hot hand. Now the PRC’s economy has grown up a lot, the stakes have gotten larger and more complex, and the Chinese central planners, like all central planners, have gotten in over their heads, and their lucky streak has played out.