On December 14, right before the FOMC decision I took a snapshot of rate hike odds and posted them in Fed Hikes Today, Then What?
Today, we compare the before vs. the after, the latter is from Friday, December 16.
Following that comparison, I present my reasons why all the expected hikes are not coming.
March 2017 Rate Hike Odds Before
June 2017 Rate Hike Odds Before
September 2017 Rate Hike Odds Before
March 2017 Rate Hike Odds After
June 2017 Rate Hike Odds After
September 2017 Rate Hike Odds After
Market Expectations Before and After Synopsis
- March: The market did not expect a hike at the March meeting either before or after the FOMC Meeting. Nonetheless, the odds of March hike rose from 15.8% to 25.3%.
- June: The odds of at least one hike by June rose from 54% to 75.3%. Odds of two or more hikes rose from 11.5% to 24.9%
- September: The odds of at least one hike by September rose from 70.2% to 89.1%. Odds of two or more hikes rose from 28.5% to 55.5%. Odds of three or more hikes rose from 6.2% to 20.2%.
This is a much more aggressive assessment that before the FOMC meeting.
Mish Expectation
I have been betting against rate hike consensus opinion for years. The Fed managed to get in one hike in each of the last two years, both in December, vs. Fed assessments of 3-4 hikes each year.
For the third straight year, rate hike expectations for the coming year soared in December, only to quickly die at the beginning of the next year. Expect more of the same.
Five Reasons Fed Won’t Hike Twice in 2017
- Housing looks weak, and mortgage rates have soared. See Housing Starts Dive 18.7 Percent: Mortgage Rates Soar.
- The New York Fed assessment is 4th Quarter GDP will be 1.8%. If so, 2016 GDP will be on the order of 1.6%. Three hikes? Really? See Nowcast, GDPNow Diverge Widely Again: What Happened?
- The strengthening US dollar is hurting exports. See Trade Deficit Widens, Exports Decline 1.8%, Imports Rise 1.3%: Two Piece Puzzle
- Trump’s policies risk a major trade war. My baseline scenario is Global Trade War Baked in the Cake: Boeing Faces China’s Wrath. Also note China Tells Trump “Nothing to Discuss” If US Drops “One China” Policy.
- Retail sales weakened, led by autos. Retail Sales Unexpectedly Dive: Spotlight on Cars and the “Amazon Effect”
Bonus Reason
If you are looking for a bonus reason, consider interest on the national debt: Rate Hike Spotlight: Interest on National Debt; What Can Possibly Go Wrong?
It would not surprise me in the least if the Fed did not hike at all. It would not even surprise me if the next move was a cut.
Mike “Mish” Shedlock
I too doubt that they will hike three times in 2017.
That seems more like a “wishful thinking” / “best case scenario” for them, where the economy shows sufficient strength to justify the hikes.
Even if they do, by some miracle, manage to hike three times next year, that would still leave the Fed Funds target at just 1.25%-1.50%. So what the heck is the 10-year Treasury doing at 2.60% right now? Factoring in three hikes a year every year for the next four years and no recession EVER?
With the “recovery” set to enter its 9th – yes, NINTH – year in July 2017, recession is a distinct possibility next year. In which case, as Mish points out, all bets are off.
Your reply accepts circular logic as good logic.
The economy is not good so rates should not rise. Yet, implied, QE and NIRP/ZIRP are bad and must go. But they can’t go NOW because we’re not ready to see them go yet.
The economy (actually ALL economies) puttered along quite nicely with higher rates for hundreds of years.
As I wrote below at the bottom, stories like the one above and replies such as yours read like Gollum arguing with himself under the influence of The Precious.
Abnormal interest rates and the consequence of abnormal rates and asset purchases have morphed into a new normal and textbook economics is being used to analyze the situation as if it is really normal, as opposed to an aberration.
But, as you might ask in fright, Won’t things get really bad if we return to normal. My reply is “Maybe, maybe not. Applying textbook logic to abnormal economics is ridiculous. And if things do get bad, the only people to blame are the idiots who put us in this position in the first place. Perhaps their cynical plan all along was to create a permanent liquidity trap where the fear of problems if steps towards normality keeps the abnormal in place.
I think you are confusing a PREDICTION interest rates wouldn’t be increased three times with an ENDORSEMENT of that policy.
Politely disagree. While I respect Mish’s opinions and agree with him on a lot, he sometimes states the Fed can’t raise rates because of the bad times that might be ahead which will get worse if they do. (my characterization.) Many others fall into this same trap. I look at that as Gollum-think.
I’ve never thought that he agreed with that notion, only that he believed that the Fed believes it. Maybe I’ve misunderstood him, in which case I agree with you.
I too find the hypocrisy amazing. NIRP is bad, the fed is evil… but, but — don’t raise rates now, or too fast.
I also find it amusing that anyone thinks futures or betting markets predict anything. It is as if they think crowd behavior somehow knows the future. Is this an admission of metaphysics or superstition? I wonder.
I guess everyone already forgot the election.
One thing I do know. The hucksters who claim to be able to predict the future years down the road, don’t know what they will have for dinner tomorrow.
We’re ripe for a big correction and/or recession.
We might even see an about-face and witness them cut rates, even as low as they are.
We’ve entered a new era where logic and reason and common sense are looked upon with disdain.
That is just so glowing right now, and worse yet, those big corporations borrowed all that currency to buy back their shares. They collected their big bonuses, but when they come back to the public to get bailed out, the public’s going to have a huge left over boner to serve from the last time they got defrauded.
Yet we will roll over and take it because we will be given no other choice beyond voluntary self destruct.
Obama is no longer president, so they don’t have to protect the economy and the markets anymore. The politics are no longer in play. Her term is now limited anyway.
Trump has no friends among the republican party leaders, they might encourage more rate hikes knowing that housing led economy will puke (as another poster eloquently described) on itself and the Donald’s finely tailored suits.
the economy and us gummint are junkies hooked on near zero interest rates, national debt financing costs will explode if interest rates return to anywhere near normal so the donald won’t be able to build infrastructure or wage discretionary wars. The fed would be bankrupt if they couldn’t revise MTM rules to suit their purposes if interest rates suddenly spiked. totally painted themselves into a corner
If the Fed really is that concerned about party politics, that would be a major boon for a Trump presidency. No matter who one supports, natural, unmanipulated interest rates in an ear as risky and unpredictable as now, is bound to be at least 5-7%. Hence, the closer the Fed gets to that, the better off the economy is. Even of they get there for the altogether “wrong” reason of messing with The Donald.
Heck, they could crank rates to 20%, and keep them there long enough to kill off both The Donald’s reelection bid, AND most his personal wealth, as so much of it is tied to the performance of the top-of-thep-leverage-pyramid New York real estate permabubble. And, as far as “the economy” is concerned, even that would only be the beginnings of righting the wrongs of the past 40 years of unconstrained financialization and debasement.
So, bring it on! One of the few benefits of as bad as it gets, is pretty much anything is an improvement!
If the fed drove real estate into the ground, Trump BUSINESSES would likely go under, but the family would retain billions. Learn what a corporation is, then come back and comment some time.
Any kind of crash would allow people like the Trumps to pick up bargains and multiply their wealth many times over.
Don’t know his personal situation, but you’d be surprised how effectively levered most rich guys are. Very few sit in cash, gold and bitcoin. Most of them got rich by being unusually strong believers in the hype, and being handsomely rewarded for it. Something which rarely results in them taking billions off the table while watching their buddies/competitors float away up the Forbes list in the next bubble.
But regardless, the important point is that by far the biggest beneficiaries of a bursting bubble, are those with the simultaneous sense to recognize it and stay away, while at the same time working on developing skills valuable for something other than running around picking up fresh print outside the Fed building. Which is another way of saying; many of the Trump voters that comprise the working and middle classes.
The housing market would puke all over itself if the Fed hiked 3 times next year. I agree that they’ll be lucky if they get even one hike in. The housing market is already approaching an an air pocket early next year with this recent rise in rates.
Mish its been proven time and again that low interest rates do not by themselves stimulate business borrowing into expansions. Businesses don’t take on debt unless they have a profitable use for the funds. Duh.
Many big companies have been stupidly taking additional debt and purchasing their own shares so when interest rates rise the debt has to be paid back because it can’t be rolled over which destroys earnings or the debt has to be rolled over with new debt at higher rates which destroys earnings.
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Purchasing the firms own shares with borrowed money is the stupidest thing you can do and yet many companies have done it with CEO’s showing they are either clueless to put money into productive use or just wanting to ensure they can cash their options at a higher stock price boosted by the buybacks.
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Buybacks magnify earnings per share but they also magnify losses per share so there will be some huge crashes in buyback heavy stocks when buybacks have to be stopped and earnings crash.
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I would make it against fiduciary duty to invest in any such companys stock which has used debt to buy back it’s own stock to stop the buyback insanity.
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Company should only buy back it’s own stock when the company is debt free and can fund buybacks with their own cash and still leave available cash at over 5% of the stocks value after doing the buyback and the stock is trading over 60% lower than the highest stock price in the last 5 years.
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Stock buybacks are an insanity lobbied by greedy CEO’s, clueless bankers and ill-informed consultants which all benefit from buybacks.
If I were working, I would have been up the CFO’s ass had he not been buying back shares at those rates. Actually amazed all public companies, with good growth prospects, did not go private over the last few years.
How very, very, true. Have made some decent returns in a couple of areas as smaller companies have gone private with growth and potential to return to the market in 3-8.
“Actually amazed all public companies, with good growth prospects, did not go private over the last few years.”
Awesome. I like hearing positive stories. Now I need to go slave over making a risotto.
And Shhh!!!… don’t tell that option 3 is re-issuing equity (at nice fat highs in the market) and buying back the debt with it. Not that that was even the point of my argument.
The Fed’s 3 hikes in 2017 is a scare tactic/psychological maneuver to get people thinking they better borrow some money now before rates go up more. The Fed is all about getting economic activity pumped up, until it gets too pumped up.
One reason why Fed might hike 3 times in 2017: Now that Trump is President-elect, Yellen doesn’t care if the stock market tanks (as compared to propping up the stock market to favor Hillary during the campaign) and higher interest rates will tend to tank the stock market (all things being equal). Plus, raising interest rates now gives the Fed some ammunition if and when a recession hits — so it wants to raise. Trump doesn’t care if the stock market tanks now because he can blame it on Obama. But come 2020, Trump will want the Fed to lower interest rates and prop up the stock market to bolster his chances for reelection. So, where the Fed wants to raise interest rates and Trump doesn’t care — there could be 3 hikes in 2017.
Sentiment is taking over from logic.
Rates increases might be taken of signs of economic robustness with the authorities behind the curve. Market moving higher.
Doesn’t matter if this is true, sentiment reigns.
Meanwhile smarter money moves out of the way.
Further rate increases would be no surprise and the questions would be what straw breaks the camels back and when?
Best to tread carefully, step aside except in conviction holds, and wait. Missing the last 20% upside.
Trump has nominated Mike Mulvaney, reputedly a fiscal hawk, to head the Office of Management and Budget. I hope this leads to some serious government shutdowns but it also represents another reason the Fed won’t hike rates.
It’s gonna get interesting to see whether the elite members of Congress are going to allow their gravy train status quo to be disturbed. “Cocaine” Mitch McConnell and “Parasite” Paul Ryan are among the many that definitely do not want accountablity. We will be lucky to see anything other than a fight against his appointment picks in the first 100 days IMO.
The government WILL shut down, no matter what cheap rate the Fed offers money center banks. Medicare goes bankrupt in about 18 months, while Obamacare costs for everyone else are rising 5-6x faster than GDP…
If your costs are rising 5-6x faster than your revenue, you will go out of business. End of story.
In spite of “endless free money” from Mario Draghi — the leaders of Greece and Italy (and soon France) continue to ignore the beautiful women of their countries in favor of staring at accounting statements and begging for bailouts… I doubt that was their choice.
sorry — this was a duplicate. Was supposed to be a new comment below
It’s the new era of Trumphoria! Everything is coming up roses. The law of gravity has been repealed. We’re making America great again!
http://bitsandpieces.us/wp-content/uploads/2012/05/imageslincoln-kennedy.jpg
The US Federal Reserve Bank was created in 1913. Lincoln died in 1865.
It is not part of the federal government, it has no reserves, and it is not a bank.
Instead it was authorized by the federal government, can create money from nothing, and is a cartel of banks. While it’s main purpose is to serve it’s banks, it tries to help the economy (not always successfully) because that is good for the banks. The government likes it because it finances the government’s deficit spending.
First, as CJ already pointed out:
“The US Federal Reserve Bank was created in 1913. Lincoln died in 1865.”
Second:
The money center banks that own the Fed are all in serious trouble (their current business model is obsolete). Arguing about the price of buggy whips isn’t going to stop the automobile.
Reagan is also known to have wanted to end the “federal” reserve.
it was former Representative Henry Gonzalas (D-Texas) who wanted to end the Fed during Reagan’s term. Reagan very strongly supported Paul Volcker.
Gonzalas, I forgot about him.
Gold standard suspended in 1862 and the Greenback was put in its place.
No one suspended gold redemption (at least not officially) — they were busy fighting the civil war / war of northern aggression (depending on which side of the Mason Dixon line you are reporting from).
Federal “Greenback” didn’t exist until 1914, with creation of Fed. Before that, money center banks each issued their own currencies (which sounds like a mess, and it was)
https://fee.org/articles/banking-before-the-federal-reserve-the-us-and-canada-compared/
Wrong. As stated above, the Federal Reserve was established in 1913. Lincoln was assassinated in 1865.
Andrew Jackson revoked the charter of The Second Bank of The United States (the Central Bank of its day) in 1836. He died of natural causes in 1845.
So that graphic is complete bullsheet.
“what else do they have in common?
Correlation is not causation.
Don’t ask what is best for the Country – just ask what is best for the Banks.
Five reasons?
(1) Housing does look weak — but cheap money for banks won’t make a milenial living in their parents basement working as a waiter/waitress suddenly able to pay off their student loans… never mind buy a house
(2) The new york fed’s guess-timates? Please. I am sure the subprime contagion is still under control
(3) The US dollar is “strengthening” because Europe and Japan are collapsing, while China is pivoting away from customers who cannot pay. Fed Funds rates have nothing to do with it
(4) A “trade war” is just click bait for TV networks. Not going to happen. Can’t make America Great Again by cutting off the world; Can’t make China Great again / still by cutting off the world. The “trade war” is 90% a television personality problem, and 10% negotiating tactic
(5) Retail sales are weak because “Under 30hr/week Obamacare jobs” do not pay the bills. Free money for JP Morgan hasn’t fixed that in the last 8 years, and won’t fix it in the next 4-8yrs either.
Mish is looking at Fed Funds rates like the calendar still says 1990-something.
The Fed raised rates last week because they ***had to***, not because they wanted to — and that won’t change no matter who is in the White House or what clueless PhD is in the Eccles building.
Trump will focus on repealing Obamacare, and coming up with a system that addresses health COSTS (not insurance) — healthcare COSTS are a regime threat. Clueless old lady shuffling around the Fed for another year is not.
“The Fed raised rates last week because they ***had to***, not because they wanted to — and that won’t change no matter who is in the White House or what clueless PhD is in the Eccles building.”
I suppose if they did not raise the rates inline with the market forces, then at some point there would be a failed bond auction? I suppose in that event, then the primary dealers would have to buy but then they would need to liquidate something else — Like stock I suppose. So, they have to raise rates to attract buyers as you suggest. I guess China is not soaking it up anymore.
As long as the government spends recklessly now, the rates have to go up until it stops.
Interest rates are already horrifyingly negative. Woe to pensions and 401k plans if rates go ever more negative.
Your bonus point is all the reason needed to not appreciably raise interest rates, unless the U.S. govt could get lower rates because it is the safest/best house in the bad neighborhood of ‘where to invest your money-ville.’
P.S. – as soon as we identify that place, I’m moving there! 🙂
The government WILL shut down, no matter what cheap rate the Fed offers money center banks. Medicare goes bankrupt in about 18 months, while Obamacare costs for everyone else are rising 5-6x faster than GDP…
If your costs are rising 5-6x faster than your revenue, you will go out of business. End of story.
In spite of “endless free money” from Mario Draghi — the leaders of Greece and Italy (and soon France) continue to ignore the beautiful women of their countries in favor of staring at accounting statements and begging for bailouts… I doubt that was their choice.
fake news
u inlist yet? gunna phite russa?
@phil — “fake news”
The ID “phil” is usually a short form of “Phillip”, a male name. I guess you might be gay or something…
…but I am pretty sure the men “leading” of Greece and Italy (and soon France) are not willfully choosing accounting statements and begging over beautiful women.
Well OK, maybe calling them “leaders” might be fake news. How about “involuntary hari-kari guides”?
Draghi is hurling pallets of “free” money at them, and it isn’t solving anything.
I know… the USA is special and won’t meet the same fate as every other global power throughout history. The US can spend and waste and spend and waste … and never have to face any consequences.
I give it the same odds as heterosexual politicians choosing accounting statements and begging over beautiful women.
Its fake news because those countries are forced to borrow in a foreign currency and the US is not.
Jon, a hypothesis:
Foreign holders of US currency are owed, hence the US is borrowing from them. In trade terms, which are part of the basis of the value of fiat (existing or future wealth), the US is in debt. To honour that debt it is debasing its currency and national economy/finance. Hence it is only doing what Euro is doing, but by its own hand and to its own tune. Looks more coherent , but it is an illusion to think the US is not at the mercy somehow of dependence on foreign creditors The point is not who is most at mercy ( creditor or debtor) , simply that both are at each others mercy. International law has no custodian but mutual benefit or mutual loss, the latter ultimately being war. Greece in Euro is just one path to the same, one that is obvious due to the schisms in social and political realities that lead to precipitous confrontation. Same may occur with US and other country, or socially within US, but by different route.
@chrysangle — Jon Sellers really isn’t worth replying to.
I come to Mishtalk hoping to get opinions of **intellegent** people with different opinions. Sometimes I change my mind, other times they make me aware of risks I hadn’t considered.
But there are also people who live in San Francisco la-la land, daydreaming and hopelessly disconnected from reality. They think the magic beans from Jack and the Beanstalk is an economic policy paper. There is a big concentration of them in San Fran, but unfortunately George Soros is breeding more of them everywhere he can get away with it (but Soros himself expects to be paid in cash, not in IOUs)
California already went bankrupt and already defaulted — paying creditors in IOUs. It is a land of silicone breasts, movie scripts, special effects, and endless IOUs.
Its one thing to pretend and fantasize in a movie script — its another thing when you can’t tell the difference between the fantasy and reality.
Trying to explain economics to people like Jon Sellers is like explaining sub-particle nuclear physics to a “James Bond girl”. Its entertaining for a movie script; but not in real life.
If he can’t be bothered to learn simple math and balanced accounting — then he isn’t worth wasting time on.
With a 0.25% rate increase every year, it will take 18 years to get back to 5%. Of course, it will never get that high again, at least not willingly. And just watch what the interest on 20+ trillion dollars will be. Lots of nice graphs here:
HIGHER INTEREST RATES WILL RAISE INTEREST COSTS ON THE NATIONAL DEBT – Dec 14, 2016
http://www.pgpf.org/analysis/2016/12/higher-interest-rates-will-raise-interest-costs-on-the-national-debt
And like I said, it will never be allowed to get to 5% willingly. Not that the CBO projections are any more accurate than the IMF’s and the Fed’s, here’s their graph, one from the above linked article:
http://www.pgpf.org/sites/default/files/CBO-projects-that-interest-rates-will-rise-significantly-from-current-levels.png
The Fed always follows, which is why they will raise. I will say it again, the only thing the Fed cares about is its reputation as a serial bubble blower. The global inflows into stocks turns into a bubble as retail jumps on board, and the more the Fed raises to stop the bubble, the more capital it attracts. Can you say soveriegn debt default!
Defaulting on promises to veterans by having a half -ssed VA hospital system is also a default. The full faith and credit of the US government is on the line.
Defaulting on promises to educate young people (public schools, heavily tax subsidized colleges, etc) — indoctrinating young people into political causes instead… another form of default.
Collecting money to fix roads, and then not doing so? Yep, a promise is a promise, and decades of potholes is a default..
Claiming to serve the public, while demanding more compensation (including benefits, etc) than the public gets? You guessed it: that is default (and arguably fraud).
Paying interest rates that do not cover inflation you cause, nor the taxes on said interest that you charge — its just slow motion default. This isn’t the first time Uncle Sam IOUs have been “certificates of confiscation”.
Incurring “debt” that you have zero intention of ever paying (the plan right now is to stick future generations with the bill) — that is just plain fraud.
Pretending that Treasury debt is somehow not already in default? That is denial.
All of the govt lies and abuses that you highlight and is becoming more visible as the economy declines and the swamp is drained is why confidence is declining, and why money will flow from public (trust) to private (no trust). There are many more failures of govt that are impacting confidence, but the lack of prosecutions of obvious frauds and abuses by banksters, and anti-trust violation by the healthcare industrial complex are on the top of the list.
The more serious problem is the corporate media and establishment politicians, which includes hacks like McCain and Graham, that continue to push the obvious propaganda that Russia impacted the elections (just as they are trying to blame Russia for the horrors in Libya, Syria, and Ukraine that are the result of establishment’s direct support). By continuing to stir the pot (sell the propaganda) divisions between people will grow, that will turn into greater civil unrest and civil war when the economy turns down. It will also set the stage for war, which has always been govt’s greatest distraction. ALL OF THE HACKS IN GOVT AND MEDIA NEED TO BE DOCUMENTED AND HELD ACCOUNTABLE WHEN THE SHTF!
I should have added academia to the list of real deplorables – https://www.armstrongeconomics.com/world-news/civil-unrest/how-professors-are-engaging-in-undermining-the-country-in-collages/.
How many people understand that propaganda became legal in Aug 2011, with the formal elimination of the Fairness Doctrine? https://www.armstrongeconomics.com/uncategorized/james-clapper-refuses-to-brief-congress-on-the-proof-that-russia-hacked-the-dnc/
…and yes, this all will impact the Fed’s decision to raise rates, as the invisible hand will push rates higher, and the Fed will be forced to follow, again.
The Pension Crisis makes the rate hikes NECESSARY.
We may not like the market crash that results, but rate hikes are needed to avoid a bigger crisis.
The Fed needs to act even in the face of political opposition as the Pension Crisis is bigger.
If they do not, watch out below.
The “Wealth Effect” of continued low rates is not enough to save the economy.
We will take the medicine sooner or latter. Latter could end the Fed and they know that.
Pretending that pensions will be paid “later” is exactly the same thing as saying debt will be paid “later”.
(neo) Keynsians have been making empty promises for years, and they have run about of people to steal from… unless one believes underemployed millennials living in their parent’s basements buried under student loans are somehow going to pay the keynesian’s debt for them.
The keynesians always planned to default. They lied to the rest of the world, and if we are being honest — many of them lied to themselves.
Good post. Concise, well written and knowledgeable response.
Only one word is missing : rehypothocation. Once that is included, it changes everything.
US government promises carry the full faith and credit of the US Congress…. The liars and cheats that have a public approval rating on par with getting a root canal.
One can rehypothocate that worthless faith all you want. Its still worthless. A republic that doesn’t have the backing of its citizens, and doesn’t even pretend to care about 99% of its citizens… doesn’t have any collateral to rehypothocate.
Obamacare was crammed down citizens throats by a witch from San Francisco… and as soon as Congress read the trash they exempted themselves from supposedly “signature legislation”. Do what we say, not what we do.
That is the kind of faith and credit you are talking about rehypothocating. It is worthless.
As bond defaults increase, the FED will be forced to raise rates. The market is in control of rates, not the FED.
“…would not even surprise me if the next move was a cut.”
Bingo. This is a GREAT bet if you get the “market” odds…
All capitalist economies need a central bank – a lender of the last resort . This is the lesson and the remedies from the first international banking crisis in 1857 described by Karl Marx, which is why volume three was bought up in large “volumes” by the bankers after the 2008 crash. The Fed is unlikely to raise again.
One interesting point to note in and amongst the debate on debt. The top 2000 companies rule the world, with 3-4 dominating each industry. If we focus on the top corporations we find that their depreciation covers their investment needs. (Take a look at the rise and rise of Intellectual Property depreciation.) And if this is the case, meaning that newly produced profits are not needed for this purpose, then why not give back your profits to shareholders in the form of dividends and buy backs. However, smaller corporations which do not have this luxury and therefore require new debt to pay for buy backs are at huge risk in the new period of higher interest rates.
This is a problem as they lobby to influence regulation, take-out smaller competitors and generally try to stifle disruptive innovation. Stagnation results, productivity and creative destruction are hampered.
Most employment is in SMES and their lobbying voice limited.
“The top 2000 companies rule the world, with 3-4 dominating each industry.”
“All capitalist economies need a central bank – a lender of the last resort.”
Correct. If they’d only constrained themselves to THAT vital function and NOTHING ELSE.
I think Mish is discounting inflation, the only reason the Fed needs to increase rates. Baby Boomers are retiring in record numbers reducing the size and experience of the workforce. Pay is too low in most industries today to attract a lot of new workers into the labor pool. The US has outsourced its high-productivity industries (manufacturing) and focused resources on low productivity industries: healthcare, education, and retailing.
We are moving quickly towards a smaller, less-skilled workforce, with low-productivity at near full employment. Couple that with the requirement to run high deficits to create tradable treasury bonds, and you have a recipe for higher inflation and interest rates.
Not if you slash tax rates and the size of govt.
“I think Mish is discounting inflation, the only reason the Fed needs to increase rates.”
Not the only. Low rates are also killing pension funds and forcing those which can do so to invest in risk assets thereby risking their destruction if another crash is allowed to occur.
Efforts to prevent or ameliorate “the next crash” is the reason we’re in this mess. The essential Darwinian effect of bankruptcies to punish stupidity, greed and the resulting speculation and malinvestments has not been sufficiently allowed by central banks over the past three decades, bankruptcies which wipe out debt and thereby reduce the slope of the inherently exponential debt growth curve to more manageable levels.
Because of these ivory tower “useful idiots” following economic dogma proven over and over again to be garbage, but which is one which tells both governments and banks what they want to hear – you can BORROW your way to prosperity – while also providing a massive wealth transfer to the ACTUAL owners of governments – the 1% – we are now in a serious mess which cannot be sustainably fixed without extremely painful corrections which they are making even more painful by trying to kick further down the road.
About that 1% and their influence, from the groundbreaking 2014 Princeton study:
Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
https://scholar.princeton.edu/sites/default/files/mgilens/files/gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf
Excerpts:
A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues.
Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites or with organized interests, they generally lose. Moreover, because of the strong status quo bias built into the U.S. political system, even when fairly large majorities of Americans favor policy change, they generally do not get it.
…the preferences of economic elites (as measured by our proxy, the preferences of “affluent” citizens) have far more independent impact upon policy change than the preferences of average citizens do. To be sure, this does not mean that ordinary citizens always lose out; they fairly often get the policies they favor, but only because those policies happen also to be preferred by the economically-elite citizens who wield the actual influence.
Solution simple. Become part of the 1%.
Anyone that thinks higher rates are going to be with us for more than just a short period just needs to look at one thing, and they will change their mind.
It is MONETARY VELOCITY. Specifically, the Velocity of the MZM (Money of Zero Maturity) Money Stock. It is has been falling for decades, and continues to inch closer and closer to the dreaded 1.00 level.
It’s all about confidence, or the lack there of.
Mish,
I fully agree the debt and stronger dollar will suppress rate hikes unless Trump really does turn the economy around which I doubt. His intentions are good but it takes time and things such as automation are against him. However I disagree about the trade wars. I think he will get better trade deals to allow entry into foreign markets but the stronger dollar will inhibit success. Lastly Trump is a strong leader which makes the dollar strong along with all of the entailed consequences. Good article.
You are using circular logic. The economy was bad so QE and ZIRP/NIRP need to be invented. The economy remains ‘bad’ so rates can not rise otherwise the economy will be worse. Getting rid of it would be catastrophic. Perhaps this is the liquidity trap some write about occasionally?
While the above is Krugmanesque, the kicker is the belief that QE and ZIRP/NIRP are bad and need to go away.
It’s like a bad comedy “get rid of it — No we can’t – But we must get rid it – No we must keep my precious”. ( adapted from Gollum and the Rings stories)
Makes no sense.
The economy puttered along quite well for hundreds of years with interest rates that are higher and QE that did not exist and low central bank balance sheets. To be petrified in fear about imaginary consequences continues to feed the needs of those who love low rates and investment that involves paper flipping more than job creation. Applying text book logic to abnormal situations as if they are some kind of new normal is ludicrous.
Normal economics requires normal economics as a prerequisite.
Thank god I started reading the comments section. I thought everything in the world was great, until I learned otherwise.
Wait until you read about Chinese Hackers pretending to be North Korean Hackers, who pretend to be Russian Hackers, who use exploits developed in the USA by college students who work as ‘Security Researchers’ to put themselves through college. Putin is only a dupe of US college students.
McCain just said Russian hacking will end democracy. I had no idea it was this fragile. Also, wouldn’t this be Al Gores fault for creating the internet. Always the unexpected consequences.
Political Fed wants to crash the market in the first year of Trump Presidency. The economy is perfectly teed up for failure by Increasing rates on the brink of a recession. Real time data says the economy is faltering. Yellen says the future looks bright. Now we know even little old ladies lie.
The Fed should have been raising rates 15 years ago but 9/11 freaked everyone out. And all we got was a lousy housing bubble, “fixed” with equity and bond bubbles.
Until the Fed starts behaving like it’s supposed to rather than the way it has for 30 years, it is logical to predict that it will continue its recent behavior. But there is also recent data to suggest that the 30-year status quo is less likely to continue. For the near future, I’m fine with the Fed finally doing the right thing even if it’s for all the wrong reasons.
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