The United States which recently went through the turmoil of the 2008 financial crisis found that it was precipitated by the relaxation of government regulations, across a multitude of sectors and government agencies. Krugman is right when he says that the attempt by the government to make housing affordable by offering prime, and eventually subprime mortgages through GSE’s was not the reason for the mortgage crisis. However, Agarwal et al, are also correct when they mention that the defaulting of loans, was partially the result of government interventions in the housing market, which caused a ballooning of subprime mortgages, and credit default swaps. Such is a similar case in India, which recently went through a liquidity crisis, which was resolved through the cancelling of certain types of bank notes, which needed to be exchanged for new ones in a certain amount of time. The replacement of these notes is not necessarily what precipitated the crisis, but rather the timing of the note exchange, and the long lines which one would have to endure an order to receive the new notes, is what led to the banking crisis in India.
Tag Archives: Fiscal Policy
Policy Note: Growth and Structural Reform Issues
The economy in the United States of America has been expanding rapidly since the election of a new President in November of 2016. This has led to unprecedented growth in the economic cycle of the United States, and countries which partake in the American economy. This has also led some to speculate that the American economic cycle, though unprecedented in length, may be coming to an end. This is evidenced by the recent stock market fluctuations in the third quarter of 2019. This has led some to speculate that third quarter GDP could actually result in a contraction for the U.S. economy. The United States, since the election of its newest President, has mandated a policy consistent with protectionism, and trade mercantilism. This has created a rash of criticism by many, and has led to the current impasse in trade negotiations with the United States’ biggest trade partner, China. The main issue, however, which seems to have taken hold of the U.S. economy is structural. After the reforms enacted by the Tax Cuts and Jobs Act of 2017, there was a tangible slowing down of the economy. This was due in part to the unforeseen consequences of major tax reform which took place near the end of the year, and the beginning of the tax season. This led to widespread confusion, and to this day there is still uncertainty over the major reforms which were enumerated in the law. Some of the more egregious errors which the law has enacted and which has hindered business is the so-called tax on accumulated assets. This tax basically prohibits the accumulation of too much capital in a business thus forcing business owners to make unnecessary purchases. This structural quirk in the law is what I would consider to be one of the major hinderances of safe and efficient commerce in the country, and its structural flaws, along with the recent COVID-19 Crisis, are what have led the country into what I believe to be a period of stagnant growth, and demand.
Policy Note: Fiscal Consolidation in Low Income and Developing Countries
By increasing and then sustaining the amount of High Yield, Low Time to Maturity Bonds (One (1),Three (3), and Six (6) Month Terms), the Government of the Developing Market Country is then able to build investor confidence within it, which will increase the amount of credit available to it, and strengthen the institutions which are then available. This is in addition to having a stable and functioning Banking Sector, a strong and independent Central Bank, as well as a strong fiscal, and domestic regulatory framework (The Five Building Blocks to Financial Development of Banks). In addition to increasing available credit, the above aforementioned actions also enable the Government to find stable ground to flourish upon, and helps to strengthen Civil Society, and Democratic institutions. This is especially true of societies which have emerging economies (Small and Medium Sized African Countries), or are still in the consolidation phase of Democracy (Post-War Syria, Ukraine).
Policy Note: Credit Crunch 2.0 and the Demise of Low Income Developing Countries’ Household Wealth
The challenges which Bank Supervisors face, particularly in Low Income Developing Countries (LIDC’s), is part and parcel both a failure of domestic and international regulations, as well as a failure of a lack of supervisory roles, and functions. This is particularly true in Low Income Countries which are currently experiencing a credit crunch, i.e. high debt levels, and leveraged assets, amongst households. This is affecting the output of these countries and is contributing to a global credit contagion. The current impasse in American Markets, and Banking Sectors, can be attributed mostly to this phenomenon. And though, while growth appears steady among industrialized countries, the lack of output growth among industrialized nations, as well as the credit crisis which is gripping households in developing countries, has led the IMF to revise its World Economic Outlook Projections for the year 2020 to 3.5% from 3.6% a year ago. This along with the current COVID-19 Crisis, and its revisions, marks the third year in a row that the IMF has made a downward revision to its WEO Growth Projections, and is indicative of a World Economy with only moderate dynamism.
Highly Speculative Environment in Commodities, Equities, and Bond Markets Seen in United States
The increased spread in Volatility has led to a marked increase in United States, and European Treasury and Gilt bonds. This new phenomena which has been partially precipitated by the sell off in U.S. equities, has it’s roots in the high risk, high volatility Cryptocurrency markets. This new paradigm, I predict, could break way into a new pattern for this market cycle that favors higher Treasury Bond yields; lower equity prices, and equity yields in the United States; higher Commodity prices, and yields; whether or not the perceived bubble in Cryptocurrencies remains. Cryptocurrencies, a highly unregulated market are perceived to be trending higher than resistance levels which are demarcated at an aggregate of the top six(6) Bitcoin trading exchanges of $54,036USD. This is lower than the current real aggregate of the top six(6) Bitcoin exchanges which as of the afternoon of February 3rd, 2018 were trading at $55678.03USD. This is a perceived weakness in the global economy because of its highly speculative nature.
This perceived weakness, along with a marked enhanced United States Treasury Bond rates over just the last week alone has caused a rethink about the current U.S. economic cycle. The decline in equities over the last couple of trading days since the beginning of February, along with the continued strength in highly speculative financial instruments such as Bitcoin, plus with what the market has perceived as a rather robust Treasury repurchase round by the Federal Reserve on the 1st day of February of this year, has led to the overall story of the uptick in U.S. Bond yields. It is not only the perceived bubble in Cryptocurrency assets which is driving these market forces but rather a covering for these bets in relatively volatile, and highly unregulated assets, by rational buyers, both legitimate, and illicit, whom have turned to legitimate longterm assets, an order to cover the spreads of their bets in the Cryptocurrency markets, and also convert some of the monies which were formerly in the Cryptocurrency exchanges into real, tangible, longterm, stable assets. This calculated, and very prudent move by Cryptocurrency investors will have a longterm effect on Treasury Bonds, and their yields, for the foreseeable future.
This change is expected to take place and last, no matter what the eventual outcome of U.S. equities in this economic cycle are. This new paradigm has far and broad reaching consequences for the global economy which cannot yet be quantified.
Commodities and Bitcoin
One area where we may begin to see movement by more speculative Bitcoin, and other Cryptocurrency traders is in Commodities, and Commodity futures. If Treasuries continue to rise at rates which are expected to move at multiples of what they currently trade at in the coming years, you could start to see a move by traders into two main Commodity markets my research tells me: Oil, and Gold. A precipitous rise in Treasuries, and Gilt bonds in the UK could foreshadow a precipitous increase, and bubble in asset prices in the global Oil markets. A sharp rise in this asset could bring a positive bearing on U.S. and European Equity markets, however in the longterm, this move could foreshadow the end of the current economic cycle here in the United States, and the broader Global Economy. One(1) main driver of this outcome could be the Saudi debut of their Aramco IPO on what is expected to be a Saudi held exchange. Such a glut of an IPO in a sector that is already seeing highly speculative bets in its asset classes could precipitate a windfall for the Saudi’s and the Aramco IPO. Along with more boutique assets in the United States, and Europe, As well. And more speculative gains in assets based in Africa, South America, and Asia. Either way the Aramco IPO success has already been “baked” into the banking fees, and other associated trades which are largely anticipated. As mentioned earlier the Aramco IPO, which is expected later this year, would come at a time of increased speculative trading in Commodities in general, including Oil asset classes.
However if there is less speculative trading coming from the Bitcoin surge, and the covering trades instead go to more tangible, and longterm assets, then a surge in Gold should be widely anticipated. The most troubling outcome from this scenario is the prospect of a currency war, which could lead to a more destabilizing Geo-Political environment. Whatever the case maybe the outcome still remains the same for bonds: a permanent influx of currency into bond, and bond trading assets will invariably lead to an increase for the foreseeable future, in short, medium, and longterm bond yields.
Cryptocurrency Reform and Regulation
The added segue of Cryptocurrencies such as Bitcoin into the bond markets, and their invariable influence on bonds, and bond related asset classes, and how they influence the overall global economy will be the story of the year for 2018. The desire to reform, and regulate cryptocurrencies is their, however the need has not arisen as of yet, or at least there is no immediacy in the overall global economy to gain ahold of what has become a very valuable, but also highly speculative instrument. If we do not reform them while we can. We may bear a heavier burden for the cost of tarrying, when we cannot, and it maybe more difficult to find consensus on the topic of cryptocurrency reforms and regulation. The correct forum I believe, and that I have always believed is the Basel Forums. The entering into negotiations for a fourth Basel accord will become, I believe one of the most important events to have transpired in the world of finance since the Great Recession of 2008. In a perfect world these reforms would be a natural outgrowth of the changing dynamics of the Global economy. As such BaselIV should be pursued post-haste and with all expediency, if we are to capture the hearts and minds of the global investment community, and propel that sentiment into meaningful and lasting reforms for welfare of all in the Global Economy.
Aberrant End to Tangential Appreciation Seen in U.S. Markets
The effects of hurricane’s, including but not limited to, Hurricane’s Irma, and Harvey; point toward the end of a cycle of tangential appreciation, with modest, yet relevant effects on the indices. It is observed that the economic effects of the Hurricane’s foreshadow a lower than expected bourse for the Dow Jones Industrial Indices ending December 29th, 2017. Henceforth the expected bourse of DOW indices on this date being 24,938 now point to a -3.76% decline in all expected returns for indices with the DOW expected to be at or near 24,000 (+or- 1%) at the end of trading on the last day of the year, December 29th, 2017. This information does not include any potential future aberrations which may occur in the global economy. This number does however price in at least one expected Fed Rate Hike during the United States holiday season(November or December).
For the U.S. economy Fiscal not Monetary Policy may be the Answer
Late in April of 2017 the United States Federal Reserve decided to abstain from enacting what was expected to be only the second rate increase in what has started out as an eventful year. The logic undergirding this lack of monetary exuberance was the current level of United States economic growth, or rather lack thereof. If the stated goal of the monetary policy of Janet Yellen’s Federal Reserve is to sustain an unprecedented period of Economic Growth in the country, while raising the value of the US currency, then In reality there is little which the Federal Reserve can do to effectuate the stated goals of this policy. There are very few monetary measures which will help to stimulate the sort of global appetite for United States equities which have not already been attempted, with varying degrees of success. The answer which the Fed, and indeed the Administration is looking for calls for a fresh, though not altogether novel approach to the current impasse. The most sound way of raising the monetary fortunes of the country, that is to say the value of the currency, would be to increase the amount of international demand for United States Equities and Direct Investment in the country. One example of the current Administration doing this is the recent trade agreement concluded between the United States and China. Though such an agreement runs counter to everything that the Administration was advocating during and immediately following the elections of 2016, such laissez faire economic policies have no doubt been greeted with arms wide open not only by United States manufacturers and investors, but also public and private entities throughout the World. Along with the cementing of trade relations as relates to the various points of contact which U.S. manufacturing and investors already have with China, this latest agreement also, as per reporting by Bloomberg Business News, also allows for the resumption of beef and cattle exports from the United States to China, something which hasn’t been accomplished since the mad cow disease scare of 2003. These integrative steps which will allow for a furthering of friendly ties between the two nations is exactly the sort of fiscal measures which the Administration can take which will build rapport with the international community for U.S. businesses, and raise the current value of the U.S. currency at the same time. This is not to say that I endorse an increase in interest rates from the monetary perspective. But rather just the opposite, If the United States hopes to continue the unprecedented run which the economy has taken, then it should look to fiscal rather than monetary policy an order to help it achieve its stated growth objectives.
December Interest Rate Decision: A Welcome Respite
One need only look at the United States, and its gold reserves an order to understand what it is that keeps countries as diverse as China, and the U.K.; North Korea, and France; South Africa, and Australia; going. Gold when held properly by a country can become a catalyst for growth, not only for the country in question, but increasingly; in an ever connected world, the entire world as well. I bring this up because as the New Year is approaching, and the Federal Reserve begins to decide for a final time this year, on a rate increase, I wanted to take this moment to elucidate what I think might happen if the Fed does indeed raise rates, and what the consequences of that would be.
Should the Federal Reserve indeed decide to raise rates I believe that it would be a boon for almost the entire world. My logic in this assumption has a lot to do with Reserve currencies around the world, Debt repayment by the United States to its own debtors, and manufacturing increases as a result of the lifting of the long standing embargo.
The United States’ reserve currency is almost completely in gold. This means that the actions of America in areas such as debt repayment, and inflation tapering, can have a cumulative effect on the U.S. markets which in turn may affect markets overseas.
And indeed the U.S. has begun lowering the budget deficit (which can only be done by repaying creditors). This action alone floods the Chinese (who are the U.S.’s number one holder of debt) markets with a powerful injection of U.S. currency which currently is pegged to the Chinese Yuan which in it of itself has a cumulative effect for the value of the monies that the Chinese receive from the U.S. Manufacturing as I think we’ve all seen can be a powerful catalyst for growth in a society (read: the industrial revolution) such as the United States. And with the Chinese heavily invested in mining giants such as Rio Tinto, Mittral Steel, and BHP Billiton; this makes for an absolute boondoggle when the U.S. does indeed raise interest rates on for its gold reserve currency.
Since before the beginning of 2014 we have a seen a dramatic drop in the U.S. of the price of everything from milk, to gasoline, to food in general. And this year in particular the inflation index has actually decreased overall for the year ending December 31st. What this has meant is that the American consumer is able to buy more things which have been really helpful for the markets. And with the price of gasoline expected to dip below forty dollars sometime next year (according to me), this will make for even more buying opportunities in U.S. equities.
By this chain of events creating a virtuous cycle we are able to see the changes that an increase in the amount it cost to borrow money in the U.S. raise the value of gold on the commodities markets, and will in turn lead to higher returns for mining giants, which will then in turn fuel manufacturing throughout the world. This chain of events should be a welcome respite for U.S., and Asian markets which have been relatively weakened from a year of uncertainties. This new tact by the Federal Reserve should come as a welcome holiday gift indeed.