WWTD part II

The heck of it is, we’ve seen this experiment in Japan and Europe.  Lowering interest rates to almost zero yielded negative consequences. 

            You think if Trump is elected, he’s going to make the economy roar?  Think again.  For the past 40 years, central banks around the world have been able to print money almost at will and after this last recession it went koo-koo.  The real hockey stick graph isn’t global warming, it’s money printing, better known as Adjusted Monetary Base.  It went from $200B in 1985 gradually to $800B in 2008 but it is $4.5 trillion today.  The Fed, bowing to Obama, has cut interest rates to virtually zero.  That is, the pure political play of Democrats is to blame the other party for recessions while mortally afraid of a recession on their watch. Hoovervilles. Bush’s fault. The Fed kept lowering rates, then QE money printing, stoking stimulus, amassing debt. Of course the old model is to raise interest to fight inflation and lower it to fight recession.  But here we are with 1.8% GDP growth and no way to lower interest if a recession comes along.  Worse, lowering rates no longer stimulates.

            How does this happen?  Well, first think what happens to some of our business models.  Insurance companies use money they get in premiums to invest and make money from which they pay claims.  If interest is zero—no investment gains-- this model fails.  Or pension providers estimate what they can pay in the future based on what they are getting from invested funds today.  No interest, no future pension.  When interest goes to zero, seniors get no gain on their life savings.  Zero interest destroys savers and savers are the bedrock of capitalism.

            But there are more horrors.  What if those individual savers put it under a mattress?  With no deposits, banks can make no loans and the system starts to collapse.  Obama piled up debt, thinking that traditionally governments have escaped the consequences by inflating -- paying off debt  with future dollars worth much less.  But what if you keep lowering interest and it has no effect in restarting the economy, companies and savers see the futility of taking on risk? Basically you get an economy where money returns nothing--Japan ever since 1992, Europe since 2007, USA dangerously close now.

            Yet there is a way out.  It takes a little pain over a long period of time.  Interest rates must be raised gradually until we get our economy back again.  That probably means a 2% Fed Funds rate and 3.5% return on a ten-year bond.

            Well, you raise interest and suddenly far fewer people can qualify for a mortgage on those high-priced houses in urban areas. (Ever ask yourself how those couples on HGTV can afford million dollar homes with median income at $54,000?) Bonds, already trading far too high (people are scared of the politics and the economy and have fled to bonds), will plunge in price.  Effects like this give politicians the heeby-jeebies over backlash.  So the rise in rates must be gradual.  Hence the Trump economy won’t rise fast.  At least his ideas of lowering corporate tax rates are good.  The foolish demand that the federal government get a cut of foreign profits from businesses is one of the great killers of bringing profits home to America. It makes no sense except to covetous Dems who hate businessmen.  A subtext of Hillary and Obama is that they hold that government is the best manager of investment capital. Sure.  Solyndra.  Solar Trust. Postal Service.  But the teeth-gritting Dems persist.  The rules for inversion mergers and capital repatriation are constantly changed by Obama’s executive orders.  Thus US corporations must add the risk of arbitrary tax persecution to the other uncertainties of staying in business.

            Given the debt overhang, the money printed, the states' pension liabilities, the reluctant investors, the rest of the world in secular stagnation (zero interest/low growth), the need for tax reform that depends on reticent politicians, we won’t come out of this thing very fast.

            Imagine the difference if such politicians cared about growth.  Corporate taxes and capital gains rates would be zero—and actual revenue loses wouldn’t be that great.  Foreign profits would be encouraged to come home.  They wouldn’t try to tell the bozo voters that recessions are due to the other party’s leadership but would state the real reason—due to billions of bad decisions made by millions in the marketplace bidding prices too high, i.e., the madness of crowds.  Banks could go back to being community lenders instead of trying to play the government for favors. The pols would be very leery of mortgaging the future with debt.  And jobs would be plentiful again, growth would return, people would save.

 And if you aspired to run a great foundation, you wouldn’t model yourself after a Secretary of State who exchanges policy favors for donations.  If you wanted to be a great real estate developer, you wouldn’t get there by playing footsie with local governments for tax favors and eminent domain. And all of America would want to hear about freedom and liberty, not what they qualify for, or who they could scapegoat.