Connecting The Dots Part 1
In this series, we will examine and connect the dots, on several topics, all of which are contributing to stagflation, low interest rates, negative economic growth, and the greatest asset bubbles of all time. Lets examine the first two topics on the list. As Shareholdersunite points out...
Secular Stagnation
Three variants:
1. The great recession has caused households to cut back on borrowing and spending.
2. Multiple factors have diminished long run economic growth potential: Outsourcing to labor at the margin, technological advances, demographics aging population, increased life expectancy, dumbing down of the masses, increased public debt levels and the great divide or Grand Canyon: the eradication of the middle class. i.e. Brazil, 2% ultra rich and everybody else 98%.
3. The longer the duration in which actual output < potential output = the greater the damage to potential output.
#3 AKA hysteresis phenomenon: when outsourced and/or unemployed, human capital depreciates; hiring practices: as in the long term unemployed and those over the age of 45 are discriminated against resulting in a reduction of the labor supply.
New capital investment decelerates, more businesses fail than start up, reducing capital stock and productivity growth.
All of the above lead to:
A. Demographic shifts. Towards fixed income, 90 million baby boomers, retirees, and forced retirees (needing extra income) and those excluded by hiring practices, all require increased savings to survive.
B. Decreased capital investment. Outsourcing to labor at the margin, changes in demographics and technological advances shift towards a less capital intensive environment (service/healthcare vs manufacturing).
C. Increased demand for safe harbor (conservative) assets.
This demonstrates that low or negative rates are not just a result of monetary policy, structural economic shifts, increased savings needs and reductions in capital investment all play a part.
These factors lead to a greater financial surplus (more savings, less spending and less investment) and can result in lower real rates.
As Cullen Roche asks... why is there $10.8 trillion stuffed under US mattresses? We only found $9.8 trillion of it.
Quantitative Easing
Quantitative Easing = Bond Purchases
1. QE does not increase the quantity of savings when the Fed trades a bond for a deposit. The quantity of net assets stays the same, but asset composition changes from safe interest bearing to safe ultra low interest bearing.
2. When the Fed buys a treasury bond, the bond is temporarily removed from the private sector, resulting in a increase in deposit liability and assets.
This reduction in the quantity of treasury bonds is equivalent to the Fed taking that bond out of circulation and a bank receiving the deposit. In addition, the bond supply or bond asset float is reduced.
3. Every year, the Fed pays interest income on its bond purchases to the Treasury.
Since these bonds have been removed from the private sector supply, the private sector loses this interest income, estimated at $100 billon per year for the last five years.
Add item A&C in Secular Stagnation to #2 above...
demographic shifts increase demand for earnings from savings + QE reduced supply of bonds + increased demand for safe harbor assets = and lets go full circle...
- less spending
+ more saving
+ more demand for safe assets
+ lower supply of those assets
+ higher price on safe assets
- lower rates
- lower yields on safe assets
- lower income from safe assets
- less spending.
More to come in Part 2.
Secular Stagnation
Three variants:
1. The great recession has caused households to cut back on borrowing and spending.
2. Multiple factors have diminished long run economic growth potential: Outsourcing to labor at the margin, technological advances, demographics aging population, increased life expectancy, dumbing down of the masses, increased public debt levels and the great divide or Grand Canyon: the eradication of the middle class. i.e. Brazil, 2% ultra rich and everybody else 98%.
3. The longer the duration in which actual output < potential output = the greater the damage to potential output.
#3 AKA hysteresis phenomenon: when outsourced and/or unemployed, human capital depreciates; hiring practices: as in the long term unemployed and those over the age of 45 are discriminated against resulting in a reduction of the labor supply.
New capital investment decelerates, more businesses fail than start up, reducing capital stock and productivity growth.
All of the above lead to:
A. Demographic shifts. Towards fixed income, 90 million baby boomers, retirees, and forced retirees (needing extra income) and those excluded by hiring practices, all require increased savings to survive.
B. Decreased capital investment. Outsourcing to labor at the margin, changes in demographics and technological advances shift towards a less capital intensive environment (service/healthcare vs manufacturing).
C. Increased demand for safe harbor (conservative) assets.
This demonstrates that low or negative rates are not just a result of monetary policy, structural economic shifts, increased savings needs and reductions in capital investment all play a part.
These factors lead to a greater financial surplus (more savings, less spending and less investment) and can result in lower real rates.
As Cullen Roche asks... why is there $10.8 trillion stuffed under US mattresses? We only found $9.8 trillion of it.
Quantitative Easing
Quantitative Easing = Bond Purchases
1. QE does not increase the quantity of savings when the Fed trades a bond for a deposit. The quantity of net assets stays the same, but asset composition changes from safe interest bearing to safe ultra low interest bearing.
2. When the Fed buys a treasury bond, the bond is temporarily removed from the private sector, resulting in a increase in deposit liability and assets.
This reduction in the quantity of treasury bonds is equivalent to the Fed taking that bond out of circulation and a bank receiving the deposit. In addition, the bond supply or bond asset float is reduced.
3. Every year, the Fed pays interest income on its bond purchases to the Treasury.
Since these bonds have been removed from the private sector supply, the private sector loses this interest income, estimated at $100 billon per year for the last five years.
Add item A&C in Secular Stagnation to #2 above...
demographic shifts increase demand for earnings from savings + QE reduced supply of bonds + increased demand for safe harbor assets = and lets go full circle...
- less spending
+ more saving
+ more demand for safe assets
+ lower supply of those assets
+ higher price on safe assets
- lower rates
- lower yields on safe assets
- lower income from safe assets
- less spending.
More to come in Part 2.
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