Is more coming? What other news bombs will go off between now and November
8? The FBI announcement towards the end of last week (see https://gordonfeil.blogspot.ca/2016/10/donald-trump-is-right-game-is-rigged.html#comment-form)
may be just the first in a series. Who
knows? Maybe the best will be saved for last. I recall living in Edmonton in
the mid-seventies and The Edmonton Journal publishing, on the day before the
mayoralty election, a front-page article with a headline in the type that I
might have thought would be reserved to announce the end of the world. The
article was a revelation of a scandal alleged to have involved the popular candidate
and former mayor, William Hawrelak. The next day, the target of that piece won
the election by a landslide as I recall.
The power of the press. So not all adverse news is destructive to a
candidate’s reputation. Nonetheless, I would not be surprised if sometime in
the next few days we are treated with new revelations and accusations that will
pale the ones already made.
These rumors may have a big effect on already tottering
markets. Tottering? Yes, tottering. You want
to know how badly? Well, when a former U.S. Treasury Secretary, in this case
Larry Summers, suggests that the Fed should buy common stocks to support the
stock market, you have to know that the roulette table is wobbly.
Pretty much every month lately the Fed puts forth the rumor
that interest rates will be increased. Savvy people have not bought into it. A rise
in interest rates before the November 8 election would go against the
Democrats, and Trump has said he’s firing Fed boss Yellen, so do you think she’s
going to do anything to get him elected? No, any rate increase will have to
wait until after the election.
The USA is long overdue for interest rate hikes. The way
things work there is that after a recession, rates are gradually raised so that
when the next downturn comes, there is room to lower them incrementally by
three or four hundred points (3 to 4 percentage points). After the 2008
washout, rates have not been raised like that.
To have done so would have tanked the economy even more. The U.S. economy just has not recovered enough
to support those rate increases. But now, this creates a problem.
The ratio of national debt to GDP has been increasing
throughout the developed world to the point where insolvency is in sight. When
your debt is too many multiples of your production, you can’t make your
payments because they are just too high. Debt increases as governments keep
buying votes with their handouts, and production has declined both because of
aging work forces moving into retirement and because of per capita production
dropping also. An economic downturn is inevitable, but the usual treatment of
lowering interest rates is not available. How can they drop 4% from what is
almost zero percent?
Ah! “Negative
interest rates” say Ivy League economists. Shades of Social Credit. The
argument is that if people are dinged a fee for saving money (negative
interest), they will not save and will spend. This will get the economy
moving. Only a PhD could have thought of
that. The Austrian school of economics
(guys like Von Hayek, von Mises, Rothbard, and their intellectual descendants)
knows better. People generally save for a reason: education for their kids,
retirement, whatever. If their savings are being eroded, they will want to save
even more to compensate. No, negative interest rates will not work, so the weapon
establishment economists use to fight downturns is gone. Their arsenal is
empty. I think that the Fed will not be
bailing out the big banks next time. The Fed may require a bailout of its own.
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