The appointment of Christine Lagarde as president of the ECB has been greeted with euphoria by financial markets. That reaction in itself should be a warning signal. When risky assets soar in the middle of a huge bubble due to a central bank appointment, the supervising entity should be concerned.
The defeat of Tsipras in Greece is the loss of those who came to power promising that two plus two would equal twenty-two, of paper promises and policies that harm those that they pretend to protect. Read More
There is absolutely no need for a rate cut.
Consumer confidence is high, unemployment is low and Treasuries’ yield is at 2.1%, while credit to the economy and corporate financing are not suffering.
The weakness in core consumer prices in May, which increased by only 0.1 %, was entirely due to lower prices of used vehicles, and core CPI inflation remains within the Fed target, falling from 2.4% in mid-2018 to 2.0% in May. Headline CPI inflation fell to 1.8% in May due to lower energy prices, so there is absolutely no logic in a rate cut. With unemployment at 3.6%and annualized GDP growth expected to remain above 2.3%, demands for a rate cut are only an excuse to keep financial asset prices higher at any cost
There are some elements that point to a slight weakness in the economy but no need for a rate cut.
- Industrial production rose 0.4% m/m in May while it stalled in other global economies.
- A strong 0.5% rise in underlying retail sales in May, along with upward revisions to previous months’ gains which means consumption is likely to grow close to 4% annualized in the second quarter.
- The headline confidence index declined marginally to 97.9 in June, from 100.0, but remains at very high levels.
A rate cut would only fuel the debt bubble further, and leave the Fed with fewer tools to address a slowdown. When so-called “High Yield” means 365 bps for junk bonds of companies close to bankruptcy and Treasuries yield 2.1% there is no reason at all to cut rates. Rather the opposite.
The debt bubble is dangerously inflated and lower rates would only make it worse. The ratio of US corporate debt to GDP, as well as the high-risk loan figure and securitized debt, have risen to pre-crisis levels. US deficit is rising because spending soars and the government finds debt cheap and abundant. Government spending rose to $440 billion in May 2019, up 21% from May of 2018. Yes, up 21% from May of 2018. All this despite record revenues. Receipts increased to $232 billion, up 7% from the same month last year.
A rate cut would only create a larger problem in the future. If the already dangerous corporate and sovereign debt bubble grow significantly more, no monetary policy will prevent a debt crisis.
In these weeks we have read a lot about the so-called trade war. However, this is better described as a negotiation between the largest consumer and the largest supplier with important political and even moral ramifications. This is also a dispute between two economic models.
Nobody wins in a trade war, and tariffs are always a bad idea, but let’s not forget that they are just a weapon. Read More
In this fifth episode of my video-blog, we discuss the mistake of believing GDP as the key driver of economic growth, as it is not difficult to inflate via debt.
We also discuss the differences between the US, China and EU, and why the slowdown in the Eurozone should concern us more.
Argentina has been “printing money for the people” MMT-style for many years. Its wrongly-called “inclusive monetary policy” of the past -print money to finance massive government spending- has driven the country to massive inflation and depression.
In this fourth episode of my video blog, I explain the economic slowdown, why central banks are not understanding the key global trends and what they mean for inflation, growth and productivity.
Do not miss the other episodes. Thanks for watching!!
Third Episode of my video-blog World Economics. Thanks for the success of the other episodes. This month we speak of the global slowdown and the poisoned solution of more stimuli and “a new deal”