Post by
Experienced on Nov 14, 2021 10:27am
Where Have All the Economists Gone?
The world griped by runaway Government spending and inflation. Most economists we see on TV seem to have forgotten Economics 101 and are simply mouthpieces for whatever political persuasion they happen to be addicted to.
The current round of inflation we are seeing was totally predictable and the solution is firmly rooted in traditional economic theory. But somehow politicians and their economist lackeys are looking at other ways to combat the problem which entails spending obscene amounts of money which will not solve the problem but only make it worse. The Biden "Build Back America" plan worth trillions of dollars is a classic example. Trudeau continuing to spend money like a drunken sailor is an example closer to home.
So what is the solution that anyone getting at least B in Economics 101 would answer on an exam paper?
The natural brake historically to inflation is rising interest rates. The problem today is that with all the rapidly increasing National Debts around the world that Central Banks have decoupled the natural relationship between inflation and interest rates. They have not only refused to increase interest rates but in many cases have done the opposite - they have reduced interest rates.
Take for example the US 10 year Treasury rate which currently sits at around 1.6% and it is the benchmark for all other interest rates. This current rate is actually LOWER than it was at the depths of the financial crisis in 2008!!!
With inflation rates in the US at over 6% and the 10 year at 1.6% it is no wonder the stock market is at an all time high and valuation for many companies are unrealistic since it makes little sense to invest in fixed income. I sold all my fixed income investment a number of years ago and hold either cash to take advanatge of short term opportunities or equities.
The problem with all this is that the natural economic forces are being resisted by economists and politicians and just like the natural environment this can only be done for so long before the power of these natural forces overwhelm the system.
The longer these forces are ignored or resisted, the more catastrophic the impact will be.
When will this happen?
Beats me and frankly I thought it would have already have happened but the inflationary pressures we now seeing suggests that that day may not be far off. Another clue that this adjustment is not far off is the panic that we see at the political level. The total of recent spending bills passed in the US are equal to TOTAL ANNUAL TAX REVENUE and the latest Biden proposal would make the total twice the total Government tax revenue - not good.
One can only hope that some sort sanity gains traction but as long as economists tout party lines and throw out their economics textbooks it isn't going to happen.
The lesson here?
Be careful and be watchful. There is potential for the violence of the adjustment to make what happened in 2008 look like a walk in the park. The parallels between has been going over the past decade and the 1920s is striking.
Comment by
Experienced on Nov 14, 2021 9:35pm
Good points - thanks for the post and your thoughts....