Thursday, April 18, 2013

The Sequester and Economic Disaster

This note reflects a few quick comments on the US economy and where it is going. No formal analysis, no formal theory, just my own impression based on a few economic events.

Historically, I did anticipate the tech bubble (companies with strong buy ratings and P/E ratios of 30,000 tell me something is wrong). I also anticipated upcoming credit problems in 2007 or so (bank offers for gold credit cards to people with $350/month social security income indicate something is wrong). So with that “stellar” record, here goes:

The Sequester: I don’t see The Sequester as a disaster. I’m guessing with The Sequester in effect the economy is either going to grow faster or show little response.

Jobs: Many lamented the “poor” March jobs report of only 85000 odd new jobs. I suggest the opposite. The Sequester gloom and doom predictions said we should have seen a drop in total employment and jump in unemployment. Instead we’re seeing continued (slow) growth. And the early April unemployment numbers (when layoffs are supposed to be happening) indicate that disaster isn’t around the corner.

Interest rates, QE, etc: I think one of the problems in the economy is that interest rates aren’t doing what they are supposed to. The Fed is giving us near zero interest rates to try to increase growth. I think instead that we need higher rates.

Interest rates today provide rather perverse incentives. Savings accounts pay essentially zero. I have one savings account that did pay 0.00% for a few months. In this environment, why save? Part of the problem with the Financial Crisis was the search for high, safe returns by large investors (thus jumping on AAA rated high yield mortgage bonds). Today under the mattress gives as good a return as a safe bank account, so either spend it or put it someplace risky.

I can’t give a formal reason, but I think that near zero interest rates are a recipe for a stagnant economy. We have seen this in Japan, which has had 1% or lower central bank rates for about 20 years along with a stagnant economy. Now the United States is seeing interest rates of almost zero and a stagnant economy. If the Fed pushed rates up to a more traditional few percent, and bank savings rates got back to a few percent, I think we’d see increased growth in the economy.