Are we running out of options?

With short term interest rates being considerably low, the Federal Reserve has little room to cut borrowing costs to bolster spending and investment in the event of an economic downturn. With national debt ballooning, efforts to boost growth through tax cuts or spending increases will be weakened. To add complication to the matter, both sides of the aisle (even amongst the ranks of the right and left), cannot seem to agree on ways to promote spending in the economy whether it be through higher government spending or through tax breaks. Meanwhile, our president is continuing to pressure a divided Federal Reserve for more interest rate cuts and is suggesting additional economic stimulus.

Having seen a fair share of warning signs, with economic growth slowing, job growth weakening, housing starts declining, and long term rates at times being overtaken by short-term rates, are we heading towards the end of our record-breaking economic expansion? If so what options do we have to bolster economic growth? or are our traditional avenues already Kaput (broken)?

Comments (44)

Aug 22, 2019

Negative interest rates and the Japanification of the west.

Can you spell 'MMT'?

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Aug 22, 2019

Time to buy a good safe. As long as probability of break-in of safe is lower than absolute value of negative interest rate it just makes sense to hoard paper! Cuz I'm sure as hell gonna think twice before investing in anything else propped up by "negative rates"

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Aug 26, 2019

You've got the right idea, but trade paper for precious metals, firearms, and collector grade spirits.

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Aug 22, 2019

Interested in hearing what others have to say. Some big things that come to mind are increased automation (unsure how pervasive this will truly be, at least in the short term) and the rapid aging of many societies. Since these are new phenomena in modern economics, it'll require some creative solutions.

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Aug 26, 2019

Andrew Yang's freedom dividend is one of the creative solutions you're referring to. Like it or not, nobody can deny he's the only person running who has a clue on this topic.

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Aug 22, 2019

Can't believe I have to say this, but growth slowing to 2% is not a warning sign of an imminent recession, nor are brief moments of an inverted yield curve. In terms of the yield curve, there are many factors that go into it, including persistent negative interest rates in Europe that make American long-term debt relatively more interesting, which pushes down yields. Negative yield curve could also be a sign that the Federal Reserve overshot short-term rates.

Aug 23, 2019

I like your commentary, and your views are shared by a number of well educated financiers who have written on the matter.

To elicit more conversation, the financial press is largely reporting on the recession, causing both irrational behavior and volatility in the markets. Despite the inverted yield curve giving off a "false positive", will the fact that people think it is a positive exacerbate economic pessimism? (...maybe leading to a further slowdown)

Most Helpful
Aug 23, 2019

This is the downside of a 24 hour news cycle, heavily connected world and extreme, almost myopic focus on short term market gyrations. We will effectively talk ourselves into a recession or talk ourselves out of one depending on which picks up steam in the ratings.

It is so complex nowadays, you can hardly tell what is what anymore. Is an inverted yield curve a recession sign with short term credit tightening up because it's scared, or did the Fed overshoot on the short end which combined with hugely structural challenges in the markets such as 30 year bonds internationally yielding negative rate, create an inverted yield curve in the US. It's probably all of the above, and ten other things that I didn't even mention.

We are, literally, heading towards the end of the economic cycle. Is it tomorrow? Doubtful. Is it in 2 years? Maybe. Is it in five years? Probably. Maybe. Sure! That all feels about right - and is in line with what you'll see out there generally.

As to our options? in the US - We have plenty of options- none of which are particularly great at this juncture. The most ideal would be to address the problem - focus on the fiscal deficit, bring some closure to trade policies and move to address the large, elephants in the room on spending which include social security, health care and defense (don't start with me about the 'discretionary' portion of the budget - it's too small to make a dent even if we cut the whole damn thing out). Oh - no matter how conservative you are, that does also mean finding revenue which is probably from taxes somewhere... or you can just monetize it. That's fun too.

As far as my solution to the above - i don't fucking know. I know it will be painful... someone is going to get screwed, be it my parents, myself or my children... probably all three. The only alternative that i can find is that everyone, globally, just accepts this debt, spending, inflation, blah, blah in perpetuity and we are just talking about the S&P at 30k in ten years...

As far as monetary policy - it's inextricably linked to our fiscal policy now. We made sure of that coming out of 2008 and will during the next one as well. The Fed blinked this summer, IMO, and that's that.

I'm done now - i'm not even sure if i'm making sense at this point, and i'd love for others who are more connected globally, etc. to chime in on the global situation or even the US. Argh.

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Aug 24, 2019

There have been inverted yield curves that last for brief periods of time in the past. Google the 1998, 2000, and 2005, inverted yield curve examples.

Stay strong!

Funniest
Aug 23, 2019

"Trade wars are good and easy to win"

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Aug 23, 2019
Banking Sucks Guys:

"Trade wars are good and easy to win"

Yes, anything is possible with The Chosen One

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Aug 23, 2019

Never hopped on the anti-MSM train, until this trade/interest rate stuff. I've heard so many "head of.." whatever finance guys this past week talking about the importance and significance of the Fed cutting rates. It's just big brother capitalism. How can you make the argument for no socialism and ask the Fed to hand you a life-long handicap every time waters get a little bit choppy.

Literally heard a guy say as long as the consumer is strong, growth will be solid and the economy will be okay. He goes on to say that "but" business investment is weakening and without a Fed cut it will have an impact throughout markets... consumers are the last to go.

It's like the plan is to beat the consumer up so much until deleveraging for another decade is all that's left.

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Aug 23, 2019

All the low interest rates in the world won't make up for the #1 and #2 economy in the world going to economic war.

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Aug 24, 2019

Supply-side shocks reduce GDP and raise prices. The Fed's job is to maintain low unemployment and stable prices, but no action taken can fix the supply shock. Cutting rates helps GDP and unemployment, but creates stagflation.

Aug 23, 2019

The Fed doesn't even set interest rates; the market sets interest rates. The Federal Reserve can target any rate they'd like, but ultimately, the market controls the rate of interest. There is a myth among 95% of observers that the Fed has some sort of omnipotent authority to set rates.

Aug 23, 2019
real_Skankhunt42:

The Fed doesn't even set interest rates; the market sets interest rates. The Federal Reserve can target any rate they'd like, but ultimately, the market controls the rate of interest. There is a myth among 95% of observers that the Fed has some sort of omnipotent authority to set rates.

That's true, but his point is that the Fed rate is the highest rate on the yield curve and its job is to help investment out to stimulate the economy. But realistically, the economy should probably go into recession. Free trade, lower tax on incomes/consumption/investment (no tariffs), and healthy markets correlate to economic growth. Trade wars and currency wars do not.

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Aug 23, 2019

The Fed does not set longer term rates but it has a substantial influence on short term rates by setting the fed funds target rate and the discount rate. With that said, it is a very unfortunate situation when the POTUS is publicly scolding the Federal Reserve's chairman. This behavior undermines the credibility of our financial system.

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Aug 26, 2019

True but there's a large amount of indirect control over rates because the Fed can directly press down on short term rates (lending to Fed member banks) to make it very profitable to borrow short and lend long, and that can ultimately pull down long term rates as banks increasingly take advantage of the spread.

Add to it the fact that Fed can also directly impact long term rates with QE. So in terms of the entire box of tools available, I would say the Fed has a lot of control over rates.

Aug 25, 2019

is MMT the solution?

Currently applying to medical school.

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Aug 25, 2019

Modern monetary theory

Aug 25, 2019

Doesn't really mean anything to me... I've never read any concise account of what MMT is, and I can't find one.

Aug 26, 2019

MMT is a solution for debtors at the expense of lenders. Print money via rate policy and QE, inflate the currency, and all debt is now worth less than before. Fixed rate borrowers win, fixed rate lenders (including bond investors, i.e. responsible old people) lose.

It's zero sum from a financial perspective . . but between lenders and borrowers, guess which side has more people. A lot more people. Including the biggest person of all, Uncle Sam.

To me, that's what MMT is all about. Taking advantage of the majority rule democracy to massively screw over a narrow few to provide a more moderate benefit to a much larger number of people, and of course buy their votes along with it.

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Aug 25, 2019

Question:Is it possible that the 08 crisis wasn't actually the end of the long term debt cycle but we are heading into it now? Or is this just a prolonging of that crisis (the cycle of damage control has been done and we haven't actually made any real economic progression since then) and are we now ready for a new paradigm change as Dalio states.

Obviously, the political landscape doesn't help either and makes things look much worse. Two of the previously most stable countries which helped maintain international order throughout the world are now the ones partially inciting it. Agreed, China trade war and Iran nuclear showdown are long over due. Main issue with Trump is he's completely unpredictable and for some reason alienates his allies in a struggle where he could definitely use them.

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Aug 25, 2019

Bubble in 08' was different because of the falloff in the personal savings rate.

U.S. needs to de- lever whether through a decrease in spending, an increase in tax receipts, or inflation reducing the debt as part of the longer run debt cycle. It's also plausible that the U.S. just moves money to investment goods like roads, bridges, and other infrastructure to prop up the saving rate so that increased GDP growth results in the debt falling as a % of GDP.

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Aug 28, 2019

Absolutely - '08 was the big unwinding. Instead of allowing the heroin withdrawal to take its course we've been pumping the addict full of methadone. What happens when the methadone runs out or loses effectiveness?

Aug 26, 2019
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Aug 27, 2019
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