Understanding the world around us often relies on logic, common sense, and rational reasoning. However, these tools are only as effective as the quality and quantity of information one has at their disposal, as well as their ability to interpret that information accurately.
Gaps in data and knowledge can lead to misguided conclusions. A single misstep in reasoning can lead thinkers down a path that leads nowhere. In the realm of economics, individuals frequently find themselves making decisions based on incomplete information. This is why appearances can be deceiving.
Take, for instance, the relationship between a significant $3 trillion expansion of the Federal Reserve’s balance sheet over the past seven years and the anticipated rise in price inflation. One might logically conclude that an influx of money should lead to escalating prices for a fixed amount of goods and services. This reasoning seems straightforward, suggesting that an increase in money supply should mathematically result in higher prices.
This appears to be a sound basis for action, perhaps prompting someone to sell off dollars in favor of gold. After all, they would have what seems like an ironclad rationale steering their decision, wouldn’t they? Continue reading
This past week unveiled more evidence that the economy is slipping backwards. On Tuesday, the Institute for Supply Management reported a Purchasing Manager’s Index (PMI) reading of 48.6 for November. A PMI below 50 indicates that manufacturing activity is not expanding but is, in fact, contracting.
The PMI of 48.6 marks the lowest level since June 2009. Clearly, a reading that evokes memories of the Great Recession is not a sign of economic health. Instead, it suggests the economy is softening significantly.
Much like the decline in corporate profits reported the previous week by the Department of Commerce, a strong dollar appears to be a key player in the downturn of manufacturing activity. A robust dollar makes U.S. goods less competitive on a global scale, thereby widening the trade deficit and negatively impacting GDP.
This trend is not isolated to U.S. manufacturers; it seems to reflect a broader global phenomenon. Continue reading
Last week, the Department of Commerce reported that U.S. gross domestic product (GDP) grew at an annual rate of 2.1 percent during the third quarter, an increase from the previously stated 1.5 percent. This revision was driven by higher-than-anticipated private inventory investment. Nevertheless, GDP remains significantly lower than the robust 3.9 percent growth seen in the second quarter.
More troubling, however, was the report on corporate profits. Profits from current production fell by $22.7 billion in the third quarter, following a $70.4 billion increase in the second quarter.
According to Reuters, “profits were down 8.1 percent from a year ago, marking the steepest decline since the fourth quarter of 2008.” This drop, reminiscent of the Great Recession, signals that businesses may not be as robust as policymakers would suggest.
The strong dollar appears to be a primary factor behind this decline in corporate earnings. It decreases the competitiveness of U.S. companies abroad and exacerbates the trade deficit. Continue reading
A persistent misconception is that policymakers can trigger substantial economic growth simply by maintaining artificially low interest rates. The widespread belief is that inexpensive credit encourages both individuals and businesses to borrow and spend more, leading to a resurgence of prosperity.
Proponents argue that this cycle will boost profits, create jobs, increase wages, and set the stage for a new economic expansion. These are the perceived benefits that can supposedly arise from central bankers injecting additional liquidity. Unfortunately, the actual outcomes often fall short of these optimistic projections.
Indeed, low interest rates can stimulate a healthy economy with manageable debt levels. However, when an economy reaches a saturation point where new debt fails to yield additional growth, the effectiveness of low credit rates diminishes. In this scenario, added credit can become a hindrance rather than a help to future growth.
Current monetary policy has landed us in a challenging situation where an increasing amount of digital credit is required each month just to maintain stability. After seven years of a zero interest rate policy (ZIRP), financial markets have become so distorted that a zero-bound federal funds rate has turned restrictive. Continue reading
### Conclusion
In summary, the intricate dynamics of economic indicators and policies often reveal a narrative that deviates from initial appearances. Despite assumptions linking monetary expansion to inflation and growth, the reality can be more complicated, warranting careful analysis and consideration. Understanding these nuances is essential for informed decision-making in an ever-changing economic landscape.
