Why We Should Fear Easy Money

Cutting interest rates now could set the stage for a collapse in the financial markets.

To widespread applause in the markets and the news media, from conservatives and liberals alike, the Federal Reserve appears poised to cut interest rates for the first time since the global financial crisis a decade ago. Adjusted for inflation, the Fed’s benchmark rate is now just half a percent and the cost of borrowing has rarely been closer to free, but the clamor for more easy money keeps growing.

Everyone wants the recovery to last and more easy money seems like the obvious way to achieve that goal. With trade wars threatening the global economy, Federal Reserve officials say rate cuts are needed to keep the slowdown from spilling into the United States, and to prevent doggedly low inflation from sliding into outright deflation.

Few words are more dreaded among economists than “deflation.” For centuries, deflation was a common and mostly benign phenomenon, with prices falling because of technological innovations that lowered the cost of producing and distributing goods. But the widespread deflation of the 1930s and the more recent experience of Japan have given the word a uniquely bad name.

After Japan’s housing and stock market bubbles burst in the early 1990s, demand fell and prices started to decline, as heavily indebted consumers began to delay purchases of everything from TV sets to cars, waiting for prices to fall further. The economy slowed to a crawl. Hoping to jar consumers into spending again, the central bank pumped money into the economy, but to no avail. Critics said Japan took action too gradually, and so its economy remained stuck in a deflationary trap for years.

Yet, in this expansion, the United States economy has grown at half the pace of the postwar recoveries. Inflation has failed to rise to the Fed’s target of a sustained 2 percent. Meanwhile, every new hint of easy money inspires fresh optimism in the financial markets, which have swollen to three times the size of the real economy.

In this environment, cutting rates could hasten exactly the outcome that the Fed is trying to avoid. By further driving up the prices of stocks, bonds and real estate, and encouraging risky borrowing, more easy money could set the stage for a collapse in the financial markets. And that could be followed by an economic downturn and falling prices — much as in Japan in the 1990s. The more expensive these financial assets become, the more precarious the situation, and the more difficult it will be to defuse without setting off a downturn.

The key lesson from Japan was that central banks can print all the money they want, but can’t dictate where it will go. Easy credit could not force over-indebted Japanese consumers to borrow and spend, and much of it ended up going to wastefinancing “bridges to nowhere” and the rise of debt-laden “zombie companies that still weigh on the economy.

Today, politicians on the right and left have come to embrace easy money, each camp for its own reasons, both ignoring the risks. President Trump has been pushing the Fed for a large rate cut to help him bring back the postwar miracle growth rates of 3 percent to 4 percent.

At the same time, liberals like Bernie Sanders and Alexandria Ocasio-Cortez are turning to unconventional easy money theories as a way to pay for ambitious social programs. But they might want to take a closer look at who has benefited most after a decade of easy money: the wealthy, monopolies, corporate debtors. Not exactly liberal causes.

By fueling a record bull run in the financial markets, easy money is increasing inequality, since the wealthy own the bulk of stocks and bonds. Research also shows that very low interest rates have helped large corporations increase their dominance across United States industries, squeezing out small companies and start-ups. Once seen as a threat only in Japan, zombie firms — which don’t earn enough profit to cover their interest payments — have been rising in the United States, where they account for one in six publicly traded companies.

All these creatures of easy credit erode the economy’s long-term growth potential by undermining productivity, and raise the risk of a global recession emanating from debt-soaked financial and housing markets. A 2015 study of 17 major economies showed that before World War II, about one in four recessions followed a collapse in stock or home prices (or both). Since the war, that number has jumped to roughly two out of three, including the economic meltdowns in Japan after 1990, Asia after 1998 and the world after 2008.

Recessions tend to be longer and deeper when the preceding boom was fueled by borrowing, because after the boom goes bust, flattened debtors struggle for years to dig out from under their loans. And lately, easy money has been enabling debt binges all over the world, particularly in corporate sectors.

As the Fed prepares to announce a decision this week, growing bipartisan support for a rate cut is fraught with irony. Slashing rates to avoid deflation made sense in the crisis atmosphere of 2008, and cutting again may seem like a logical response to weakening global growth now. But with the price of borrowing already so low, more easy money will raise a more serious threat.

By further lifting stock and bond prices and encouraging people to take on more debt, lowering rates could set the stage for the kind of debt-fueled market collapse that has preceded the economic downturns of recent decades. Our economy is hooked on easy money — and it is a dangerous addiction.

Trump May Kill the Global Recovery

In a sharp departure from this time last year, the global economy is now being buffeted by growing concerns over US President Donald Trump’s trade war, fragile emerging markets, a slowdown in Europe, and other risks. It is safe to say that the period of low volatility and synchronized global growth is behind us.

.. In 2017, the world economy was undergoing a synchronized expansion, with growth accelerating in both advanced economies and emerging markets. Moreover, despite stronger growth, inflation was tame – if not falling – even in economies like the United States, where goods and labor markets were tightening.
.. Stronger growth with inflation still below target allowed unconventional monetary policies either to remain in full force, as in the eurozone and Japan, or to be rolled back very gradually
.. Markets gave US President Donald Trump the benefit of the doubt during his first year in office; and investors celebrated his tax cuts and deregulatory policies. Many commentators even argued that the decade of the “new mediocre” and “secular stagnation” was giving way to a new “goldilocks” phase of steady, stronger growth.
.. Though the world economy is still experiencing a lukewarm expansion, growth is no longer synchronized. Economic growth in the eurozone, the United Kingdom, Japan, and a number of fragile emerging markets is slowing.
.. while the US and Chinese economies are still expanding, the former is being driven by unsustainable fiscal stimulus.
..with the US economy near full employment, fiscal-stimulus policies, together with rising oil and commodity prices, are stoking domestic inflation.
.. the US Federal Reserve must raise interest rates faster than expected, while also unwinding its balance sheet.
.. the prospect of higher inflation has led even the European Central Bank to consider gradually ending unconventional monetary policies, implying less monetary accommodation at the global level. The combination of a stronger dollar, higher interest rates, and less liquidity does not bode well for emerging markets.
..  Despite strong corporate earnings – which have been goosed by the US tax cuts – US and global equity markets have drifted sideways in recent months.
.. The danger now is that a negative feedback loop between economies and markets will take hold. The slowdown in some economies could lead to even tighter financial conditions in equity, bond, and credit markets, which could further limit growth.
.. Since 2010, economic slowdowns, risk-off episodes, and market corrections have heightened the risks of stag-deflation (slow growth and low inflation); but major central banks came to the rescue with unconventional monetary policies as both growth and inflation were falling.
.. These risks include the negative supply shock that could come from a trade war; higher oil prices, owing to politically motivated supply constraints; and inflationary domestic policies in the US.
.. this time the Fed and other central banks are starting or continuing to tighten monetary policies, and, with inflation rising, cannot come to the markets’ rescue this time.
Another big difference in 2018 is that Trump’s policies are creating further uncertainty. In addition to
  • launching a trade war, Trump is also
  • actively undermining the global economic and geostrategic order that the US created after World War II.

.. the Trump administration’s modest growth-boosting policies are already behind us, the effects of policies that could hamper growth have yet to be fully felt. Trump’s favored fiscal and trade policies will crowd out private investment, reduce foreign direct investment in the US, and produce larger external deficits.

  • His draconian  will diminish the supply of labor needed to support an aging society.
  • His environmental policies will make it harder for the US to compete in the green economy of the future.
  • And his bullying of the private sector will make firms hesitant to hire or invest in the US.

.. Even if the US economy exceeds potential growth over the next year, the effects of fiscal stimulus will fade by the second half of 2019, and the Fed will overshoot its long-term equilibrium policy rate as it tries to control inflation; thus,

achieving a soft landing will become harder.

.. By then, and with protectionism rising, frothy global markets will probably have become even bumpier, owing to the serious risk of a growth stall – or even a downturn – in 2020.

.. With the era of low volatility now behind us, it would seem that the current risk-off era is here to stay.

Older drivers: Insurance Institute for Highway Safety

In 2015, motor vehicle crashes accounted for less than 1 percent of fatalities among people 70 and older. 1People ages 70 and older are less likely to be licensed to drive compared with younger people, and drivers 70 and older also drive fewer miles. However, older drivers are keeping their licenses longer and driving more miles than in the past.

Per mile traveled, fatal crash rates increase noticeably starting at age 70-74 and are highest among drivers 85 and older. The increased fatal crash risk among older drivers is largely due to their increased susceptibility to injury, particularly chest injuries, and medical complications, rather than an increased tendency to get into crashes. 2

Babushkas for Putin

Russian women, who outlive men by more than a decade on average,
are among the president’s biggest fans, especially older women.

“Putin is respected by everyone, so men should pay attention to how and what he does,” Anna Veresova, 75, a retired teacher, told me. “In theory, he is the perfect man to have around.”

 61 percent of his votescame from women and just 39 percent from men. The gender gap has persisted:

.. For the election on Sunday, 69.2 percent of women said they planned to vote for Putin, while only 57.5 percent of men did

.. Most said they were doing so in part because he was a good man — strong, healthy and active.

.. Ms. Veresova and the other women I photographed live in a world of very few men. Russian women outlive Russian men by over a decade

.. women are expected to live until 76, and men to just 65.

.. By the time women reach retirement age, their husbands have often died, and their days consist of taking care of grandchildren, spending time with other older women and watching television.

.. On the one hand, no one I spoke with seemed to feel that they were worse off, exactly: Even before their husbands died, the women were already doing all the household chores. Most saw retirement as a chance to relax, to try things they’d always wanted to do. I met women who became professional divers, started horseback riding, were learning to use smartphones and were singing in choirs. One started a business.

.. And yet their emotional response to Mr. Putin — the only man their age who is a presence in their lives — seems to speak to both the holes and the scars that Russian men, in their absence, have left. Mr. Putin is not lazy, these women say. He doesn’t drink. He’s calm, sober, even charming.

.. He looked into the camera, praised Russia’s women who “take care of our homes and children every day.” He recited poetry. The babushkas alone in their homes watched.