Moving on a Slow Bell

5 May 2015

Dear Tetraneuris,

            I realize it’s been quite a while since you’ve heard from me. I thought I’d drop you a quick note. It’s almost three in the morning and I have been not sleeping too well lately so I may as well make use of the time. Yesterday at about this time I read Hardy’s The Going, Your Last Drive, The Walk and Rain on a Grave. Something about Hardy draws me. You should see the forests today, Tetraneuris. The Rhododendron, our state flower, are in bloom along with the Dogwoods. I came across a blooming schedule for your old stomping grounds in the Monongahela you may find somewhat nostalgic. It won’t be long and the Mountain Laurel will be taking off as well. You should really attempt to make it back here, you know. When was the last time? We need to canoe the Greenbrier. I imagine you are getting ready for the June hatches in you neck of the woods. Given those, I believe you’ve become somewhat spoiled and set in your ways in Montana. Remember the Small Mouths during our youth? That will draw you back for a visit soon, I’m certain.
            I was thinking early this morning about Bernanke’s new blog and his desire to see people put their economic thoughts to work in the modern era of electronic media. I decided at some point that he and Paulson probably made the correct decisions initially, recognizing the present day economic lubricant derives itself from the securitization markets much more so than from the traditional lending arena; therefore, the Fed’s implementation of the present day lender of last resort found itself being played out via the central bank’s securities purchasing programs and understandably so. Congratulations to Bernanke on the deserved consult appointments with the hedge and mutual fund organizations, an apparent post Fed tradition. Perhaps this is the end incentive of government work, which should be of a principally civic nature rather than today’s six figure government positions with elaborate health benefits and in many cases a pension available for the rest of the former employee’s life. I’ve found myself having to explain to my children, Tetraneuris, why our government (which includes the central bank) had to bail out the nation’s lending institutions, insurance firms, money markets, conglomerates and automobile companies as a “short term preventative measure” to derail the almost certain economic collapse that was going to ensue and most likely social strife thereafter. A financial crisis rather than the traditional cyclical inventory business cycle. “Why did we bail out the autos?” My sophomore recently asked me while we drove to her school. I found myself at pains to answer the question, as you might imagine. “If we had not done so, it would probably be the case that today you might begin seeing the fruits (in the form of new automobile brands in the country) of new innovations being made by new companies that arose out of the ashes of the depression we would be still recovering from today. Instead, in part for the maintenance of jobs, and in part the oft (perhaps ill) cited maintenance of national security (remember the old “ball bearings issue” and key industrial components of the economy we’re talking about here…), we see on the road the same gas guzzling pigs as were on the road prior to the debacle. Many new 15 mpg vehicles everywhere. I’m not sure if the zero interest rate game is being played again, working the margin on the higher priced guzzlers,” I recall saying in some fashion. Granted, gasoline prices have dropped given the slow global macro growth and increased world production. However, it seems a failure to see the same old song being played out at the Big Three. I reckon understandably better margins are still ruling the day with the expensive, big vehicles. If people will buy ’em, why should not firms produce them? It may be the case that technology investments in efficiency improvements is a glacial matter. Granted, one does see about a few smaller and a few hybrid types too. A local mechanic recently told me the “cash for clunkers” program (our Keynesian get out of jail measure in the vehicle patch) was now being played out in the form of no decent inexpensive used vehicles around in the area. Perfectly fine automobiles lying drilled out and destroyed in the scrap yards. “People don’t realize how much money it costs three years after purchasing that hybrid to replace the battery,” he said, saying replacing the battery was pretty spendy, something which I’ve not verified. Of course, new vehicles probably don’t find their way into the local mechanic’s shop either… I reckon folks do need those fancy computers running their new autos today… The opportunity cost of cash for clunkers is scarcity in the used vehicle market which hits youth and lower income level folks the hardest. A poor policy in hindsight which should have been better thought out at the time. Tax incentives in production of high milage, low retail cost vehicles is (and would have been) a better route. Today, a specially designated gasoline tax, set-up in a trust of some sort, to specifically reduce the national debt would be another sound idea as well. I, like you Tetraneuris, view taxes as economic impediments to growth, but oil is down, prices at the pump low and the nation is in a debt crisis. Higher pump prices will cause folks to heavily consider whether or not to buy the guzzlers as well. My son brought in a gallon of milk last night which he said was $4. “Yep, more than a gallon of gasoline,” I quipped following with a remark that inflation certainly exists in food land. The prices of fish and beef are astronomical. I understand the fish and scarcity bit, but overall, the average family is experiencing a rise in food prices to complement their stagnant incomes and low interest rates on their savings. The rising dollar and low fuel prices do not appear to be having much of an affect on certain items in the foods space. The same goes for medicine and the health industry. The inelastic things folks need, as usual. The cuts at the pump are at the moment somewhat of an offset, but how much and for how long?
            It seems to me that in Bernanke’s discussion of the equilibrium rate he neglected to note that the greatest players in the market environment today are the central banks. You probably caught the former Fed chief’s post. Markets have to accept that these “new” (in some countries) buyers and sellers are there and are going to, at least in the immediate term, remain in the markets without question affecting the equilibrium rate. This unfortunately means also that rates in the global bond markets will have a more dramatic influence from the political winds of the day. Granted central banks are supposed to be independent operators, but one knows to some extent the reality. As the equilibrium rate is influenced by the actors in the securities markets, and the central banks are Significant actors therein, it cannot be argued that central banks do not play a role in present day low interest rates affecting seniors and savers. Granted the term transitory was used, however, I recall hearing or reading subsequently it being argued that the central bank should be in no hurry to decrease its “positions,” (it continues rolling proceeds into the markets at the present) and policies such as quantitative easing may become a regular tool in the Fed’s kit. It should be the case (and has been to a small relative degree) in Europe that their easing program, were markets behaving rationally, should lower the interest rates of higher risk states; however, given the negative yields or zero yields of the financially stronger states and remaining higher yields in the weaker ones, it appears to be the case that the policy being employed is having a poor effect in the markets. Or, perhaps, were the Euro area easing program not in place, can one imagine what rates in the not as strong financial states would be at the moment? A touch of grey there, T. At least on the surface, things are not playing out the same in Europe as they did in the US. As you realize, there are many reasons for this which relate to a true federal system versus the present scenario. Then comes the debate about whether one is warranted in Europe and then the cultural issues… The European Central Bank, however, should recognize the truth for what it is and allow markets to naturally clear. This would be painful initially, but unemployment rates remain elevated in the financially weaker sections of the region at present regardless, so perhaps the interim pain would be not as great as one might reckon? Again, this is unclear.
            Unemployment levels in the States have improved. One of the latest monthly jobs numbers, however, reflects finally the collapse that has occurred in the commodity patch which has also begun to reveal itself in the revenues of related firms and their share prices. Generally employment though has been improving. The participation rate remains a conundrum, however, which should be deeply explored. Important questions need to be asked as not all of these folks are retiring boomers. Why are they not returning to the workforce? If the jobs are available, and perhaps the training (maybe even the education by some firms), why are workers not returning? Do people no longer enjoy working? What about those presently employed? Do Americans still enjoy working? The nation’s poor productivity numbers would indicate perhaps not. These, as you know, are important subjects that need to be better analyzed. Transfers need to be studied and their impact on today’s numbers as well. Private sector business creation rates, too. The usual stuff we’ve been discussing on and off for a while now.
            An analysis might be arranged to look into what impact lower rates in the bond markets and generally are having on the insurance industry. It’s clear firms in this space are raising their premiums to compensate for their lack of investment returns. Is there a future claims paying ability collapse on the horizon? It seems impossible to have sympathy for this industry (I should simply stop there) given the role some of its major players had in the collapse and the subsequent bailout the group received, but preventing a future one should be looked into as well given the consumer interest in the space. Like the autos, today we’d probably have new, young and successful firms in the insurance market which today do not exist. The bailout paradox, protection of the established in the name of protecting employment and consumers… This regeneration principle can be applied to the banks as well. New bank creation remains off. Given the immense regulatory regime, competition apparently is being hindered by the lack of drive for new firm creation. Economic collapses have their healthy flushing benefits if allowed to play out. It still may well do so as things are more precarious than perhaps one realizes, understanding the unwillingness of legislative bodies to curtail bad habits and address reality. The Great Transfer slogs on, Tetraneuris, risks remaining only at different levels. Low interest rates allowing governments to roll their obligations and exist. Meanwhile, industrial production languishes.
            At some point, Tetraneuris, we should revisit Japan, China, Brazil, India, Russia, Canada and the other non-Euro economic players to note their economic issues and how they relate to ours, including currencies and how things are playing out at the moment in that realm. However, since I don’t want to put you to sleep reading perhaps what you may already realize, I’ll cut it off here until our next visit. Hope you drop me a line soon, or better yet head this way. Good luck with the spring fishing and on the tags this year, I know you paid a small fortune entering the special permits drawing for your children. Hang on…

Cheers,

Periwinkle

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