Sunday, February 14, 2016

Tradable Sectors are Doing the Heavy Lifting

Lately I've sought to pay more attention to "fine details". Is it just my imagination, or is the dialogue - which now includes the reality of negative interest rates - becoming more complex? Whatever the case, economic events around the world, are occurring at a fast and furious rate. It's a combination which has slowed down posting on my part!

In all of this, tradable sectors are expected to do the heavy lifting for the economy, in spite of reduced labor force participation (to buy these goods) and lower commodity prices due to tight monetary conditions. And even though negative interest rates could be likened to central bankers tossing a bone to tradable sectors, this isn't a very meaty bone. Tradable sectors may become quite thin if this is the only bone they can expect...

Tradable sectors should not have to shoulder the burden indefinitely, given present day restraints on long term growth. And table scraps from the government - should these sectors lose too many battles for aggregate demand - would be the worst Faustian bargain possible. In the meantime, how much "back door" liquidity would be provided on their behalf, through negative interest rates?  Only remember that front door liquidity remains closed, as the real central banker policy (IOR) contracts monetary policy by diverting much needed resources to asset stabilization. As Scott Sumner explained in a recent post, the issue is not that negative interest rates are "good" or "bad". Even so, they would certainly prove an inconvenience regardless of income category. Ah well you can't always get what you want.

As to the meaty bones of IOR - the ones which are being used in lieu of nominal income to stabilize non tradable sector assets, Bill Woolsey writes,
...make no mistake--the Fed's policy of paying interest to banks for holding reserves, is a policy aimed at keeping nominal interest rates up. 
Readers are well aware that I would rather see assets - and the natural interest rate - stabilized over time, with a nominal level target that would gradually restore marketplace potential. Few assets can remain secure until a level nominal target is maintained, so that income provides for asset stability at the outset. What is significant, is that the Fed finds present monetary reality a bit distasteful, even as central bankers try to disguise the fate they brought upon themselves.

Bill Woolsey also notes that for negative rates, interest rates are a price. It's not difficult to imagine the present price as reflecting the multitudes: patiently standing in line waiting their turn at life, due to imbalances between tradable and non tradable sectors which have gone untended for too long. While negative interest rates sometimes prove necessary, it is doubtful that many populations would be comfortable with them as a long term measure. This particularly concerns me, for too many recent Fed adjustments - when they do occur - are being treated as though permanent.

Regarding interest rate "pricing", Bill Woolsey also notes:
With interest rates, however, the relevant coordination is savings and investment. Saving is that part of income not spent on consumer goods and services. And investment is spending on capital goods. If the interest rate which results in saving and investment matching up is less than zero, then that is the right interest rate.
Even though investment is spoken of as high level (financial) activity, think how this perception is changing for the average individual. Today, some of the most heavily advertised "investments" include time and knowledge based services. These services, by extension, are "supposed" to provide the investment which leads to economic access - whether early in life such as higher education, or (possibly) later in life such as the "right" dental work. How much relevance still exists for the original rationale, given the fact investment is initially approached as personal improvements which might not pay off?

Hence the first set of investments needs real results, before the second investment group can be considered viable options. The problem for many is not that they aren't investing enough, but that initial personal investments don't open the door for "follow through" investment.

Yet the problem remains hidden, because this more recent set of investment expectations revolves around human capital. And human capital remains in the stranglehold of non tradable sectors. And since more seek economic access through investment in human capital than the marketplace can absorb, nations continue to move towards below zero interest rates. It's time to reverse this tragedy, with a marketplace for time value. Let's give the tradable sectors a break, and start the process of renewed growth.

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