Cyreenik Says
The combination of anemic growth and low inflation since the 2007 Bust has become a years-long mystery now. No one has a good explanation as to why growth has remained so slow, and inflation so low, for so long.
I offer this possibility: We have a dearth of positive feedback investment projects available. As in, there have been too few money-making projects with high returns to invest in.
Positive feedback projects are those that, when invested in, create even more growth. Here is an example from the 1800's and movie Westerns: Invest in bringing a railroad to town and the town will grow spectacularly. Hot dog! Not only did the railroad bring a lot more growth to all the townspeople, it meant there became a lot of competition in how to invest money in growing the town. And as soon as that trend was clear there became a lot of competition among many towns to be an early railroad embracer. All this competition meant money was scarce compared to demand and that meant interest rates were high.
...The opposite of what we are experiencing today. What this indicates is that today we are facing a drought of positive feedback investment projects. There aren't enough high return projects that are competing for money.
Why is this? What's missing compared to, say, the 1990's, or 1950's?
Here are some possibilities:
o There aren't highly productive technologies available to invest in -- something such as Uber is socially disruptive, but it isn't changing productivity that much. Compare Uber to a steel mill or a personal computer company. What are the positive feedback technologies waiting to be exploited today that would transform how we make and service things by doing it differently, and much faster, better and cheaper?
Driverless cars could fit this bill, but we are still five-to-twenty years away on those. Health technologies could, but that pipeline currently progresses at glacial speeds -- which means there is little current demand for more R&D funds.
o The business environment is too "grief-filled" so the returns are too small -- running a business these days is a whole lot about complying with regulations. This is time, money and attention that is not being spent on doing the substantial experimenting it takes to perfect a world-shaking idea and create a profitable business based on it. All this regulating makes business building more expensive and less positive feedback -- which is reducing demand for investing money.
These research and development, and running businesses areas are areas where where we need to simplify. We need to cut hoop-jumping so that the positive feedback ideas can be more quickly discovered and exploited. When this simplifying happens then demand for money will increase, growth will increase, and we will get back into good old prosperity mode. It can happen by simplifying what the existing institutions must undergo, or it can happen by creating brand-new institutions which are considered outside the current regulatory domains.
o Investing in infrastructure needs to be simplified -- This is another area where there is way too much hoop-jumping required. We need to be dramatically improving our roads, railroads, buildings and air transport. We need to be able to change these to improve them, and repair the existing structures, with a lot less grief than it currently takes.
Update: This 22 Dec 15 WSJ article, Capital Spending: The Economy’s Weak Spot Weak demand for durable goods underscores corporate skittishness for capital spending by Steven Russolillo, is covering this issue.
From the article, "One economic trend that hasn’t done its bit for this 6½-year recovery: capital spending.
Hiring has improved, stock markets have rallied and consumer confidence has rebounded. But U.S. corporations remain hesitant to deploy funds to new projects and equipment, or to upgrade facilities and technology. Instead, companies continue to shower shareholders with record levels of dividends and buybacks."
Update: This 31 Dec 15 Economist Free Exchange article, Economists’ evolving understanding of the zero-rate liquidity trap, takes a similar point of view.
From the article, "[T]he problem is a global glut of savings relative to attractive investment options. This glut of capital has steadily and relentlessly pushed real interest rates around the world towards zero."
It looks as if we may be in for yet one more financial surprise before 2015 ends. This time it is starting as a run on a junk bond-based mutual fund, and the worry that other mutual funds may also suffer runs.
This 13 Dec 15 WSJ article, The Liquidity Trap That’s Spooking Bond Funds The specter of a destabilizing run on debt is haunting markets by John Carney, talks about the worries being caused by the collapse of the Third Avenue Management mutual fund.
From the article, "The debt world is haunted by a specter—of a destabilizing run on markets."
This is like the 2007 panic, and most preceding ones, in that the first symptom of the panic onset is a surprise failure. In the 2007 case it was the surprise of a many-months-long decline in US housing prices. In this case it is the inability of a junk-bond-based mutual fund to liquidate assets fast enough to satisfy customer redemption requests. (The added irony here is that a movie, The Big Short, about the 2007 collapse is hitting the theaters this week.)
The important point here -- the moral -- is that all these memorable crashes start as surprises. The thinking before the crash by those aware of what could happen is, "Sure... this bad-case scenario could happen, but it hasn't happened before now. Why should it happen now?" It is only after the fact that the 20/20 hindsighters have their day in the sun.
And why do these crash-waiting-to-happen situations constantly keep developing? Because each is part of an innovation. They are part of new ways for many people to cooperate, and through cooperating make money. Business and finance, even the well understood older forms, are risky endeavors. This means there is no reason not to keep experimenting, and innovating, and suffering from unpleasant surprises as well as pleasant ones. These unpleasant surprises are just like all other experiments in many other endeavors: some go wrong, you learn from them, and do better the next time. (Well... there is one difference: our instinctive thinking about money. That's why the finance ones are so spooky!)
Time for a little perspective taking:
o Trump and Sanders are not the problem.
They are not the problem because they are simply exercising their free speech rights.
o The problem is thousands of Trump and Sanders enthusiasts.
We need to be asking why so many US people are so enthusiastic about what these two are saying? What in our education system of the past couple decades, and our current circumstance, has produced these thousands of enthusiastic supporters for way-off-center ideas? That is the question that should be high-profile.
We are moving deeper and deeper into a Time of Nutcases. (my term, article here) This is a time when conventional solutions and conventional leaders are not solving current problems in ways that satisfy their followers. The followers are frustrated, so they are seriously looking at, and considering, lots of unconventional solutions being paraded about by leaders who previously had been given little serious consideration -- who had previously been considered nutcases by the average community member.
Closely related to this is that we are currently working through a time of political acrimony -- our government leaders would rather argue, and continue arguing -- instead of arguing, then compromising and cooperating on solutions.
The big picture problem is that we are lacking a Big Vision to get behind. If Barack Obama can be called for a big failing, it is not Middle East policy, it is lack of providing a Big Vision that the country can unite behind. The Middle East problems are small potatoes compared to that failing.
The intensity of this current Time of Nutcases is something of a mystery to me. The US economy is growing, albeit slowly. There are more jobs being created and wages are starting to rise, but again slowly.
The spooky part is imagining how much worse this frustration would be if a recession was in progress... or one starts up between now and election day. Brrr!!!
Update: This 12 Dec 15 Economist article, Anti-immigrant populism The march of Europe’s little Trumps Xenophobic parties have long been ostracised by mainstream politicians. That may no longer be possible, describes the rise of Time of Nutcases happening in Europe.
From the article, "Opinions of this sort used to be marginal in Sweden. For years the country has taken pride in accepting more refugees per person than any other in Europe. In the 2006 election the SD, which once had ties to neo-Nazi groups, drew just 2.9% of the vote. But in last year’s election it won 13%, and recent polls give it 20% or more, making it the country’s biggest or second-biggest party. It is expanding beyond its working-class base, attracting supporters who have been to university. In multicultural Stockholm, bien-pensant yuppies anxiously confess that childhood friends now support the SD."
I've offered these opinions before, but in the light of this end-of-year surge in frightening terror-related activities, they are worth repeating:
o The best weapon against terrorism is Business as Usual. (article here)
o If a war is going on longer than expected, look for surprise enemies and protected resources. (article here)
The last few months have seen a boom in both Big Media and social media talking about terrorist acts. This is a mistake because this promotes more terrorist acts. When terrorist acts are treated as high-profile news, the fence-sitting potential terrorist can see that not only will he or she get their twenty virgins in the life-beyond, they are going to get a whole lot of "news at ten" in our real-world life here on earth. For some people this high-profile exposure is legacy-building -- a widely recognized incentive. Another example of legacy-building is library construction by ex-Presidents.
The way to discourage potential terrorists who are attracted to the media exposure is to cut the exposure way down -- report, but don't promote. We should mostly ignore terrorist acts instead of being over-the-top worried by them and making media circuses of them. My term: conduct Business as Usual.
Business as Usual will affect the conduct of terrorist organizations too. These people are promoting a cause. They are looking at the cost-benefit when they do. When there is a media circus the benefit side soars. Take that way, the benefit sinks to not-worth-it, and these groups will find other ways to promote their causes.
There has been a lot more talk over the last month about bombing ISIS, but for some reason there has been very little talk about hitting ISIS where it really hurts: in their pocketbook.
ISIS is getting money, lots of money, from somewhere. But I've seen no media coverage on where it is coming from. As long as this money source is not identified, and not cut off, ISIS will continue to thrive. Conversely, if the money is cut off... whoops! there goes the financing for weapons, slick Internet videos, and supporting the people who still live in ISIS-controlled territories. In short, without lots of money coming in, lots of ISIS supporters are going to get real unhappy, real quickly.
It is yet another indicator of how confused the US and European strategies on ISIS are that neither has said Word One about enacting economic sanctions on it, or those supporting it.
Find the ISIS pocketbook and strike at that. The war will wind down quickly.
This 12 Dec 15 Economist article, Islamic State Unfriended There are signs that Islamic State’s propaganda machine is losing its edge, talks about life in the ISIS areas and how it may be getting more impoverished since the Paris terror incidents of this fall.
From the article, "Yet for all the group’s success at purveying and projecting terror, life on the ground within IS territory has grown dramatically darker since Paris. Although far from defeated, the group can no longer live up to its slogan “to remain and expand”. IS propaganda depicts a well-ordered caliphate where children learn proper religion, markets are full and the state hands out welfare and regulates fishing in the Tigris and Euphrates. The reality is bleaker."
A step in the right direction for two reasons: the article is talking about economics, and it indicates that ISIS may finally be overstepping itself. If ISIS really is getting poorer, the next sign will be lots more internal arguing about what to do next, and yet another split in this cultural current of extremism.
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