Alan Greenspan used the word to describe the curious goings-on in the bond market. Greenspan raises short-term rates, but long-term yields fall! It’s not supposed to happen that way. The Fed is supposed to be raising rates in response to strong growth, which is supposed to be pushing up inflation and bond yields.
We had an explanation: the world economy is weakening, not getting stronger…more specifically, the U.S. economy is still sinking into the long, slow, soft slump we warned about three years ago.
Another way of looking at it is that long rates are falling because people see little risk of inflation. They’re happy to take 6%, or even 5%, for 30 years.
Alan Greenspan had an explanation for the interest rate conundrum last week. He finally noticed that there were a lot of people in Asia willing to work for a lot less than people in America. This “glut of labor” is inherently deflationary. It pulls real prices down. (Nominal prices, of course, are another conundrum. No matter how fast Wal-Mart can cut prices, the U.S. treasury can — theoretically — cut the price of the dollar. If it wanted to do so, the Fed could drop dollar bills from helicopters as Fed governor, Ben Bernanke, has suggested. Or it could hide it in tin cans all over town, for little boys to find, as John Maynard Keynes once whimsically suggested.)
But the real conundrum was why it took so long for people to see what was obvious all along — you can’t really build a sustainable, healthy economy on consumer spending in excess of consumer wages. You have to earn it before you can spend it. If you do it the other way around, there comes a time when you must stop spending it so you can repay what you already spent.
Such old-fashioned ideas are as out of style as spats. Everyone now believes the economy can be manipulated, guided, and directed towards any outcome the central planners want. The collapse of the Berlin Wall was supposed to represent the victory of freedom over central planning. But here’s a conundrum for you: why does everyone now believe in central planning?
The Feds think they can find a short-term interest rate better than the one that arises naturally from the actions of lenders and borrowers. It seems to bother no one but us that they, our central bankers, chose a rate far below what lenders would willingly accept.
“Finding a new captain for our economic ship,” is a headline from Newsday. It refers, of course, to a replacement for the maestro himself. (Currently, Ben Bernanke is among the frontrunners.) But what is interesting in the headline is the way it presumes that we are all on this economic ship together and we need someone to run the thing for us. The days when people were individually responsible for piloting their own economic barks disappeared with the Old Republic and sarsaparilla. What used to matter was private virtue; if you worked hard enough, saved your money, and used your head…you could improve your lot in life. (More below…)
If you fell into sloth, extravagance or iniquity, on the other hand, you could expect that your economic fortunes would be diminished. But so what? It was your own damned fault. But now, we have a no-fault economy. Now, what matters is having someone in the captain’s seat clever enough to make sure today’s lack of virtue doesn’t catch up to us.
• What’s this? The euro is still falling; it’s down to $1.21. Generally, markets shrugged off the “no” votes on the European constitution. But the euro is still under pressure. What will happen to the euro? Who knows…it’s a conundrum.
• The NY Times has been exploring money matters in a series of articles. The general drift is as might be expected: the rich are getting richer; the poor are getting poorer! We have to do something!
It must be getting harder and harder to remain poor in America today. “If you can fog a mirror, you can get a mortgage,” said a lender recently. And if you can get a mortgage, you can get your little boat onto the great current of wealth that is making everyone in the United States rich — at least, in their own minds. Before you know it, you’ll have been swept along into a McMansion.
But now you can qualify for sympathy no matter how much you make. Beyond subsistence, wealth is relative. “Advocates for the poor say the poverty line is far too restrictive to a be a realistic measure of material deprivation.” The Times shows us a person who is not really “poor” but still someone we should worry about. Irma Williams was a drug addict, derelict, promiscuous bum eight years ago — with four children she did not take care of. Now, she is a college graduate earning $27,000 a year. Not a lot of money…but still more than 10 times as much as the average person in China or India earns. And naturally, even though the taxpayers paid for her “rehabilitation,” detox, and food stamps and still pay most of her rent, the poor woman cannot make ends meet and has run-up $12,000 in student loans and $8,000 in credit card debt. And yet, when we look at how she spends her money, we see that she could easily make cut backs. The photo of her in the paper shows she plainly eats too much. She goes to the beauty parlor and gets manicures. She has a gym membership. If she were Chinese she would walk to work, or ride a bicycle rather than pay for transportation.
We wonder: why should this woman, who has squandered most of her life, earn 1,000% more than the average Chinese? What has she done to deserve it? Compared to 3 billion people in Asia, Ms. Williams is a rich woman.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.