Sunday, August 7, 2016

comments on Rolf’s View of the World and Singapore’s Economy – The whole world has been leveraging up! (Part 3)

comments on:

not an inapt comparison.

"Imagine you held currencies worth US$35 since 1970. Fast forward more than 40 years today, while the paper US$35 currencies are still the same dollar notes, the purchasing power of the currencies have fallen dramatically.  In retrospect, if you bought 1 ounce of gold in 1970 which cost US$35, the dollar value of that ounce of gold is worth US$1,350 at present time. This is a whopping increase of >38 times."

and you see the effect on longer dated bond prices.

During the GFC, QEs were used to acquire assets of longer maturity as well as the distressed mortgage backed securities from US government sponsored Fannie Mae and Freddie Mac, thereby lowering longer-term interest rates. Thanks to QE1 implemented in Nov 2008, just one year after the worst crisis since Depression, business remarkably went back to usual. Subsequently, QE2 took place in Nov 2010, followed by QE3 in Sep 2012. 

it will require coordinated central banks together with coordinated fiscal policies.

Janet Yellen, the current Fed chairwoman was left behind an enormous public debt problem in US today (~19 trillions) that I reckon there is no way she can turn back, but to continue the artificial support of the world’s economy. It is possible that any major tightening of money supply will possibly lead to collapse of the entire market. 

for the personal, just simply reduce your debts.
but the interesting immediate consequences of a gradual rate hike is the effect of this on currencies and trade balances.
as of now, it seems while EU and BOJ haven't abandoned their monetary stimuli, the Fed will continue to hold off any rate hike.
BOJ's recent action has caused a noticeable reaction on long dated treasuries.

When debt becomes so huge, even a less than substantial increase in borrowing rate can bring about significant interest repayments.  

productivity growth can no longer lead to jobs and higher income due to technology.
it may become more relevant again with higher acceleration of consumption demand.
consumption demand by itself will not help much, only acceleration of its growth will.
productivity growth is an old metric. and i suspect increasingly irrelevant.

Recently he also discussed the biggest worries in US now is the low productivity growth that will eventually lead to economic stagnation particularly in most developed OECD countries.  

i believe this stimulus disappointment was the best move by BOJ at this current juncture due to previous stimulus moves resulting in higher yen.
the problem with Japan is a mentality problem that won't go away easily.
but demographics are changing and the younger guard are bringing back some energy and new ideas and new changes.
it will take time though.

Just recently, PM Abe had announce another round, >28 trillions yen ($265b) of stimulus. However its effectiveness remains to be seen. Many suspect if this strategy is to fail, Japan may need more dramatic strategy ahead, such as "helicopter money"! 

surprisingly, I think the cheap devaluation of GBP and EUR (without spending upfront money, they may pay for it with legislation and restructuring of economic policies later on) has given them some help. we may see this positive aid in figures later this year granted confidence hasn't totally abandoned EU with the recent bank stocks collapses and being kicked out of STOXX and the recent terror attacks and the recent migration of more elites from Europe to US and other countries.
the problem with europe is long term and cannot be solved easily.
They will still do better as a trading bloc but it is not so simple; binding one size fits all legislation, binding currencies out of sync with the economies, tyranny of the majority votes in EU, conflicting interests.
they can do better with a looser structure but the EUR is important for them.

The recent Brexit does not bode well for the EU. About half of UK imports come from EU. In particular France and Germany are UK largest trading partners after the U.S. Brexit also further dampened the solidarity in EU.  Already cohesiveness is low because the core economies do not like the idea that they need to support the countries that cannot pay their bills, which includes Greece, Portugal, Spain, Ireland and Cyprus who defaulted resulted in the Euro Debt crisis after the GFC.

China has devalued this year too.
but comparatively, they are quite nice already. they didn't devalued too much.
even given their long transition pains from export to self sustainable economy.
they are already being nice to global community so far.