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In fight against crushing global deflationary forces
October 18, 2016
6 Min Read
<p>U.S. Federal Reserve Building, Washington, D.C.</p>
Problem: Anemic growth, recessions, depressions common globally
Additional global aggressive intervention by governments and central banks required “immediately”
Time period: Multi-year aggressive intervention process required
Continued status quo - central banks are trapped by math.
If they raise the rates the central banks destroy debtors and asset markets.
If they keep rates at zero the central banks destroy pension funds, banks and insurers.
Simon Mikhailovich @S_Mikhailovich
Alternative to the current status quo:
Globally elevate levels of appropriately targeted stimulus and intervention required to achieve balanced employment, inflation, etc., growth characteristics and prevent global military conflict.
Global government and central bank challenges:
Chronic slow global growth is a function of burdensome building debt levels throughout the world, which creates:
Chronic global deflationary forces
Chronic slow global growth
Low to negative interest rates
Lagging productivity challenges
Burdensome (cost prohibitive) social programs
Burdensome taxes
Burdensome regulations
Lagging infrastructure develop
Lagging innovation and technology development
Lagging military preparedness
Populists movements spooning unanticipated risks events
Federal Reserve Chair Janet L. Yellen
Chair Janet L. Yellen spoke at “The Elusive ‘Great’ Recovery: Causes and Implications for Future Business Cycle Dynamics” 60th annual economic conference sponsored by the Federal Reserve Bank of Boston, Boston, Mass., on Oct. 14, 2016.
The title of her presentation “Macroeconomic Research After the Crisis.”
One of her inflation comments follows: “With nominal short-term interest rates at or close to their effective lower bound in many countries, the broader question of how expectations are formed has taken on heightened importance. Under such circumstances, many central banks have sought additional ways to stimulate their economies, including adopting policies that are directly aimed at influencing expectations of future interest rates and inflation. The unusually explicit and extended guidance about the likely future path of the federal funds rate that was provided by the FOMC from 2011 through 2014 is an example of such a policy, as is the Bank of Japan’s upward revision to its official inflation objective in 2013. Moreover, these and other expectational strategies may be needed again in the future, given the likelihood that the global economy may continue to experience historically low interest rates, thereby making it unlikely that reductions in short-term interest rates alone would be an adequate response to a future recession.”
The point is a “hawkish” U.S. Federal Reserve is providing elevated guidance for global markets. The Fed coupled with global fiscal and monetary policymakers are accelerating the roll-out an aggressive stimulus and monetary policy package to address the needs of an anemic global economy.
They collectively are in the process of carrying out a reflation agenda, which will pay dividends over the next one to three years for hard assets like equities, commodities, land and fine arts, which in turn will give lenders some enhanced pricing power to counteract historic low interest rates.
Christine Lagarde. Managing Director, International Monetary Fund (IMF)
On Oct. 7, 2016, at the 2016 IMF-World Bank Annual Meetings Plenary in Washington, D.C., Christine Lagarde discussed “Managing an Inclusive Transition for the Global Economy.”
Select key speech points related to this article:
Advanced economies remain stuck in a low-growth, low-investment, low-inflation cycle. And while growth in emerging markets is picking up, low-income commodity exporters are struggling with low prices.
The first priority for inclusive growth is to escape the “new mediocre” of low growth, low employment, and low wages.
That means using all policy tools – monetary, fiscal, and structural: to maximize the synergies within countries—and amplify the impact though coordination across countries.
This “three-pronged” approach would free up more policy space – more room to act – than is commonly assumed.
Implementing structural reforms to unleash economic potential is key. Using fiscal tools—where available—to prepare for the transition is also key.
With interest rates at historic lows, there is no better time for public investment: to expand access to high-speed internet, promote energy-efficient transport, and build climate-friendly infrastructure.
Even where fiscal space is unavailable, governments can reallocate funds into R&D – by offering tax credits and supporting public research institutions.
Remember: all the technologies that make our mobile phones “smart” have benefited from public funding – wireless networks, GPS, touch screens.
To reinvigorate growth, we also need to reinvigorate trade. Over the past 25 years, trade has leveraged new technologies into productivity increases worldwide – helping to reduce by half the proportion of the global population living in extreme poverty, and creating millions of new jobs with higher wages.
Conversely, building trade barriers is a sure way to reduce overall output, investment, and jobs.
But again, we need to put greater emphasis on policies that can help mitigate the negative effects of trade, and make everybody benefit.
Achieving greater inclusion is actually a tall order. It requires more than macroeconomics. It also involves politics. And social contracts – which must reflect national, regional, and cultural diversity.
Market impact
Globally in a world awash in money with limited investment options, due to low to negative interest rates, market participants, over the next six to 12 months, are anticipating a highly aggressive level of simulative and accommodative levels of government and central bank activity.
Near-term market impact: (Careful to not over-interpret! Domestic and global markets are a bit like underestimating a rattlesnake’s ability to strike.)
Global currencies: The dollar anticipates at the very least a Fed rate hike in December 2016 and global emphasis on reflating the global economy, so currently expect more dollar strength than weakness. The dollar is still range bound. Charts 1-8
Interest Rates: More strength than weakness in interest rates, say the 10-year Treasury yield rises to 2 to 2.25, possibly more. Near-term this should be highly supportive of the financial sector. A rise in yield is a function of at the very least an anticipated December Fed rate hike and elevated interest rates rising globally. Chart 9
U.S. equities presently likely need some corrective price action, but present and future intervention activities and global monies seeking potential positive returns on investment are supportive of a price advance. Charts 10-11
Oil price direction has been highly unpredictable, WTIC in a range of 40 to 60 reasonable, near-term finding support above $52 implies an advance to $60. A current advance to $60 could likely carry an array of domestic and global hard asset prices (equities and commodities) up with the rise in oil prices. Charts 12, 14, and 21
Cotton: Corrective price action appears to be giving way to price strength. Chart 18
Rice: Bottoming process underway. Chart 17
Soybeans: Potential price weakness remains. Chart 15
Corn: Bottoming process underway, revisiting the previous low still a possibility. Chart 16
Wheat: Bottoming process underway, downside price potential remains below previous low. Chart 19
Globally, fiscal and monetary authorities are throttling up intervention to a level of stimulus and accompanying activities to induce an acceptable level of growth, inflation, and price stability.
Therefore expect building levels of inflationary forces to be supportive of domestic and global growth over the next one to three years.
Chart Book Index
Weekly Charts, September 2013 – October 14, 2016
Chart 1. Australian Dollar
Chart 2. British Pound
Chart 3. Canadian Dollar
Chart 4. EURO
Chart 5. Swiss Franc
Chart 6. Swedish Krona
Chart 7. Japanese Yen
Chart 8. US Dollar
Chart 9. 10-Year US Treasury Yield
Chart 10. S&P 500 ETF
Chart 11. QQQ NASDAQ
Chart 12. USO United States Oil Fund
Chart 13. UUP US Dollar Index
Chart 14. XLE Energy Fund
Chart 15. Soybeans
Chart 16. Corn
Chart 17. Rice
Chart 18. Cotton
Chart 19. Wheat
Chart 20. Copper
Chart 21. $WTIC
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected].
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