I’m not an economist or anyone with a plethora of degrees but I am an observer, and have been for many decades. Consequently, my view of economics and the world is probably very basic in comparison to many readers. I ask your forgiveness for anything foolish I may express. Nonetheless, I’d like to scope out views to better understand the world and how it works.
As far as I have come to understand, economics is the science of productive property. I know, I know, heresy! But bear with me a moment. Doesn’t economic growth and prosperity come from productive property being used in products and services that customers acquire because it takes the uncertainty out of some outcome they are trying to achieve, like: food, shelter, security, knowledge, health, beauty, or even getting rid of a headache. From a very basic point of view, the land we use to cultivate crops addresses our uncertainty about having enough food to survive. No?
Likewise, when our economy experiences an economic expansion it is sometimes – not always – “asset-backed”. The economic growth many countries experienced before the financial crisis was based on primarily on real estate. New assets being built at an amazing pace fueled by cheap money and the illusion of security provided by asset-backed securities and credit default swaps. At its lowest level, the construction boom created wealth and jobs in the construction industry. However, this spate of building also created demand for a whole “ecosystem” comprised of bankers, extractive and manufacturing industries, and – let’s not forget – retailers because many people, in the U.S. at least, were using their property as piggy-banks. Of course, once those asset values – real estate values – exceeded their “real” economic value it all came crashing down.
The occurrences of asset-backed bubbles – seems to me – to be very much a consequence of the liberalization of the financial services industry in the 80s. First, the savings and loans crisis then the Internet bubble and lastly the real estate crisis. Each bubble seems to become bigger and further reaching as time goes by. Or, maybe that is just an impression. Thoughts?
Similarly, there are economic expansions after these bubbles pop. Like drinking too much “bubbly”, you have to get over the hangover you feel the day after. These periods of economic growth bring the economy to a “new normal” which isn’t very different from the be state that existed before (1% – 2% GDP growth rates). Assuming I got this straight and you agree with this view, the growth experienced following the Financial Crisis was the result of this return to stability.
So what is next?
Well, it seems fair to me that the US Fed increase interest rates. Surely someone will disagree with me but that’s okay, I look forward to reading you. There are three major reasons I see for an interest rate. First, economic stability has been restored. Second, the rates practiced by the Fed go to benefit the big financial institutions, in the U.S. and abroad. If memory serves me, the US banks have been borrowing at low rates and lending that money to the Federal Government at 2%-3%; helping them to payback their bailout loans in record time? And third, if memory serves me, those low rates never made it to the real economy because of the need to deleverage and to recapitalize the banks. Not to mention that so many US dollars have been loaned to emerging markets that an interest rate hike would cause them significant damage. Now that emerging market borrowers have had the time to protect themselves and the Volker Rule has reduced US exposure to these markets when the US gets a cold emerging markets won’t sneeze. In sum, increasing US interest rates is a signal to the world that all is normal again in the US market.
If we tack onto this interest rate hike the weakness in commodities and many emerging market currencies the world economy seems primed for satisfy increased demand especially from the West. The only challenge to this increased demand is consumers having the funds to acquire goods and services above and beyond what they already have. In the US, there has been increasing pressure to increase the minimum wage and to pay overtime, both of which should put more money in the consumer’s pocket allowing them to buy without increasing their indebtedness.
But we can’t forget the retiring Baby Boomers, either. Since about 70% of US GDP is consumption, we must include them in the mix. Aside from their Social Security checks, these people live off of their retirement funds which are invested in stocks and bonds. If consumption can stimulated then stock prices and dividends will flow. However, with an increase in interest rates so will the interest in bonds. Any government with an aging population must take care of its pensioners! The US already did a lot to help this segment of the population out through the Affordable Healthcare Act which essentially redistributed healthcare costs through the private sector and bolstered the share price of insurers that are owned – probably to a significant degree – by pension systems. But this is another discussion for another time.
Assuming this all makes sense, we should see a slow economic expansion in the coming years. Nothing wild. Why? Because there is no new asset on which to base our irrational exuberance.
In keeping with the historical model, there could be a new asset. We did start with tangible property classes and then – during the industrial Revolution – added intangible property classes. If we go one step further – and we are knocking on this door with collaborative consumption – our legislators could add certain private property to productive property thus increasing the asset base some more. But this is a very challenging subject I don’t want to go into here.
Thanks for reading all this, now I look forward to reading your thoughts.