Tags: investors | Growth | inflation | Debt

Weak Growth, Low Inflation and High Debt Is Lethal, Toxic Mix

Weak Growth, Low Inflation and High Debt Is Lethal, Toxic Mix
(Dollar Photo Club)

By    |   Wednesday, 14 October 2015 09:08 AM

Tuesday, we got the minutes of the Fed’s discount rate meeting that was held just one day before the 16-17 September FOMC meeting.

Eight directors of the Federal Reserve Banks of Philadelphia, St. Louis, Cleveland, Richmond, Atlanta, Kansas City, Dallas, and San Francisco had voted earlier to the FOMC meeting for raising the “primary” discount rate from 0.75 percent to 1.0 percent, which would have normalized somewhat the spread between the Fed’s discount rate that governs the Fed’s lending and the overnight Fed funds rate, which is the Fed’s primary economic lever. Their votes remained nothing more than a request.

Even if this seems to be only a small detail, it underlines the existing divide among Fed governors. It seems a growing number thinks the Fed’s rates aren't where they should be.

Meanwhile, St. Louis Fed James Bullard criticized the FOMC efforts to respond too explicitly to global events. According to him, markets have already priced in the low oil prices, the strong dollar and other global developments, of which China represents the biggest question mark.

“The die has been cast. We are going to have extremely accommodative policy for two to three years," Bullard concluded. "The risk is that you stay with emergency settings way beyond the time emergency settings are required, with unknown consequences. So the simple thing to do is edge your policy back to normal.”

I would only like to add: “The devil will be in the details!”

Edging slowly back to normal has very little chance of being successful as it can only work when there won’t be a new crisis erupting over the next couple of years, which is doubtful.

On Monday, Lael Brainard of the Board of Governors concluded her prepared speech “Economic Outlook and Monetary Policy.”

A highlight:

“We should not take the continued strength of domestic demand growth for granted. Although the outlook for domestic demand is good, global forces are weighing on net exports and inflation, and the risks from abroad appear tilted to the downside. Our economy has made good progress toward full employment, but sluggish wage growth suggests there is some room to go, and inflation has remained persistently below our target. With equilibrium real interest rates likely to remain low for some time and policy options that are more limited if conditions deteriorate than if they accelerate, risk-management considerations counsel a stance of waiting to see if the risks to the outlook diminish.”

Brainard refers to a hypothetical, but not far from realistic, scenario stating the U.S. economy lacks strength to resist a global deflationary pull. Brainard warns that further weakness in global demand and a stronger dollar could increase the negative effect of the global environment on U.S. demand.

Looking abroad, we saw more bad news coming in from China while the global low-inflationary trends continue to extend.

In September, China’s foreign trade dropped 8.8 percent year-over-year (y/y) with imports dropping -17.7 percent for the eleventh month in a row while exports remained in negative territory at -1.1 percent, which is of course all “deflationary” to the world.

On the global inflation front, we got also more damaging numbers:

It’s certainly not an overstatement to say the world is facing a lethal, toxic mix of too low growth, way too low inflation and way too high debt.

Long-term investors could do well by asking themselves, “Should I better be “in” or “out” of the markets?”

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It’s certainly not an overstatement to say the world is facing a lethal, toxic mix of too-low growth, way too-low inflation and way too-high debt.
investors, Growth, inflation, Debt
Wednesday, 14 October 2015 09:08 AM
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