U.S. ECONOMY IS OUTPERFORMING REST OF WORLD
INVERTED YIELD IS NOT ALWAYS A SIGN OF RECESSION
Much has been made of the fact that interest rates on long term rates had a lower yield than short term rates. It has been stated that every previous recession was preceded by an inverted yield curve. While this may be true, what has not been stated is that not all inverted yield curves have resulted in recession.
This hullabaloo is a knee jerk reaction without exploring the facts of why this has occurred. When the U.S. reduced corporate interest rates to be competitive with the rest of the world, it changed the economic balance in the western economies. Our rates were not made lower than theirs, just put in line, so U.S. corporations did not have a built in handicap. There also were reforms of oppressive regulations.
We have since witnessed a resurgence in the U.S. economy, unemployment at all time lows, U.S. savings rate has increased to 8% from a number that was near 0. Growth has been steady in the 2.5 to 3% range. The biggest obstacle for U.S. companies is finding enough qualified employees to grow their businesses. Wages, especially at the lower income levels has been rising at over 3%. Many of these wages were flat for the last decade.
The economies of western Europe on the other hand are struggling to keep from declining into recession. They are continuing with the same old policies of reducing interest rates to stimulate their economies. There is very weak demand in all those countries. Take a look at their present interest rates.
|Central Banks||Current Interest Rate||Next Meeting||Last Change|
|Reserve Bank of Australia||1.000 %||9-3-2019 - 04:30||7-2-2019 - 04:30|
|Federal Reserve||2.250 %||9-18-2019 - 18:00||7-31-2019 - 18:00|
|Swiss National Bank||-0.750 %||9-19-2019 - 07:30||1-15-2015 - 09:30|
|European Central Bank||0.000 %||9-12-2019 - 11:45||3-10-2016 - 12:45|
|Bank of Japan||-0.100 %||9-19-2019 - 02:00||1-29-2016 - 03:00|
|Reserve Bank of New Zealand||1.000 %||9-24-2019 - 21:00||8-7-2019 - 02:00|
|Bank of Canada||1.750 %||9-4-2019 - 14:00||10-24-2018 - 14:00|
|Bank of England||0.750 %||9-19-2019 - 11:00||8-2-2018 - 11:00|
So, if you were an investor, would you be more inclined to purchase U.S. bonds or European bonds with either 0 or possibly negative return. Switzerland, Denmark and Sweden all have negative returns of up to -.75. Denmark has just introduced 10 year mortgages with a negative interest rate. Sounds like crazy desperation.
So what we have is a rush to shift assets to the U.S. both in the bond market and the stock market, because returns in most of the developed world are very poor indeed. The U.S. federal reserve will soon be forced to lower their rates, not because of a week U.S. economy but because of a strong economy and too much of a difference between rates.
This has also increased the value of the dollar compared to other currencies making imported goods cheaper for U.S. importers, but making it more difficult for U.S. exporters.
The federal reserve also needs to scrap their link between increased wages and inflation. If they are going to raise rates to keep wages low that is not in the best interest of workers or the country.
When they do reduce rates we will hear the back benchers in the media and the dems declare that the economy is failing, it is not true.
Western Europe needs to rethink their fiscal policy, why not reduce taxes and regulation rather than interest rates? This will be hard for them to swallow as their goal has always been more government control.
There has been an organized effort by Democratic candidates and some in the business world who are fearful that real free trade will cut into their profits. They are used to buying very cheap in China and selling into our strong consumer market. They have pushed policies that would subsidize displaced workers with things like guaranteed incomes,so that consumers could still have resources to buy their products without experiencing the dignity of work. Democrats live on dependent, vulnerable people, if the whole country would prosper it would be severe threat to their power.
So, we can expect to see an attempt to to talk down the economy, to attempt to convince people they should forgo future spending and hope they can engineer a slow down for political purposes. There is no limit to how low they will go in their quest for power.