CHARTS: THE 10 YEAR LOW EDITION
I was just perusing some long-term charts tonight and some of the new lows are just downright depressing from a long-term perspective. I don’t have a whole lot of original commentary to add to these images except….man, what a crappy 10 years it’s been (pretty original, huh?).
So here are some randomly selected equity indices and one other index whose 10 year performance might just surprise you. First the three nightmare equity indices. Not surprisingly, two of them are from Europe.
Japan’s Nikkei Index approaches a 10 year low (correction – the original article said the Nikkei was at a 28 year low. That was WRONG. It is the TOPIX that’s at a 28 year low):
Greece at a nightmare low:
Spain at a 10 year low:
And the shocker….CRB Commodity Index is up just 35% TOTAL over the 10 year period for a compound annual return of just 3%:
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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62 Comments
It would have been nice to have a gold chart in the mix just to put things in perspective
Agreed! Cullen, can you please add a Gold chart and a long-dated UST chart for stark contrast
Don’t you like lower/low commodity prices (as represented by the CRB index) ?
lower how? where? CR’s perspective is 10 yrs. Seems to me, limited strictly to the charts presented, hard ‘goods’ are the only asset whose value has grown. Now then, why would that be? Many factors can influence, no doubt; but let us attempt to distill the trivial many from the vital few. Any great and powerful macro OZ’s out there to sift this one?
What do you mean Japan is at a 28 year low?
Is that supposed to be a joke – I don’t understand.
According to my info, the NIKKEI index started in 1980 at about 5000. It peaked in late 1989 at about 39000. After 1990 it went – on average – one way only: down.
C.R. means that the NIKKEI went above the 8290 for the first time 28 years ago (i.e. in 1984).
Sorry guys. It’s the TOPIX that’s at a 28 year low. Not the Nikkei.
Your Nikkei algo must be on a super duper aggressive buy though; that has to be good.
Remember that Japan’s Nikkei was once (not sure if it still is) the second largest stock market in the world by total market capitalization. If this kind of nightmare can occur in the second biggest, then maybe it can also happen to the US market.
Note: As I am typing this, Barry Ritholtz is on Bloomberg TV saying that we are in a long-term secular bear market that should last until about 2015 or so.
This is why we write call options. Mr. Market has been cashing in on this slow drip of income for a long, long time.
@VII: Still holding EWJ ? Even with this horrible chart ?
Too ballzy to call today the day the Nikkei begins to sustainably outperform the SPX moving forward including today’s rip in the EWJ?
@ Mr. Market-
Yes-short answer
Long answer- Looking at the chart. We get this backwards sometimes- I’m buying at a 10 year low. Is that better than a 10 year high? Depends right. I’ve taken a 2.5% position. It’s down around -11.35…affecting me -.27% ish as of yesterdays close. I put this on with the idea of outperformance relative to the U.S and a longer trade.
I don’t like the china situation. I like where the Yen is now hitting resistance to make me whole on this trade but I love many of the things that got me into this trade. Let me touch on a few.
Back in March the price-book of Japan was 1.68.
NKY Forward % Returns after NKY 1 year High & First time in 1 year out one year 3/2013 is 12.69% on average (7 up 2 down)
Improving Economic Data-Citgroup Economic Surprise Index(back above 0) since 2003 12 month annulazied returns 12.2% on average(CESIJPY,Daily)
Bullish seasonal Window-April May(BIG moves occur)
Long-Term cycle Trough 41 month cycle signal on 3/27 taking us out 11/2012 has produced returns of 9.6% 11 out of 16.
Analogs of NIkkei vs. 2003(correlation 81%), 1995 (Correclation 75%) show the Nikkei about to RIP.
That is why…and at the time the Price Action confirmed this.
Price Action changed..but if you remember for me this was aout relative outperformance. Since then the YEN is hitting major resistanc and I acpect it to fall to make me whole on this trade. I will then reasses if this is the right time to own Japan.
HERE Is the NEGATIVE- The seasonals JUNE- OCT. are TERRRIBLE.
China- fill in what ever you think this stinks.
U.S & Europe- Who is Japan going to sell too for 12 months.
This is why I went small. Now if we remove the short term discussions one could argue that all the above charts should be bought for the next 10 years. But I’ve only takend a wack at Japan- and like the Flag it is a big red dot on my position page. For now I hold it and if the Yen can decline I will reasses this position. Thats where I’m at on this-
@ Market
One other major hurdle- If the Yen breaks resistance- But I did not put this long on naked- so I should get the benefit of a short position and possible Gold moving up.
I could also go long the Yen- which right now I’m in the oppostite position. But-with the Monetary gimmicks and Bloomberg G7 rumors to slow the downward trend in markets…I am only naked on one trade- EVerything else I put on is being hedged.
But the one trade I’m not naked on is big…and were looking at it to move tomorrow. Only Ben himself can blow me out of this one. And I never doubt his ability to change the game so I’m prepared to close this out should TMZ show him and Geitner mixing kool aid in a helicopter hanger near Wall ST.
1. Japanes companies have large pension liabilities and too much employees. That’s why those price-book ratios are so low. Japanese stocktraders seem to know something about the securities they trade.
2. I expect the USD/Yen to go lower. Reason: (a lot of) Japanese companies invoice in USD and not in Yen. So, they have a large stash of USDs and when they need cash they sell the USD and buy Yen, hence the falling USD/Yen (in e.g. the second half of 2008) in distressed times. And that’s why currently the EUR/Yen is falling as well.
Source ? the indispensable Hugh Hendry !
http://www.4shared.com/office/CA8XB7OH/TEF_April_2012_120430.html
@ Mr. Market-
In the context of what I think will occur shortly- I struggle with this position.
In essence I’m holding this with conjecture that I think X, Y and Z will occur.
I can round off my position at a lower price and or be made whole. But I have to ask myself the most important question. What is the price action telling me to do? Forget about all my fundamental research as to why it shouldn’t be printing lower. If I do this I should use today and if I’m lucky tomorrow to ride the yen decline to reduce my loss on this position and sell.
Having worked through this. I don’t disagree with you. In fact our work calls for material declines. Only the Central Bankers can prevent or stall this right now. If that is what our work says…then I should not be long EWJ. Thanks Market…a long time ago we would not have helped each other. You just helped me.
Mr. Market
Reviewing my stuff again. With out giving it away. I have to hold right here. I’m short some things here and need to hold EWJ. Until some things break resistance/support I must hold this. That is my final Answer!!
Again-flexibility is the key…If some things break through or break down I will have to close EWJ out. But right here right now I’d be front running what it’s telling me to do because I’m connecting waterfall declines to EWJ. I shold make that up in my short positions.
Final Answer!
Deflation has this affect. You can prime the pump of liquidity and if the money is given to fools only financial assets rise, albeit as the charts show, it is for not. Deflation destroys debt which was in a previous time valued as a means for weath creation.
CAPM teaches us that companies are to use debt funding as long as it is attractive as a tax shelter. Market driven debt financing has made a perversion of this axiom driven by the greed of unregulated markets. Now we are shutting the barn door after Betsy has aleady ran out of the barn.
“CAPM teaches us that companies are to use debt funding as long as it is attractive as a tax shelter.”
No, you’re confusing your financial theories. You’re thinking of Miller-Modigliani (I list Miller first because I did my MBA at U Chicago). CAPM says nothing at all about firm capital structure.
http://www.econ.uiuc.edu/~avillami/course-files/PalgraveRev_ModiglianiMiller_Villamil.pdf
Debt deflation is where the population vectors their output to service debt. When that happens they are not spending on the productive side of the economy. In other words, the producers are not consuming what other producers are creating. All of us humans can only consume what we output, and we do this by trading our output with others.
Yes, the debt stream vectors to banks, where it can be respent by the banker, but much of it also goes to de-leveraging. This deleveraging is money leaving the supply and decrementing numbers on the banker’s ledger. The level of private debt is informative for how long de-leveraging will last.
The slow drip of deleveraging is usually sped up with depressions or recessions as the bankers ledger’s are rewritten, or “written off.” Often, real assets (not money) change hands during this period as well. When the debts are cleared out by the magic eraser of bankruptcy, then the economy starts on an upswing as a new cycle of credit money is created (new loans).
If credit money goes toward real productivity, for example as being spent into capital infrastructure (factories and production) then it is beneficial. If credit formation is spent on consumption, especially foreign goods consumption, then it is bad. The bad is a malformed economy that has a debt virus in its blood stream.
Priming the pump of liquidity at the government level (using deficit spend base money) ignores “how the money is spent.” Economists have long known that there are four modes of production: Land, Capital, Labor, and Public Commons. Simple government pump priming without regard to how and where it is spent is the height of ignorance. Welcome to the world, where poltiicians are mostly lawyers, and are clueless.
What if government spent directly on private sector deleveraging? That’d get us out of this mess quick, no? Deficit spending right now is only tangential deleveraging at best.
‘And the shocker….CRB Commodity Index is up just 35% TOTAL over the 10 year period for a compound annual return of just 3%’
Maybe your chum Bennie Boy could print up another few trillion, get that ‘growth’ higher for y’all.
So what if a few more in the 3rd world die from hunger eh?
What a sick world you inhabit.
Sick world I inhabit? I didn’t defend QE. I was one of its most vocal critics saying it was contributing to a run-up in commodity prices that would not last. Not sure why you’re hanging any of that on me and my “sickness”. That’s totally uncalled for Gary….
You (deliberately yet again) miss my point.
Which was that you see CRB gains as something to trade, and so feel ‘shocked’ and perhaps sad that ONLY 35% increases happened over 10 years.
You want more gains? You don’t care that the world’s poor therefore will starve, as long as you get more.
And ( you little twister) I remember well your post when you said if BB is going to QE then I am looking forward to getting some of the gains in risk assets.
Hypocrite.
Gary,
I am not sure what you’re mad at me about. I never said I wanted gains in commodities. And I never bet on rising commodities. You’re the one who has been betting on commodities with your endless rants about how hyperinflation is coming and how all we should own is gold and silver. I advocate owning real productive assets that actually help people make the world a better place. You advocate owning metal rocks that are good for absolutely nothing aside from staring into and caressing on lonely nights. You shouldn’t come here getting angry at me for these things. That’s just ridiculous.
Cullen
I can read you know, and you just wrote this:
‘And the shocker….CRB Commodity Index is up just 35% TOTAL over the 10 year period for a compound annual return of just 3%’
No good trying to backtrack or wriggle now.
Yes, I am surprised that commodities are only up that much over the 10 year period. I don’t know what you’re getting at….You seem to be lashing out at me for no good reason….I am sorry that your hyperinflation prediction has not come true (which, ironically, would have caused infinitely more pain than commodity prices being up 35% over 10 years)….
Gary,
You, sir, are an a$$. Or should that be a££?
Thanks,
NaE
That is too funny – Gary U.K. a hyper inflationist! This is the same Gary U.K. that was aggressively shorting the SPY at 1,050 in 2009 and got his face blown off.
Back to the Guardian comments forum with you, UK Gary.
Believe there’s a special “bash the capitalist-running-dog-swine” fest over there today, courtesy of the Wisconsin recall.
easy there, Gil. We cheeseheads aren’t anti-capitalists swine bashers, but we DON’T really go for the crony capitalism that this guv brought into our midst! (Well, half of us, anywho…) A manager from Texas for our deerherd! good lord! Slainte to you!
rhp
Whoops, didn’t mean to impugn the good people of Wisconsin or seem to take sides in that particular fight; not my state for starters. Just that the Guardian forum following the recall (it’s all one world now) was thick with the sort of anger UK Gary was exhibiting here; the kind of furious lashing out that gets under my skin after awhile. Saol fada chugat!
Be flexible- This is the week that determines everything. Don’t get angry at the Fed or ECB. It is not your job to fight something bigger than you. YOU must go with them and plug your nose if you must. If you really hate more Easing than buy GDX/GLD.
But if they do nothing this week…well then let this mother go where she is meant to go. Get out of the way and pull your longs.
Were set up for both outcomes but going into it honoring the work that was done to get us here. It won’t be the first time I crumple up a piece of paper should I have to. God Bless the USA and good luck to Europe! Your up ECB…..followed by the man in the beard.
Why this week? Greek vote is on 17th and FOMC meeting on 20th. I thought it will be touch and go until then???
The ECB MUST come out big tomorrow. Anything short of this and the market has the patience of a Palastinian Valet in Jerusalum parking a White Van that sounds like a clock.
The problems are over in the Atlantic and they come front and center this week. Why do you think an emergency meeting was called. The clock is ticking.
This week should be the catalyst for Ben to move. Which would take us to the first week of July where by you would go long. (I hate telling the market what I think…but that’s my 2 cent Conjecture)
It would give Policy Makers an excuse to pressure Germany. (more conjecure worth nothing)
“The ECB MUST come out big tomorrow. Anything short of this and the market has the patience of a Palastinian Valet in Jerusalum parking a White Van that sounds like a clock.”
I’m giving you a big LOLOLOLOL for that because that’s literally what I did when I read it. Good stuff Maynard.
LOL VII you’re the best comedian in this website, my most sincere congratulations for making us laugh with your sometimes not-serious comments.
@VII, You said: “The ECB MUST come out big tomorrow. Anything short of this and the market has the patience of a Palastinian Valet in Jerusalum parking a White Van that sounds like a clock. ”
I hear that White Van ticking like a clock, and you hear it, but does Draghi at the ECB hear it? ECB did NOT come out big, so why are the futures up?? Although now only up less than half what they were at 6;30am EDT. The market seems ambivalent this morning, no definitive verdict either way so far. Meantime, that White Van keeps on ticking ……..
Larry
The market will tip it’s hat. Our job is to be flexible. I need to dot my I’s and cross my t’s for both outcomes.
More I’m getting close to letting my ego confuse me. My job is to make money, not to be a prophet. We have a set up and need to let things work either way. Be back a later. I pray to the gods of Jinx I may have disrespected them.
Great job with Miami…odd from a laker but I loved the way your guys fight.
@VII, thanks for your kudos to the Boston Celtics. Yes, they are a scrappy bunch of fighters, and also, a unique concept, they actually play as a T-E-A-M. It is a tribute to all that they suppress their egos and work together for the good of the team.
By the way, you are right about suppressing your ego and letting the market and the facts dictate your trading position, instead of trying to be a prophet. Easier said than done for me.
Go L.A. Kings if you are a hockey fan!!
I’ve seen lots of fireworks shows in my lifetime. The selling during the month of May and into June 1st was a fairly decent fireworks display, but we have yet to see the Finale.
What if government spent directly on private sector deleveraging? That’d get us out of this mess quick, no? Deficit spending right now is only tangential deleveraging at best.
———-
Yes, government could QE and bypass the banks. We did this in WW2 when we spent directly into industry. Germany did the same prior to the war with Federer money. These were bonds that served as money, and could only be spent on certain things. The things they were spent on, only served to increase productivity. This is why Germany went from being broke in 1932 to being the richest in Europe by 1939.
In the U.S. we could QE with something similar to Federer money. Every adult gets say 10K, and it must be spent on debt deleveraging. If the person is not in debt, they have to prove it, and then the money has to be spent on the modes of production (which is not consumption). In this way, the QE changes the shape of the banks balance sheet, and also injects capital properly. When capital is spent properly, there is increased productivity so increased money in the supply is non inflationary.
The shape of the balance sheet means that the banker does not get future profits. Boo Hoo. Instead, the balance sheet recession, really debt deflation, comes to an end faster than the way we are doing it now.
If our politicians had a brain, they could use the QE to make a grand bargain, say revoke the 17′th amendment, and fix the tax structure to tax the free lunch (land and financial transactions).
We just put the industrial revolution into hyperdrive with the advent of technology. Everybody going bust in the midst of this revolution? Something smells and most people can smell it, they just cannot put their finger on it.
Capital equal DOLLAR?
Can Fed print capital from thin air?
The FED creates money from nothing on their keyboard. The can issue the money down into their private banks and pull in a bond of some sort in exchange. All paths for money creation are two way, with an asset going one way and money going the other.
The Fed can also create money from nothing and issue it into the secondary bond market. By law, the FED cannot monetize newly issued TBills in the primary bond market. But, it is mostly semantics. By buying in the secondary market, old bonds are removed and new money is injected, thus increasing the money supply. This new money is now available to buy primary issued T Bills, thus funding deficit spending.
Follow the path, new money created at the FED, and then FED holds a counter vehicle e.g. bond. Said new digitaly created money ultimately finds its way to the Treasury in exchange for a new TBill on the primary market. The Treasury deficit spends into banks, or whoever has an account at a private bank. The new deficit spend money is exogenous to the banking system and is seen as new base money.
If anybody thinks that banks are reserve constrained, then please think again. Just the deficit spend money alone makes up enough reserves.
Money paths are always two way in our economy. A bond or asset goes one direction, and money goes the other. You trade your house for a loan, or the FED trades new money from already created bonds. Take with one hand and give with another.
There have been times in the past where new money was created without a counter, for example the GreenBack period during the civil war. In this case, the new money was not inflationary as the northern economy grew.
The FED rebates the treasury at 90%, a little known fact to most people. So, if the FED holds a TBILL that demands interest from the government, they only demand 10% of the going rate.
Vertical spend government money is cheap and effective if it is spent right. But if it is spent on unemployment and consumption of chinese goods, it just bounces back from China, buys a TBill, and puts American’s on a long term debt hook. If the Chinese buy our debt, that is entirely different than when the Fed buys it.
Can Fed print WEALTH/OUTPUT from thin air?
Money is not wealth. Money is a shadow of wealth. Money is lubricant that allows the economy to work. If money takes wealth for its right to exist then that is bad.
For example, if the Government creates money to consume for itself…bad. If the government creates money that the private sector needs to operate…good. The four modes of production are capital, land, labor, and public commons.
When you drive home and don’t have to pay tolls…good. If you use public infrastructure, like clean water…good.
Money can only be understood in the context of where it is circulating in the economy and what it is doing at that time. Also, how it was created and for what purpose should be known.
The FED cannot create wealth. Only people create wealth. But, people cannot create wealth if they don’t have the tools. We give up some of our sovereignty and our money power to government, as is proper in a federal system. Private bank credit creation is actually antithetical to federalism.
Why are the futures up this morning after ECB’s non-action? Bloomberg TV just said that there will be world-wide coordinated central bank intervention immediately after the Greek election. That is what the bulls must be anticipating. Not sure of the source of this rumor – has anyone got a source for it?
Can the ticking White Van wait until June 17?
Things like oil, copper, and other commodities WILL go down to or below their production costs level. And then demand and supply will determine where the new equilibrium is going to be.
And that equilibrium has been distorted by the “”printing”" of lots of money in the last – at least – 12 years and falling interest rates.
Private debt is 300% of GDP. After WW2 is was 40%. Big difference. The tsunami of money was endogenous, meaning credit formation at the private level. The bubble run ups of endogenous money always create depressions later. 1928 U.S., Japan circa 1980s, and today. Always. We borrowed from the future, asset inflated, and now the balance sheets are demanding money. Where does it come from if loans are not forthcoming?
Government printing is only an oblque way to drive down the private balance sheets. Or to rephrase, the way the government spends is oblique and incorrect. It doesn’t address the real problem, and it causes sector inflation and all kinds of distortions.
Also, when government is too large a part of the economy, then private wealth creation is consumed and used ineffieciently by government. During the 50s government was about smaller, apprx 2/3 of today.
There is plenty of blame to go around. Government and private are both playing two card montey and giving it to the population raw. But, without a frame of reference or proper education, most people point to government as the bad actor. In the meantime there is an endogenous elephant in the room that is being ignored.
We will need monetary reform. Our system was built up ad hoc and doesn’t work.
Ren,
I would be interested in a summary of the needed reforms – including the place of ‘federalism’ and of private banks.
I’m pretty radical, like the founders. I want to return power to the people and make them free as the founder’s intended. I also belive that the best political and legal decisions are made down low as possible.
Federalism means returning power to the states and pushing power further into communities, and letting them decide what to do with their money. To do that, the central issuing authority (Treasury) spends into states by head count. This is done by law, and controlled with real legal teeth. Treasury officialsgo to jail if they break the law, and don’t spend properly. Let the best state with the best ideas win, and let the laboratory of democracy work.
The 17′th ammendment has to be repealed so Congress is no longer populist. The founders intended for the States to be a bulwark against growing cental powers located in Washington. It is no accident that Woodrow Wilson signed in the 16′th (income tax) 17′th (Direct Election of Senators) and the Federal Reserve act. The growth in Washington takes off after these acts were signed into law.
All of these acts work together like a machine, with the goal of stripping money power from the Senate. The government can tax you, and then redirect that money into its parasitical master e.g. banking system. TARP is a good example of this in action. The 17′th ammendment insures that Senators have to grease the population for votes, and hence are available to be bought out with lobby money. Both business and wall street now have too much access to Senators. The Senate is supposed to be above the political fray but cannot be when they have to buy votes. The founders intended for Senators to be sent by their State legislature, and thus were guardians of State’s rights. Senators were recalled if they didn’t follow the wishes of their State’s. Senators are supposed to be long range thinkers and guardians of American Civilization. Do we have that now?
The Senate was given control over money by the founders. They cannot control the money power and be populists. The money power properly belongs to the Senate, not the FED.
Briefly, monetary policy can be improved with 100% reserves, which means assets don’t need to be grabbed every downturn. Money becomes money and starts to behave differently. In fact, credit money helps cause downturns with negative feedback, so most of the depression and asset inflation cycle goes away.
For interest rate control, some percentage of new loan money will need to be government money, which can be drained and not spent, or can be made available to lower interest rates. This way day to day control of the money supply can be done, and any monopoly interests can be thwarted.
Banks remain private, but no longer can create money. All money becomes nationalized, but not the banks. Contracts between individuals remain private. Government only gets involved to supply money needs of the economy. We loan our savings to others and engage in mutual risk.
Federalism means the centralization of power. The US tried decentralized power with strong states under the Articles of Confederation. That didn’t work out too well. Even the founders hated it.
The Constitution gives the House, not the Senate, the power of the purse precisely because it is a populist institution.
If the federal government is bought and paid for what makes you think 50 little, individual states can fare against big finance?
Just had to clear that up.
“I also belive that the best political and legal decisions are made down low as possible.”
Sounds wonderful … until you realize that low-down laws like Jim Crow, etc., etc., etc., are made exactly there, down low.
It’s a paradox of course. Down low keeps it on a level that makes it seem within arm’s length, somehow more manageable, more malleable. But the lower down it gets, the more the risk that it turns into tribalism.
Raise the education level of “down low”, and I’m on board. But one of the big reasons that level is currently abysmal is that the major decisions on education are made exactly “down low”.
Okay, I’m an elite snob.
Thanks for the response. (I’ve decided to label myself a ‘moderately conservative radical’ – which might also apply to the ‘founders’.)
I agree that the balance has tilted too far toward centralization, and more powers need to be returned to states, localities, and individuals. However, federalism by my definition means a balance between centralization and decentralization; the center should have significant power, but this should be clearly limited; the way to achieve this would seem to have some principled basis for deciding what powers are appropriate to that authority, and which should be retained at lower levels.
For example, it does seem sound to have the central government be the currency issuer – which is a tremendous power. However, funds and discretion in their use can be transferred to lower levels. (I would not do this strictly per capita as need would seem to be a valid criterion – thus historically, disadvantaged areas such as Appalachia have been aided by targeted federal funds).
Another aspect of federalism involves the respective roles of the different branches. Thus, historically, the federal courts played a significant role in ending racial discrimination; it would seem appropriate that they should have this power to ensure equal treatment under the law, at all levels.
I don’t think I would concur with returning the power to name US Senators to the state legislatures. Prior to Wilson, the railroads ‘owned’ a number of senators, and one need only look at what Art Pope has done to the NC legislature, to see that these are not immune to corruption. A better measure might be to limit the influence of money on politics – if necessary, by amending the constitution. (My understanding is also that the House has the primary ‘power of the purse’.)
Your ideas on money and credit are interesting. It would be good if they were put to a real test (eg if some country with a sovereign currency elected to operate on that basis).
I am very confused with this huge build up of low interest debt. When interest rates are held close to zero for so many years doesn’t it allow creditors to take on more and more debt? (Wasn’t this one of the major causes of the housing bubble?)The fed has assured borrowers they can continue to pile up large amounts of debt and still be able to roll it over by promising not to raise rates for many years into the future? Doesn’t this result in a huge wall of short term debt(so they can get the lowest rates) in both the private and public that cannot be sustained unless interest rates stay permanently near zero? This leaves us with a highly leveraged society that is increasingly taking on more cheap debt that constantly needs to be “rolled over”. So BB is not helping the US deleverage….he is actually stoking their addiction to cheap credit? Wouldn’t a more rational interest rate policy be to announce that the fed will be raising interest rates very slowly over the next 5 years to encourage people to reduce their debt and restructure their finances? Currently, they only promise more cheap debt and money printing. How does that ever get us out of this problem?
@Torch, Ben Bernanke is terrified that we might go into a deflation, which in his view is the worst outcome. Accordingly, he is keeping interest rates near zero knowing that it is a disincentive for people to pay down their debts. This is a time when total credit outstanding is shrinking, not growing, putting downward pressure on the cost of housing and on wages. Ben wants the debt bubble to deflate very, very slowly. Raising interest rates would make it deflate faster, and might throw us into a deflationary depression like the 1930′s, unless we had a stimulative fiscal policy with an even bigger gov’t deficit to offset the effects of higher interest rates.
The railroads were an interesting case. The economist Henry George noticed that land owners around rail heads gained wealth without any of their own inputs. The people around the rail “town”, the cooks and workers essentially built the wealth. The absentee landowner benefited from other’s work, so an invisible pick pocket hand stole from labor and transferred it to land owners. Eventually the rail road barons monopolized industry and tied in with private banks, especially the Rockefeller and Morgan interests. They then used their private money power to manipulate government.
In other words, the railroad land giveaways and government largess created forces that almost undid the country. Even without the 17′th, private money power found ways to infiltrate. This is a common theme throughout history. Italian banking and the Catholics. Dutch money perverting England with the Orange Kings resulting finally in the private bank of England in 1694. (This lead directly to the revolutionary war.) Both the first and second bank in the U.S. were stacked with foreign interests and internal financial monopolists. Jefferson bought the Louisiana purchase with Gold so the Country would not borrow debt and deliver itself into private and foreign hands.
The pride defect in man will always try to drive certain individuals toward some sort of predatory gain. That is why the money power needs to be surrounded by constitutional law and watched like fire. Direct spend into states would allow the selfishness of man to prevent the power from slipping back upwards. In other words, States would defend their prerogative. But, yes, direct spend into Appalachia and other depressed areas must be allowed by law, otherwise it is not a country of like minded citizens. Direct spend by head count and special grants are not mutually exclusive.
The founders wanted us to learn and adapt our constitution, which is why there is the ability to amend it. It seems we don’t do that anymore and we are stuck in amber, especially as all power centralizes in Washington and we gridlock.
Jim Crow was an economic event, just like slavery was. Fix the economics and some of what we conflate as politics goes away. The British colonial system makes economies unbalanced. In the case of the South, cotton was grown and then sent to England for manufacture. The South bought high value merchandise from England in return. In this way, the South’s economy stayed stunted, and imported more and more slaves to work the land.
After the war, Jim Crowe laws evolved to enable the “economics” to continue, that is the exploitation of labor. However, if labor is able to keep their wealth, then gradually they gain a measure of power. The only way labor can keep their wealth is if money itself is not manipulated. Labor uses money as a token to measure their output. It is unlikely that Jim Crowe labor would ever be in a position to buy land or become a capitalist. However, a real money system would have short circuited much of our negative history. Booker T. Washington also believed in the power of Green. Once labor had decent jobs then the politics would fall to the wayside. The argument between Booker T. and W.E.B. Dubois is appropriate to this point. Dubois felt that the courts and activism was required. We see in other countries that Dubois was likely wrong, England for example undid slavery easily.
Federalism is often confused with the Federalists. Federalists were merchants and other “elites” who did a power grab with the First bank. They are the opposite of Federalism.
Thanks again for the thoughtful responses. I posted a similar take on the railroads earlier on this site.
The historical fact is that the federal courts played a critical role in ending legal discrimination. England’s history in this area is different enough that I’m not sure it is a good comparison (although Brazil’s ending of slavery suggests that it could have been done peacefully in the US, especially since the industrial revolution here might have shortly eliminated its economic viability.)
Also, Britain has had a strong labor movement – with its party in power by early in the last century – yet class stratification there has been strongly persistent. Perhaps this is due to the elite’s retaining the ‘money power’. One can certainly argue that this is the hinge on which everything else depends, but a living test of the kind of system you envision would seem the only way to demonstrate this conclusively.
Interesting charts but unless corrected for inflation are strictly NWAS!
Part of the reason why bond yields have dropped so low is that they have been in a Death Spiral, i.e. the lower yields go, the more bonds pension funds and insurance companies are forced to buy. It has been a vicious cycle. To that end, this is an interesting story:
“Swedish Bonds Slump as Regulator Proposes Discount Rate Floor
2012-06-07 08:45:17.208 GMT
By Stephen Treloar and Kim McLaughlin
June 7 (Bloomberg) — Sweden’s government debt slumped after the country’s financial regulator proposed to set a temporary floor on discount rates for insurance companies and pension funds, sapping demand for the securities.
Sweden’s 10-year yield jumped 21 basis points, or 0.21 percentage point, to 1.36 percent, up from a record low of 1.13 percent earlier this week. The two-year yield gained 11 basis points to 0.83 percent as of 10:39 a.m. in Stockholm.
“The incentive for life insurance companies to buy bonds, especially if yields were to fall further but also at today’s level, decreases,” said Claes Maahlen, head of trading research Svenska Handelsbanken AB, by phone. “So that’s why you see Swedish bonds underperforming now.”
The Financial Supervisory Authority proposed a temporary one-year floor to the rate at which Swedish life insurance companies and occupational pension funds discount their liabilities in solvency calculations. The plan is meant to counteract sales of shares and buying of interest-bearing assets, the authority said. In solvency calculations, insurance liabilities are discounted by a market rate and the value of liabilities rise when rates fall. Swedish life insurance companies and occupational pension funds have been under strain from falling interest rates, the FSA said.
“The companies’ actions would otherwise risk creating a negative spiral of falling stock market prices and interest rates which could further worsen the situation,” the FSA said in an e-mailed statement. “In the long run, policyholders risk getting lower pensions.”
The companies will be allowed to calculate the rate of discount with the current method, but based on the May 31 closing prices, for one year, the authority said.”
@Larry,
In the real estate industry it is a known fact that when interest rates start to rise potential buyers (“fence sitters”) are motivated to buy. Couldn’t these low interest rates actually be hurting the housing market since there is no immediate need to buy. Also, the low interest rates are hurting the buying power of retirees who have taken a huge hit to their income. Besides all of this….how does one determine the net present value of an investment now days….since the cost of money is almost zero…..wouldn’t this also discourage investment and growth? Lastly, by very slowly raising the interest rates wouldn’t that also strengthen the dollar which would cause oil and other commodities to drop in price which would also stimulate investment? I think most of the drop in outstanding credit is due to defaults and bankrupcties…hardly the most desirable way to reduce debt.