Advancing Time: Low Interest Rates Do Not Guarantee Economic Growth

Advancing Time: Low Interest Rates Do Not Guarantee Economic Growth: To all those investors looking forward to the Fed dropping rates, the bad news is that lower interest rates do not guarantee economic growth...

Low Interest Rates Do Not Guarantee Economic Growth

To all those investors looking forward to the Fed dropping rates, the bad news is that lower interest rates do not guarantee economic growth. This is a fact, and what many people fail to consider is that more goes into the economic "stew" than just interest rates. In some ways, easy money policies can impair growth and the quality of growth. An example of this is that they allow zombie companies to continue operating.

While many investors talk about the link between low-interest rates driving the economy and markets ever higher, this correlation is very weak. We only need to look at Japan to understand that low interest rates do not guarantee a booming economy. For decades, Japan has pursued super-low and even negative interest rates while drifting into and out of recession. In short, other factors have been driving Japan's economy rather than simply keeping rates low.

Yes, there is a big difference between 10% and 5% interest rates, but when you are talking about a quarter of a percent, it has little bearing on the overall economy. It can be argued that the only place where rate cuts make a huge difference is when you get down near two percent. At that point, a 25 or 50 basis drop creates huge sums of "speculative" money. Growth is often more about liquidity and the availability of money than low interest rates. We should question how much a couple of quarter-point drops in interest rates will really make. This is very important considering many consumers are completely disconnected from fed rates and paying well over 20% APR on charge cards.

The Eurodollar University YouTube Channel continues to hone in on slow growth across the world, claiming the global economy is in a synchronized slowdown and recession. He does this in part by repeatedly using the line, "forgot how to grow," while pointing out that true economic growth has faltered. Part of the problem is that low interest rates tend to pull spending forward, but there is a limit as to how far this can go.

Debt Has Grown Faster Than The GDP

Over the last decade, low interest rates have contributed to increased inequality. Not all people and businesses benefit equally from low-interest policies. The Fed has fueled inequality by feeding money into a system where "the big boys" and Wall Street soak up cheap, easy money, but small businesses saw lending standards rise. This resulted in making it more difficult for many small companies to get loans and resulted in many productive small companies closing their doors forever.

The legacy of Central Banks pursuing "low rate" policies has caused debt and bad debts to explode. By not demanding the right kind of growth and simply throwing money at problems, Central banks and governments have delayed and added to a much larger crisis in the future. This is becoming apparent in central banks' limited ability to directly determine rates at the long end of the curve. 

Circling back to Japan, for years, many economists claimed that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead, the Government of Japan ran huge deficits and ran up massive debt. The country languished in what has become known as "the lost decades," during which it avoided disaster only by the fact that for decades it enjoyed a large trade surplus. 

At some point, both investors and the public will realize that central banks can only do so much through printing money and lowering interest rates. America continues to spend far more than it takes in, and such deficits are unsustainable. Most of this money finds its way into the economy as "poorly crafted subsidies" that push data higher, creating the false illusion that all is well. The bottom line is that much of the world may well be looking at a version of the "Japan Syndrome" with stagflation. This translates into years of slow growth coupled with a protracted period of inflation.

Low rates are also supposed to encourage business borrowing and boost employment, but often it also encourages savers to take on more risk than they should, as they search for higher yields. History shows that when rates are held at an artificially low level for too long, capital is often misallocated and flows into speculative investments. The current low rates combined with our massive government deficit are creating a false economy that is also baking in a higher overall cost structure. Want to know where the real cost of things is going? Just look at the replacement cost from recent storms and natural disasters.  

Many of those already concerned about the strength of the economy find little comfort in the argument that conditions remain too fragile to begin a return to historic norms. Lower rates have almost been guaranteed and promised; however, we should never forget that liquidity is far more important. Liquidity is the lifeblood of commerce. It is difficult to envision how the world will handle the additional debt of governments if long-term rates begin to rise. As we look back years from now, the policies of ZIRP and NIRP are likely to be considered major mistakes.  

 

FOOTNOTE: The wealth effect is most likely a far greater contributor to growth, not necessarily "good growth," than low interest rates. Click here to link to an article that highlights using the wealth effect as an economic tool.  You can let me know your thoughts in the comments section. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Advancing Time: China Quietly Moving To Challenge Boeing and Airbus

Advancing Time: China Quietly Moving To Challenge Boeing and Airbus: China has proven that even a state-driven economy fosters many limitations and blind spots. State-driven economies also sport the ability to...

China Quietly Moving To Challenge Boeing and Airbus

China has proven that even a state-driven economy fosters many limitations and blind spots. State-driven economies also sport the ability to rapidly get things done. Using the power of the state, China has the ability to use its predatory economic system to ramp up production at record speed. It could be argued that it is best not to over or under-estimate China.

China Has A Predatory Economic System Able To Ramp Up Production

A recent and glaring example of how such an economic system can ramp up production is visible in how China has rapidly positioned itself as the world's low-price Electric Vehicle producer. While high tariffs and other barriers may slow the sales of China's EVs in many developed countries, it is likely they will sell well in many markets. In just a few years China has  overtaken Tesla and become the world's low-cost EV producer. Now it is poised to crush Tesla by introducing new improvements. BYD, China's largest EV producer has just announced it can, in only 5 minutes, now charge a battery to 60%. 

When we choose to ignore what is occurring we should expect to be surprised at some point. This issue is front and center in the aviation industry. Few people are paying attention to the fact that China is preparing to move up the manufacturing food chain and challenge Western aerospace giants like Boeing and Airbus. Following the commercial entry of the C919. China set its sights on developing a wide-body aircraft with a range of up to 12,000 kilometers. 

The C929 started in 2015 when Comac partnered with Russia’s United Aircraft Corporation (UAC) to develop a new aircraft. China was to bear the full development costs, and Russia agreed to provide technical support. China's large-scale manufacturing expertise and supply chain management coupled with Russia's strengths in materials, aerodynamics, and engine technology appeared to be a good match. The final assembly line was to be based in China, with the goal of targeting sales in China, Russia, and the broader Asian region. In 2022, Russia withdrew from the project after failing to meet its commitments and China continued on its own. 

Sales of Chinese Aircraft Are Gaining Traction

Little noticed or intentionally ignored by much of the Western world, and especially America, is that sales of the C909 and the C919 are gaining traction. One video explores the rise of China’s aerospace industry - it claims the overlooked C909, the C919, and now, the ultra-long-haul wide-body C939 are game changers. It then questions what this means for Boeing, Airbus, and $6 trillion of future aircraft sales. But, it doesn't stop there, above, embedded in the text is a link to a video touting the C929, here is another link to a video diving into even a larger Chinese aircraft, the COMAC C939. https://www.youtube.com/watch?v=Ynik56MdU-I   

As for the C929, while many people chose to ignore this, that did not halt its development, the C929 is now a reality  it is a long-range wide-body aircraft entirely developed by China. With a capacity of 280 passengers. The C929 puts China in a position to reshape the aviation global landscape, the plane is designed to compete directly with the Boeing 787 and the Airbus 350. How contentious will the competition be going forward? It seems that the US has already weighed in and warned Ireland not to buy China's C919 aircraft, go to,  https://youtu.be/eBCg7taEsHM?t=1409

Adding to the allure of these Chinese aircraft are a slew of avionic upgrades and improvements. These are coupled with far lower prices due to China's predatory economic system. Telling companies and even countries not to buy Chinese aircraft most likely will not be enough. To all the skeptics who immediately scream that many people have no intention and would never fly in a Chinese-made aircraft, it doesn't matter. Simply put, other people will fly in them.

The fact China is making great strides in creating a threat to the main Western aviation industry duopoly. We should not forget years ago the Chinese went into space. Just because China cranks out a lot of cheap goods for consumers does not mean they are low-tech. When it comes to economic dominance, they are playing the long game.

This article is not meant to counter the notion that China is on the edge of economic collapse. Its planned economy has a history of major blunders. China remains in some ways a paper tiger, often overestimated, however, as long as its people remain under the control of the Chinese Communist Party and its predatory economic system, China will remain a rival and global power. 

 

FOOTNOTE: This article dovetails with several others that I have written. China has exported low-cost goods to the world using the profits from these sales to target and subsidize markets aimed at expanding key industries. This underscores the need for tariffs. Below are the links to some of these articles. 

https://brucewilds.blogspot.com/2021/11/as-railroads-grow-in-importance-china.html

https://brucewilds.blogspot.com/2021/10/china-housing-market-is-on-life-support.html

https://brucewilds.blogspot.com/2024/10/tariffs-are-way-of-putting-finger-on.html

https://brucewilds.blogspot.com/2024/05/chinese-evs-are-piling-up-and-blocking.html

https://brucewilds.blogspot.com/2023/09/subsidies-corrupt-economies-china.html

https://brucewilds.blogspot.com/2023/02/chinas-first-large-homegrown-airliner.html

https://brucewilds.blogspot.com/2022/12/chinas-future-remains-cloudy-and.html

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)   

 

Advancing Time: Waking Up To A World Done Saved, Again!

Advancing Time: Waking Up To A World Done Saved, Again!: Again this morning I find it difficult to sit down and pound out a few words when everything old is new again, it all has been said so many ...

Waking Up To A World Done Saved, Again!

Again this morning I find it difficult to sit down and pound out a few words when everything old is new again, it all has been said so many times. Looking at the news I find everything's coming up roses, this translates into smooth sailing ahead. Markets were up, deals had been made, and problems were solved! Rather than writing something new, I simply have chosen to reprint an April 2019 piece titled; Waking Up To A World Done Saved! 

Other than the fact that the evil orange man has returned to wreak havoc upon the world, China is on the cusp of collapse, the EU is in turmoil, and nuclear war could be unleashed upon us at any time, all is well. Oh, happy days are here again, what could go wrong? Below is the reprinted article.

April 12, 2019

Waking Up To A World Done Saved!

Rejoice, Everything Is Coming Up Roses!

This morning I woke up to a "World Done Saved!" This translates into smooth sailing ahead. Markets were up, deals had been made, and problems solved! In such a situation only the most cynical among us would have reason to doubt all is well. I just read it, so it must be true! As a matter of fact, I would not be surprised if April 12th becomes a day that will be heralded as a turning point for all of eternity. Here are just a few of the stories that add substance to my claim. Jumping off the page were the following reasons to rejoice and no reason for concern.

The terrible, possibly one of the worst people to ever have lived, according to America's security apparatus, Julian Assange has been taken into custody. Assange the head and founder of Wikileaks is responsible for leaking government secrets. He is guilty of informing the world that America's government has purposely been lying to its citizens. Halting such leaks is key to the government being able to continue acting for "the greater good."

A company just announced it has successfully tested an integral component of its Synergetic Air-Breathing Rocket Engine (SABRE). This could clear the path for commercial hypersonic flight in the next decade, read the press release. Slap this baby on the wings of an airliner and we could travel at Mach 5 or even faster. This would allow us to travel from New York to London in just one hour. Adding to this good news, Reaction Engines responsible for this breakthrough is located in the Denver area. Being centrally located everyone can get to it, whereas, if it was located on one of the coasts it would be more difficult for buyers of their product to reach them.

Also, overnight, a sharp rebound in Chinese trade data coupled with a surge in Chinese credit bolstered risk assets across the board. This underpinned "signs of resilience" in the global economy, and acted as a catalyst that caused the S&P futures to rally back above 2,900, their highest level since September 2018. This rebound in March exports is considered proof of its economic recovery. The PBOC also reported new yuan loans of 1.69 trillion, far above the 1.25 trillion estimate, while total aggregate financing in March soared higher at 2.86t yuan. This smashed the 1.85t yuan estimate and was more than four times the February 703BN yuan increase. This translates into proof that China once again is doing everything in its power to flood the economy with new credit reversing concerns from the sharp February TSF drop. 

Saving the best for last, the Asian Times reports the European Union and China managed to come up with an important joint statement. It outlined agreement on three quite sensitive fronts and paves the way, in theory, that a complex, wide-ranging EU-China investment deal may be signed “by the end of next year. The statement was signed by Chinese Premier Li Keqiang, European Commission President Jean-Claude Juncker, and the head of the European Council, Donald Tusk. It is already being described as "the real deal" and a departure from antics such as the endless Brexit soap opera.

In the article the writer notes, that the joint statement reads in fact like a rose garden: “The high level of ambition will be reflected in substantially improved market access [and] the elimination of discriminatory requirements and practices affecting foreign investors.” Better yet, there were no accusations of “unfair” trade hurled at Beijing. It appears that Brussels and Beijing seem to be finally engaging in building some sort of synergy between the One Belt One Road Initiative and something only Eurocrats know actually exists but is outlined in the EU Connecting Europe and Asia project report.

The only real negative to all this great news is that the devil is in the details. This is where you find nothing is really different and in many cases, close inspection reveals that the motivation behind the headlines indicates trouble ahead. As for the examples above, should we celebrate the deep state's victory over Wikileaks an international non-profit organization that publishes secret information, news leaks, and classified media provided by anonymous sources? Do we really think the world will change overnight because jets travel faster? Is this unfinished deal with a deteriorating Europe and a desperate China really going to benefit anyone but the Chinese? It may be best not to ask too many questions or your enthusiasm may rapidly wane.  

 

 

Footnote: The above reprint was inspired by a couple of today's headlines. "Beijing Stops Publishing "Hundreds Of Statistics" To Cover Up Economic Collapse" And, "The EU Zombie Uses Trump As Cover To Further Feed On Citizens"

 

                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free to E-mail it to a friend.

Advancing Time: Tariffs Are Hitting Global Supply Chains And Shipping

Advancing Time: Tariffs Are Hitting Global Supply Chains And Shipping: Tariffs are affecting supply chains and shipping big time. The point of this post is shipping matters and already the first real volley in...