deflation

Debt Jubilee Led by Central Banks

   Perhaps central banks will decide to simply print up money and donate to those who have too much debt, which is a debt jubilee. This would be a way to stimulate the economy without hurting savers with negative interest rates. Unlike Fed rate cutting that lacks believability and effectiveness, this would be highly credible as consumers could feel the benefits and get emotional about it, thus stimulating demand. To make this work it would have to be similar to the tax code where those who are neediest get the best outcome. If someone is truly wealthy they shouldn’t get to benefit from debt forgiveness.    If done in a harsh recession it might not cause that much new inflation,

2019-08-27T10:51:38-07:00September 10th, 2019|mayflowercapital blog|0 Comments

Negative Rates and the End of Central Banking

   Negative interest rates will act as a deflationary force that will reduce consumption and reduce investment in productive capital assets, as well as reducing consumer confidence. It will act to weaken the confidence of stock market investors thus resulting in a sell off of stocks. The central banks gambled and lost regarding their policy of negative rates. Their credibility has been diminished. Once people realize that central banks and their rate cuts can’t stimulate the economy then investors will stop believing in the myth of the central bank put option. This will exacerbate the stock sell off. The U.S. central bank bailouts and stimulus of 1998, 2003, and especially 2008 acted to create Moral Hazard (where the availability of

2019-08-27T10:23:24-07:00September 5th, 2019|mayflowercapital blog|0 Comments

Fed Rate Cut: An Unhelpful Placebo

        Today the Federal Reserve cut the rate by 0.25%, the first cut in 11 years. They did this a half year after they raised rates when they said there was a need for more tightening. Rate cuts are not that useful and lack substantial impact on the economy. Most borrowing is done with short term or intermediate term debt which may be fully amortized over a few years, thus the principal payments as a percentage of the total payment are quite high, so a tiny 0.25% cut in the rate (tax-deductible for business and many homeowners) is a very tiny portion of the total payment. If a business manager is worried there will be no demand for a new

2019-08-04T15:15:50-07:00July 31st, 2019|mayflowercapital blog|Comments Off on Fed Rate Cut: An Unhelpful Placebo

Will Bonds Perform the Same as in the 1970’s Inflation Era?

   During the 1970’s there was a significant increase in inflation in the US and the UK which made interest rates rise, thus damaging long term bonds. Gold’s price rose during the 1970’s and was the best asset during that era. Stocks spent the inflationary era of 1966 to 1982 going down 50% and then their prices returned to their starting points after a 16 year bear market, so on a nominal price return basis investors made no gains, however they did get dividends. Could this time be different where yields are repressed by central banks and not allowed to rise in tandem with inflation? There was a precedent for that in the UK in the 1970’s the real rate

2019-07-12T16:11:06-07:00July 12th, 2019|mayflowercapital blog|Comments Off on Will Bonds Perform the Same as in the 1970’s Inflation Era?

Will The U.S. Become a Bankrupt Banana Republic?

   Looking 30 years ahead the growing federal deficit as forecast by a Congressional agency implies the U.S. will become a Banana republic with high interest rates and an unaffordable gigantic budget deficit. Since people may become alert to this and take steps ahead of time to overcome the problem then I expect the following things to occur: * Defense spending greatly reduced, resulting in less global stability and greater flight capital into the US and similar countries. The increased flight capital puts downward pressure on interest rates. * Social Security starting age raised to 72, forcing more workers to delay their retirement, creating a surplus of job seekers, which is deflationary. * Medicare and Medicaid spending reduced through new

2019-06-26T17:52:47-07:00June 26th, 2019|mayflowercapital blog|Comments Off on Will The U.S. Become a Bankrupt Banana Republic?

Will Inflation Return?

     Economist Mohamed El Erian wrote that inflation may increase once cost cuts from the gig economy (Uber, Amazon, etc.) have been maxed out and the supply of unemployed people dries up, and corporations get more oligopolistic. I disagree, I believe: The dominant paradigm of the era is cheap EM labor undermining Developed countries resulting in unemployment, foreclosures, low growth in Developed countries. This force is far more powerful than the inflationary force suggested by Mohamed El-Erian. The fundamentals of EM countries are export subsidies, and excess production funded by local banks under political orders to loan money to companies that are not financially sound, so as to create make-work jobs, etc. Ironically as the trade dispute with China acts

2019-05-22T17:25:26-07:00May 22nd, 2019|mayflowercapital blog|Comments Off on Will Inflation Return?

Will China Tariffs Be Inflationary?

     The 25% tariff against imports from China won’t be inflationary. Consumers in the U.S. will simply buy less goods because they have a limited budget. Thus if they chose to buy imported goods from China, that suddenly cost 25% more because of the tariff, they will simply buy less of other items. The higher cost will inspire domestic competition and more likely inspire additional competition from other EM countries that have lower wage costs than China. Based on the fact that China devalued by 50% in 1994 a 25% devaluation by China, in response to the tariffs, will occur. This would trigger a retaliatory devaluation by Japan which has used devaluation to compete and stimulate its economy. This would

2019-05-14T15:06:33-07:00May 14th, 2019|mayflowercapital blog|Comments Off on Will China Tariffs Be Inflationary?

Dramatic Policy Shifts By The Fed

   The Federal Reserve’s recent dramatic shift from tightening to implied loosening is the fastest shift of Fed behavior in 50 years. Some people have leapt to the conclusion that Fed chief Powell simply caved into pressure from Trump, betraying good hard money policies, and changed to easing because of Trump. The real reason for the easing is because Fed employees have researched and realized that the Fed and other central banks made many mistakes, including being too optimistic about economic recovery since the crash of 2008, so they want to be truly prepared for the coming recession. It is highly likely that economic cycles can’t last more than ten years. The current cycle was modestly extended by Trump’s tax

2019-03-22T19:02:14-07:00March 22nd, 2019|mayflowercapital blog|Comments Off on Dramatic Policy Shifts By The Fed

Debt Crisis: Will High Interest Rates Occur?

   Yesterday bond guru Jeff Gundlach gave a scary lecture, warning about the danger of rising federal deficits which in turn could trigger a decline in the value of the dollar and a significant rise in interest rates. I disagree. I lived through the scary inflationary 1970’s when some yields hit 21% in 1981 and inflation hit 14%. Many frightening things happened in the 1970’s where it was common for people to worry that we were doomed, but eventually inflation was brought under control and the economy grew out of its problems. First, the recent contribution to the rising deficit is the Trump tax cut signed on 12-22-2017. But this is a temporary law constrained by the ten year time

2019-03-13T14:24:55-07:00March 13th, 2019|mayflowercapital blog|Comments Off on Debt Crisis: Will High Interest Rates Occur?

Central Bank Bubble Making: A Misleading Activity Worsening The Economy

   Don’t be fooled by the central bank’s ability to reflate the intangible financial economy and recover from a crash. If a crash occurs in financial assets then rhetorically speaking one can allege that prices are somehow unknowable or shrouded in an undiscoverable mystery so it’s somehow OK for central banks and governments to manipulate markets and artificially prop up asset prices. When stocks, bonds, real estate, and banks collapse, the central bank can print money and buy these assets at artificially high prices while the government and legislature can decree that “mark to market” accounting is suspended and that people must use the high water mark for valuation purposes.  This ability to create a miraculous “recovery” has fooled investors

2019-03-06T17:44:43-07:00March 6th, 2019|mayflowercapital blog|Comments Off on Central Bank Bubble Making: A Misleading Activity Worsening The Economy