YOUR MONEY

How to avoid Destroying the World Economy

It is now exactly 8 years since the Financial Crisis due to earthquake-like disasters in U.S. subprime housing market, leveraged and over-extended (bankrupt) Lehmann Brothers and forced, worldwide bank write offs of billions of dollars as stupid, leveraged certificates (based on those U.S. bad housing loans) all collapsed as the bubble burst.

Since then, ‘emergency aid’ of previously unheard levels -- of trillions of dollars --- Central Banks has continued for close to a decade:  Growth and GDP and China-- the world's second largest economy and till now the world’s unending maw for raw materials -- have never recopvered and  leveled off at under 2% in the developed world and to well below Chinese government's inflated figures of 7% to 9 %.

The new normal has been very modest growth of 1% to 2% across the developed world -- and even China.

Consequently Central bankstried and continue to kick start growth to well above 3% with cheap money and negative interest rates (as a penalty for saving) but these strategies have proven dismal failures in Japan (for some 30 years), America and Europe with no  impact on manufacturing and corporate investment and expansion.

Instead, almost free money has fostered more and more reckless speculation and high risk ‘gambling’ by the super rich, sovereignty funds, derivatives funds, international bank stock brokerages and even pension plans. 

Making things worse has been the vacillation and hollow warnings of upcoming interest rate hikes from Federal Reserve Chair Janet Yellen. In September, 2015,-- a full year ago -- she warned one and all that the Fed would soon start to raise rates at ¼% every few month so as to return to ‘historic normal’ levels of 4% to 5%.

But she has been more like the Boy-who-cried-wolf as rate hikes have not materialized whatsoever and the pronouncement this past Tuesday was that no increase will occur until December at the earliest.

Surprise, surprise!!!  With a close Presidential and Congress elections just over a month away, would anyone in their right mind 'rock the boat' after a full year of delay? 

Who would have guessed.

So we all must wait for another 3 months -- or more -- for any start to a return to 'economic normalcy'.

The Fed., put simply, continues to  created uncertainty and toys with the financial plans of all concerned: those who benefit from almost-free money and those who are facing destitution and ruin on fixed incomes.

Everyone is left dangling.

And as any student of the world stock markets know, we are in the 8^th year of the recovery and a recession may be around the corner – based on historical cycles.

But the new normal of the last few years defies old thinking.  Stocks in the U.S. are at highly inflated valuations compared to earnings – some 23 to 1 rather than the standard, safe risk factor of 17 to 1.

And exchange volumes are down and relatively few players are in the game and calling the shots.

Q: So what would revive the world economy and normalcy - or at least the developed world?   

A:  RAISING INTEREST RATES! 

Starting with an automatic increase in December , 2016 – we have already lost a full year to dithering and hypocrisy and cowardice – and announcing a fixed schedule for further regular increases in 2016 and 2017 that must be set in stone!


Yes, expect a stock market swoon for at least a few days or more, and gold will do its usual piroet, but the economy is NOT the stock market or the price of gold,; it is main street and the fileds of farmers and ranchers of middle America and Canada.

Put simply, a 1/4 % rate hike is not the end of the world when prime rates are close to zero instead of historic post-WWII norms of U.S 4% to 5%.

And the above would send clear messages and have immediate impact:

1. no more rampant speculation with free government money

2. No more housing market free for all as totally unqualified buyers get stuck with huge mortgages they will not be able to pay at 3% interest let alone the historic house mortgage  norms ranging from 6% to 7%.

3. Companies still sitting on trillions of dollars will expand and invest in their businesses immediately before interest rates rise to the above mentioned normal levels.

Kindness and cheap money has not worked..

Penalizing savings with below inflation returns and negative interest rates has not worked either.

 Pension plans and seniors and insurance companies have all suffered as a result and face insolvency.

Capitalism and logic demand that Central banks raise rates and do so on a fixed, written-in-stone schedule: to end uncertainty and rtoller coaster stock market volatility. 

Only this will save the world economy.