Coming Economic Measures

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You should wash your hands and put on a face mask before beginning this discussion. And I’m not reading tea leaves this time. No need for a ouija board to conjure. No need for a crystal ball. No need to sacrifice a pigeon to read the entrails. I didn’t sacrifice a cat.
There is chatter inside the beltway about the Federal Reserve instituting a negative interest rate for a specific time to stimulate the economy. I thought that we should discuss what that is and what it means.

A negative interest rate environment is in effect when the nominal interest rate drops below zero percent for a specific economic zone, meaning banks and other financial firms would have to pay to keep their excess reserves stored at the central bank rather than receive positive interest income.
Swiss banks often use negative interest rates for certain types of accounts. You have to pay the bank to keep your money on account rather than the other way around. In the Swiss bank scenario, there is a vested advantage (anonymity, security, etc.) to storing funds with them. The old numbered accounts were never cheap.
During deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in aggregate demand, which leads to prices falling even further, a slowdown or halt in real production and output, and an increase in unemployment. If deflationary forces are strong enough, simply cutting the central bank’s interest rate to zero may not be sufficient to stimulate borrowing and and lending. 

It is a drastic measure but it’s not unprecedented. And we are engaged in an economic war for the survival of the American way of life. So don’t be surprised if that becomes part of the economic recovery strategy. Goldman Sachs, JP Morgan and others are predicting a catastrophic second quarter and possibly third quarter.
Meanwhile, I received a phone call from a friend involving a (cool) new sensor system that he’d like to introduce into the Army and Marine Corps inventories. I asked, “What?” The military will be fortunate to keep the programs that are currently being funded. Frankly, I think that there will be short term budgetary cutbacks for exotic programs. Bread and butter procurement items will likely remain on the table in the short term because they employ American workers. But the Navy will need to reassess its demands for new platforms as will other services. Ship yards will need to remain open so there will be ships built. But maybe not precisely what the Navy currently dreams of getting. 
The global debt load is about to take a massive jump and NATO members such as Italy, are unlikely to push more funding to military programs in the short term. Will Russia and China take advantage of this? It’s doubtful. China was having its worst economic year in the past 47 before they experienced the accidental release from their bug factory. And business with the rest of the world is about to become more difficult for them despite their blustering rhetoric.
It’s not just the debt, it’s the collapse of oil prices, the economic impact of the Chinese Plague, and the fragility of global supply chains. The Buy American movement and the pressure to relocate overseas manufacturing to the Western Hemisphere is about to get intense. There is a new normal, if you haven’t noticed. The stock market lost a third of its value in two weeks, and nobody knows where the bottom is. And nobody is sure what that new normal will be. But it won’t be smooth sailing for quite some time. Don’t quit your day job.

20 thoughts on “Coming Economic Measures

  1. I guess the Chinese strategist found their way to slowly take over the US. First they grabbed all the IP they could, then all the manufacturing including the vital pharmaceutical products and now… xinhuanet.com/2020-03/04/c_1125660473.htm#

    What is left in the US is the dollar and hopefully some spirit, liberty and willingness to fight back.

  2. May God Bless my Mother and Father, children of the depression, who taught me thrift and an aversion to debt.

  3. LL, what do you think about funding for the PLA and its hardware? I understand the PLA got most of its spending money from its own quasi-commercial enterprises, using the profits to fund its operations. If those enterprises have gone down the tubes along with the rest of China's economy, where will the PLA go to get money for the next round of warships, aircraft and tanks? Any ideas?

  4. You can't suck it up and drive on if you spend all your time mind-jacking propaganda and worrying about the government taking other people's stuff and giving it to you. It's an election year and if Americans fail to send a lot of parasites home from their state, local, and federal sinecures, we just might be blessed with an opportunity to do what's right rather than sign up for the bondage tour. Or everything could always go rainbows and unicorns by itself.

  5. All temporary (that's me guessing as good as anyone else.)

    All the doomsday prognostication by "experts" might just change after today's presser…older drugs to combat the COVID19 have been successfully employed and are under further fast track testing (thanks to our President unshackling regulations to get this moved along in short order.)

    Let's see what the Lefty media says about this one.

  6. I would add that this "pandemic" is the Left's perfect storm; governors have given themselves universal power without actually calling it Marshall Law – curfews, closing anything they deem "nonessential" regardless of merit, gatherings of 250, then, 100, then 50, now 10…the list goes on.

    Add to that the Dem's desire of a tanked economy because they have nothing to offer America except angst and discord, so sold their souls for a Hail Mary attempt in order to win in November.

    Along with that is the contemptible media fomenting fear and panic. (CNN just did what I alluded to above regarding the new drug therapy.)

    All of these people need to be ignored.

    x2! to PrairieAdventure – well said.

  7. I guess my extensive Matchbox car collection will have to be sold off to afford bread, milk and a mortgage payment… How does Negative Interest Rates affect loans already on the books? I am not that well versed in higher order financial and economic theories and practice. As I see the banks then give us back monies paid in on loan interests? (snarc)

  8. Seems most of the world is running, and has been running, deficit economies. Is there a limit?

  9. The cats in the neighborhood come in three types:

    Bobcats – larger than a house cat, big paws, bigger claws, fangs, a nasty attitude.

    Cougars (mountain lions, not horney middle-aged women) which enjoy eating your entrails while you're alive.

    Jaguars, which are rare here but they do come though and they're just very large cougars with bigger egos.

    Each could sacrifice me.

  10. There are volumes written on the subject by people smarter than I am. If the interest on the national debt is essentially zero (US Treasury Bonds), the problem isn't that great and there is still an appetite worldwide to hold US Treasuries, the pressure isn't as great as it would otherwise be.

    The Chinese are threatening to short US Treasury Bonds to try and crash the system. Isn't the Yellow Peril just cool?

  11. It would be a short term measure that would encourage businesses with large balances to invest their money into the economy rather than keeping it in banks. The idea would be a short term incentive to boost the economy.

  12. I suspect that a lot of PLA, PLA's Navy, etc. are rethinking their development programs, in much the same way as we are going to have to. I can't see the Chinese central government funding at their current level – within the decade ahead.

    We're all in an era of new rules. And with tourism and the money making machine essentially dead and the 2024 Olympics in doubt, they are going to have to make guns or butter, but they can't do both.

    And this is the larger issue: The Chinese Public. They've gorged themselves on newly found wealth and that gravy train is about to end. Then where does their dissatisfaction with their lot in life go? The Communist Party or the USA (The Great Satan)?

  13. My grandparents raised me. They suffered greatly though the depression. I'm sure that my stories would mirror yours in terms of the legacy of pain that they suffered through. My grandfather fed the family on venison that he poached. If not for that, I don't know whether or not they would have survived.

  14. I read the Chinese propaganda article. It's not the way I see things on the ground and I'm here, not in China, looking across the pond at the US. China wants the RMB to be the world's reserve currency. They've been trying to do that for a long time but in order to do that, they'd have to let it float rather than marking its value artificially. And they're not doing that, are they? Not yet, anyway.

    The declaration of emergencies is simply an American funding mechanism. We do it all the time for a variety of reasons. It sounds tragic, but it's not. It's simply how the federated government works. When President Trump declared an emergency, it allowed him access to $46 billion in the FEMA reserve fund, for example. That's why these things happen. Will the Chinese Plague get worse in the US? Yes, certainly in the short term. However, treatments will be available by the middle of April that eliminate most of the symptoms. Not a vaccine, but the next best thing.

    The fall out of this will hurt China immeasurably. Apple is building a plant in the US and was before this started. Many industries will abandon China and will relocate in the Western Hemisphere. I see the US coming out of this much stronger in relationship to China. The Chinese should worry.

  15. The problem with "tools" such as negative interest and other such actions is they can also be used as weapons. And weapons don't care who wields them. The tools currently being used to rescue the economy can be used just as effectively to trash it if power to use them is attained by those less friendly to freedom.

  16. I quite agree.

    They're all two edged swords, and they cut in either direction. They need to be used with great circumspection…and this is government we're talking about.

  17. My uncle kept the family alive with money he sent back from the far east. He worked for an oil company, ditched his job and fled Japan in 1940.

  18. I'd like to hear more of that story. The lives of people and how they made it through are the most interesting tales of all.

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