Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
BREWING FINANCIAL CRISIS 2.0 Suggests RECESSION 2022 - 28th Jan 22
Financial Stocks Sector ETF XLF $37.50 Continues To Present Opportunities - 28th Jan 22
Stock Market Rushing Headlong - 28th Jan 22
The right way to play Climate Change Investing (not green energy stocks) - 28th Jan 22
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The U.S. Economy’s Ebb and Flow

Economics / US Economy Nov 19, 2014 - 12:59 PM GMT

By: Harry_Dent

Economics

Paul Krugman recently wrote an op-ed in The New York Times about the exit of Bill Gross from Pimco and why that happened because he didn’t understand that we’re in a deflationary or depression-like economy. He kept betting on interest rates rising on a lag from money printing or quantitative easing (QE) but that never happened and his massive bond fund suffered.

I don’t agree with Paul Krugman about too many things, but I do agree with one of his major points in that article.


He said that people like Gross and the gold bugs have a view of present government deficits that isn’t appropriate. The classic theory is that if the government borrows too much, it both tends to raise interest rates and to crowd out private borrowing.

And that does tend to be the case in most economic periods…

The Ups & Downs of an Economy

In boom periods, businesses begin to expand, higher rates occur and there is little interest in bonds, especially when stocks are doing well.

This would definitely be the case during an inflationary period similar to the one that occurred during the late 1960s through the 1970s. New investment is a necessity when there are shortages of capacity, goods and high inflation rates. In this scenario, high rates and heavy-handed government borrowing become strong deterrents.

And it’s here where Krugman is right.

After the fall bubble boom of 1983 to 2007, both businesses and consumers over-borrowed and over-invested. Even when central banks reduce short-term interest rates to zero and long-term rates near or below zero real returns, businesses aren’t lining up to borrow, nor are consumers (especially the older baby boomers who still dominate the economy).

Government deficits and increases in borrowing don’t compete with the private sector. The chart below shows how private debt has deleveraged or shrunk slightly since the crisis of 2008, while government debt levels have continued to soar.

Has inflation gone up with $4 trillion of money printing and $7 trillion and rising in deficits since 2008? No, it has actually fallen.

Has government borrowing crowded out business? Definitely not. They have just used most of what they have borrowed to buy back their own stock and increase earnings per share, as most don’t need more plant and capacity.

Deflationary periods occur once in a lifetime when debt bubbles cause over-expansion and financial asset speculation. When those bubbles deleverage and debt and wealth is rapidly destroyed, you have less money chasing the same goods which is the classic definition of deflation!

But that’s as far as I agree with Krugman.

Stimulus Ends

Despite the fact that the Fed brought QE to an end, he still thinks the government should have run deeper deficits and had more money printing to offset the decline and debt deleveraging of the private sectors — classic Keynesian economics. That represents an even greater misunderstanding of the dynamics of the economy than the concept held by the gold bugs.

He, like most economists would like to see an economy that grows at 3% to 4% with 1% to 2% inflation and with no recessions — ever!

He, who has never run a business, doesn’t understand that the innovation that underpins free-market capitalism is driven by the play of the opposites of many factors, like boom and bust, inflation and deflation, innovation and creative destruction, success and failure.

The greatest innovations come in challenging periods of busts and high inflation or deflation — NOT in economists’ dream economy of 3% growth and 2% inflation.

It’s human nature to overdo and over shoot everything. That’s why the economy and markets have natural mechanisms for re-balancing. Inflation stimulates investments that bring inflation down and then benefit the economy for decades to come — the killer apps like the assembly line in 1914 and the PC in the late 1970s.

Deflation is where you see the most radical long-term innovations from autos, electricity and phones in the late 1800s to TVs, automated appliances the computer and jet engines in the 1930s and 1940s. Excessive debt needs to be washed out when it’s no longer useful for the future and was largely built around speculation, not productive capacity.

At least the gold bugs understand that you don’t get something for nothing and that you can’t borrow your way out of a debt crisis. They just don’t get the impacts from much farther back in history (1930s) of what actually happens when a debt and financial asset bubble deleverages.

But Krugman and most economists don’t understand the most fundamental dynamics of the economy… at all!

If Krugman had his way with endless money printing, the economy will never rebalance and we would have gone into a coma economy like the one the Japanese have been in for 25 years now and not yet come out of it.

I have faith and strongly predict that the markets are going to win in the next five or more years and we’ll get a great reset or depression that deleverages the whole system and lays fertile ground for the next spring boom from 2023 into 2036 forward.

Harry

http://economyandmarkets.com

Follow me on Twitter @HarryDentjr

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

Copyright © 2014 Harry Dent- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in