THE U.S. vs CHINA. THE CASE OF THE TWO STUMBLING ECONOMIES.
June 23, 2023 5 Comments
5 Responses to THE U.S. vs CHINA. THE CASE OF THE TWO STUMBLING ECONOMIES.
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THEPLANNINGMOTIVE.COM 
You again make some very salient points.What is difficult to understand is that given the relative weakness of the US economy why the FED says it will continue with further interest rate hikes . You demonstrated in a previous post that when the owner-occupier portion of the headline inflation rate is ignored(with good reason) then it appeared as if inflation was relatively well controlled and I had interpreted the decision to pause interest rate hikes in the face of a “stellar”job creation report an indication of this.I would very much appreciate your understanding of this apparent contradiction.
It is my contention that the US economy is much weaker than the official data suggests. Two questions arise with the job data. Most of the lay offs have been amongst sections of better paid workers, while any hirings have tended to be lower paid workers. So qualitatively speaking rather than quantitatively, the number of jobs if they are real would not indicate more purchasing power from workers hence no higher demand. Secondly, there is something called births and deaths of companies. The BLS assumes so many new companies are being formed, so many old companies are folding. Generally, their model assumes that in a rising economy more firms are added than lost so hypothetically more jobs are being added. The BLS continues to work on the assumption that the economy is rising when in fact it is not so they are adding hypothetical jobs to the Establishment data. This is one of the reasons the establishment and household employment data have diverged. I cannot understand why the FED is taken in by its own numbers. All their surveys and private surveys now describe an increasingly soft labour market.
Now to the most important question of the period which you have also articulated. Why further interest rate rises when it appears inflation is waning? The primary reason is that fiscal and monetary policies are at odds. Fiscal spending yielding a 7% deficit is expansionary while monetary policy is tightening. The more fiscal deficits boost effective demand, the higher interest rates are forced up to have the same effect. Then there were the A.I. induced buoyant stock markets which are now admittedly in retreat following Powell’s hawkish statements. The FED claims it can only influence demand by means of interest rates, not supply. But while the FED claims it does not have any control over supply, the paradox is that higher interest rates are likely to affect supply more in the end than demand, because it accelerates the bankrupting of existing firms while discouraging new investment. Thus it is a very fine line the FED must tread.
I watched a really interesting program on Bloomberg TV. They were interviewing an economics professor tipped to join the FED Board. She said the convention had arisen over the last 25 years where the FED neither discusses nor comments on fiscal policies and their effects. She said this was clearly wrong. Monetary policy unsupported by fiscal policy was ineffective to begin with, and damaging to end with. She was quite right. The FED’s focus on the hot labour market rather than on fiscal deficits is misguided as it is not demand originating from the labour market which is driving demand but fiscal spending arising from a 7% budget deficit which incidentally is unsustainable.
Having learnt my lesson, I comment on price movements in hindsight rather than predicting their movement in the future. What I do know is that weather events will make such predictions impossible in any case. For example many crop growing areas in the USA have had record low rainfalls during June. And this is only the beginning. All of this is out of the hands of the FED which needs to adapt but so far there is no sign of this.
Excellent response.
Seems the Bank of International Settlements is following this exchange. They have called on governments around the world to tighten fiscal policy by cutting spending or raising taxes to ease the burden on interest rates. Here is a Financial Times article on their concerns over lax fiscal policies. https://www.ft.com/content/774e7da2-8a90-46d0-9f2b-9fbaffb59868
What is somewhat disappointing (but not surprising) is that no social democratic or even mildly “progressive” political party has used this approach to campaign for higher corporate taxes.I do not believe they are ignorant of this bur have made a political decision to not go after corporate profits.It is really difficult to generate any enthusiasm whatsoever for these political formations as they really do seem incapable of even modest political and economic reforms.