If one only listened to the consensus, one would be optimistic, notwithstanding the ugly US presidential contest, that the US economy is moving forward steadily with strong employment, low inflation, and low interest rates. In this month’s letter, Bill Longbrake takes a more critical look at recent data and discusses the consequences of years of aggressive and market-intrusive monetary policy, which leads him to a much different and more troublesome outlook. According to one well-respected economic research firm, there is now a 50-50 chance of recession in the next 12 months. The strong third quarter real GDP report was a mirage that hid a steady six-quarter long deterioration in growth momentum.
In previous letters Bill Longbrake has discussed the growing imbalances in the global economic and political fabric. Because there is much at stake the established political and financial elite have an enormous vested interest to maintain stability at all costs. To date they have been successful. But, let there be no doubt that events are gradually undermining the foundation of the old order. In this month’s letter Bill examines US productivity, a much too neglected topic but one that is key to real economic growth and our society’s well-being in the long run. The course we are on is unhealthy but not inevitable.
Britain’s vote to leave the European Union is already having negative consequences in the U.K., but the rest of the world has yawned and “risk-on” animal spirits are back in vogue as the U.S. stock and bond markets hit all-time highs. Otherwise not much has changed in the U.S. Productivity and economic growth remain weak and inequality is worsening, but employment growth is strong. Populism and nationalism increasingly is impacting politics in the U.S. and other countries. In the July-August letter, Bill Longbrake discusses the policy flaws embedded in neoliberalism, which espouses free movement of capital and fiscal austerity. He also explains why interest rates are very low and are likely to remain so for a very long time. Special topics include Italy’s banking crisis, Japan’s revamping of Abenomics, and unexpectedly large inventory destocking in the U.S.
Phillip L. Swagel, a UMD School of Public Policy professor and academic fellow with the Smith School’s Center for Financial Policy, says the current focus on Glass-Steagall is symbolic. “It’s something to propose more than to actually do,” he says. “For (Donald) Trump, it’s a way to highlight (Hillary) Clinton as the candidate of Wall Street, as identified by Bernie Sanders. For the left, it positions them as ‘cracking down on big banks.’”
Not a Financial Crisis Catalyst
Swagel reasserts his 2011 Congressional testimony that counters reinstatement proponents who suggest the repeal of Glass-Steagall spurred the 2008 financial crisis: “The end of the Glass-Steagall restrictions is not well correlated with the failures evident in the recent financial crisis. Bear Stearns and Lehman Brothers both failed, but these firms had remained investment banks. JPMorgan Chase, on the other hand, combined investment banking and commercial banking and yet weathered the strains of the crisis relatively well. The problems revealed by the crisis seem to be in the riskiness of the activities themselves—subprime lending, for example—and not in the combination of commercial and investment banking.”
The US and global economies are marking time while imbalances continue to build slowly. But, there were two surprising, and not necessarily related, events in June – the US May employment report was dismal; the Federal Open Market Committee (FOMC) slashed interest-rate projections. In this month’s letter Bill Longbrake explains why neither of these developments is all that surprising. Slower employment growth and low interest rates are here to stay. He believes that the FOMC’s interest rate projections are still too high.