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An opposing view Print
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Wednesday, 03 June 2020 12:45

An opposing view

Conventional wisdom is a wonderful thing, particularly for herding creatures. In our herds we are social animals and so agreeing with others' points of view gives us the group acceptance that we crave.

It's safe, it takes no independent thought, it's comfortable and easy to go along with the majority opinion.

Questioning, by applying thought to the reality of what is actually happening, and stating those thoughts, risks being labelled a heretic and an outcast. Now, feeling unsettled, the herd is now longer safe and comfortable for us.

Those in control of "herd think", are those who shout loudest and the most often. And so it is with the US Federal Reserve, who have told us there is no alternative to their current policies in achieving economic growth.

They want us to spend our savings and then borrow and spend, borrow and spend more. The goal, they tell us, is so the economy will not collapse but will grow again and we will all achieve Nirvana.

This became the conventional wisdom and has lasted since at least the GFC in 2008.

Lower, then negative, rates will ensure we can spend even more than we can borrow. The banks will even pay us to borrow - as long as we spend of course.

Reality is turning out a little differently.

Bank of America recently published a chart showing what happens when savings rates drop below 4%. The opposite of what the Federal reserve were telling us they expected.

Spending does increase as rates fall, but this effect changes below about 4%. Consumers then worry about their future. Ever lower rates then reduce spending and increase savings, as BofA quote:

As low growth & inflation make low-risk-asset income scarce (e.g. from government bonds), households are forced to reduce consumption and increase savings in order to meet retirement goals.

Forced saving further depresses demand in a vicious cycle.

It's a doomed loop as the full article here explains.

 

From the blog

Want to See What's Next for the Economy? Try This....

Want to See What's Next for the Economy? Try This....

 

On Monday 15th July, US stock markets made a new all time high. Does this also mean that the US economy is doing just fine?

The US Federal Reserve believe so despite the naysayers who so often tell us the 'real' economy is about to collapse into recession. Next Wednesday, the last day of July, is Fed day when many commentators believe it is highly likely there will be an interest rate reversal.

We've had a stream of quarter point rises. For some, the expectation is now for at least a quarter point cut, maybe more. Will this be enough to save off recession and keep the market buzzing to new highs?

Read on for the Socionomic view from Elliott Wave International...

Don't listen to the naysayers -- there IS a way to forecast the general health of the economy. This method has repeatedly proven itself.

Yes, you can anticipate the likelihood of a recession, even a depression -- or, conversely, when major economic measures -- like jobs -- will be robust.

That surefire way is the performance of the stock market.

That's right, despite the widespread belief that the economy drives the stock market, it's the stock market which leads the economy. Why not the other way around? Because the economy is a slow boat.

Read more...

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