Over the last several weeks/months there has been the drop in the value of many currencies when compared to the US but this as primarily driven not because of any sort of underling economic fundamentals but rather the promise by the Federal Reserve that they’re going to ‘raise interest rates in the near future’ and ‘get things back on a path to normality’ so the usual mouth breathing morons jump on that bandwagon by stocking up on US dollars even though no evidence points to an actual rate rise. In other words what we’ve seen is the Fed using words and authority to manipulate the market but the result is something happening but them doing nothing ( link ). This may sound great to them but eventually the market is going to stop believing resulting in them in the future actually having to do something if they want something to happen and any sort of ‘good will’ there might have been between the market and the Fed will rapidly disappear. The net result of ‘doing nothing’ has been a sharp rise in the NZ dollar compared to the US dollar ( link ) as I speculated when chatting to a friend of mine on Skype.
So the Fed have had the interest rates stuck at 0% for 7 years, are we getting to the point where the United States is gradually turning into a Japan? Over in Japan they’ve kept their interest rates at around 0% for over a decade and the likes of Paul Krugman and other economist have questioned whether this will actually stimulate the economy especially when you consider how highly leveraged the average consumer is with debt. In the US the consumer makes up 70% of the economic activity in the economy but the problem is that wages have stagnated and although private debt has been reduced along with an improvement in savings there still isn’t the ability to manoeuvre without taking on more debt and if more debt does occur then it’ll be a temporary boost to the economy until once again the consumer hits that capacity of being able to borrow.
So what is the alternative? the only alternative as far as I see it is the proposal by ‘Dr Doom’ aka Professor Steve Keen noted there needs to be a debt write off and better still we also need to get rid of ‘bullshit’ (for the lack of a better word) of formalised fraud under the guise of ‘financial instruments’ where elongated ‘bullshit’ is given the thin veneer of authenticity when reality very few people can actually nail down what these things actually do. Lets face it, finance isn’t difficult – you start a business and you want to grow a business so you can either go and look for investors, borrow money from a bank, issue bonds on the market, maybe even patricianly float your business to bring in cash to fuel expansion. Another type of agreement is one where a supplier and end user where there is an agreed price that smooths off the peaks and troughs where both side benefit; the user has a predictable costing for their inputs and the supplier has a steady long term client. These are incredibly simplistic examples but examples non the less showing that for the most part I have to ask whether these ‘financial instruments’ are needed or whether they’re a creation of the financial sector to make more money but have very little in the way of actual benefit to the real economy – the real economy where people make stuff, employ people and then sell that stuff to consumers.