It’s time to take a look at what might be called the large factors and institutions in our economy. Here are a series of articles which may, or may not, give you insight.
One, “The Looming Bank Collapse” by Frank Partnoy in the July/August 2020 Atlantic, made a case for a new vulnerability. Before “the financial crisis of 2008,” which “was about home mortgages,” “hundreds of billions of dollars in loans to home buyers were repackaged into securities called collateralized debt obligations, or CDOs.” These instruments contained paper for mortgages of varying qualities, ranging from those solid and current to others on which no more money would ever be paid. After “Lehman Brothers went under, taking the economy with it,” these CDOs “fell out of favor,” but “demand” for them shifted to “the CLO, or collateralized loan obligation,” each example of which includes “loans made to businesses – troubled businesses.” If these instruments collapse in large numbers, per Partnoy they could take the rest of the economy along.
Something we have long implicitly known was articulated in “The Hutchins Roundup,” issued by Brookings on October 15th, namely that the “Stock market is less representative of the economy than it was in the 1970s.” Two researchers found that publicly traded companies’ shares of total nonfarm payroll employment dropped from 41% in 1973 to 29% in 2019, a cause of fewer people below the top 1% holding securities. That also may be a root of the market’s strength, as those accumulating more and more money have less need than others to sell.
Maybe I’m missing something, but isn’t “The Puzzle of Low Interest Rates” (N. Gregory Mankiw, The New York Times, December 4th) easy to solve? The author found six “hypotheses” which “might explain the decline in the natural rate of interest,” five of which with merit, but only grazed the main explanation, that we are awash with capital, and that, combined with low business interest in large projects, means money usually sits in place with low demand. This situation may change if taxes dramatically increase, and the upcoming infrastructure effort creates millions of jobs, but for now don’t be surprised if the Dow Jones Industrial Average continues to go up more in a typical month than balances in money-market savings accounts rise in a year.
“How much should we worry today about the rising federal debt?,” asked David Wessel in a December 14th Brookings report. Not much, he said, as our government is paying less than 1% interest on its 10-year obligations. It would do well though to follow the prudent individual spending practice and “pay for things today that we consume today” such as defense, Social Security payments, and most salaries, but that “we should not hesitate to borrow at today’s very low interest rates for public investments that will pay off in the future,” including infrastructure and human development. However, low borrowing costs only “buy us some time,” and eventually we will need a reckoning.
Is it true that we have seen “Biden and the Fed Leave 1970s Inflation Fears Behind” (Jim Tankersley and Jeanna Smialek, The New York Times, February 15th)? Yes, and that was the right thing to do. As a corollary to money pooling up, inflation is much less of a risk than it was 40 years ago, and rates of 3% to 4% would hardly be disastrous. With pent-up demand soon to explode, and, per “Janet Yellen Drops Hints” by Andrew Ross Sorkin et al. in the same publication on February 23rd we can expect further stimuli, we’re facing a real test of this theory, but we have a long way to go to see a real problem.
How are bond prices doing, and can we see “What the Bond Market Is Telling Us About the Biden Economy” (The New York Times, February 23rd)? Per author Neil Irwin, bond returns are not well, as many pay below inflation. With our presidential administration carefully watching them we can expect generally freer spending, but “the line between too hot and just right is a narrow one,” meaning Washington’s willingness to fund more things may quickly change – if rates do indeed increase.
As for the Federal Reserve itself, we saw that chair “Jerome Powell Promises Not to Take Away the Punch Bowl” (by Neil Irwin, also in the Times, March 17th). Powell denied the central bank would let forecasts alone, such as what Irwin called “a veritable boom” later this year, stop its monthly $80 billion bond purchases, but would “wait to see actual data.” That is another optimistic indicator – so let’s get ready to party hearty! In the meantime, we need to stay safe until our coronavirus independence days – two weeks after our last vaccinations – have arrived.