Notes From Underground: When the Paradox Of Thrift Doesn’t Apply

John Maynard Keynes’ critical theory said in times of uncertainty economic actors tend to save more, which leads to a negative feedback loop that slows the economy as demand shrinks. This is why governments need to increase fiscal stimulus to boost demand. It’s too bad that President Trump doesn’t exercise the paradox of thrift when it comes to WORDS. Let there be no mistake: We at NOTES have been expecting a response from Trump like this.

From the July 31 blog post:

In Sunday’s Blog post I asked whether the tariffs trumped U.S. economic data. Well, we got our answer on Wednesday and it’s a resounding YES. Federal Reserve Chairman Jerome Powell’s press conference Wednesday suggested that he has been sucked into the vortex of President Trump’s media manipulation of the tariff narrative.

On Friday, the president manipulated Powell yet again by President Trump as he attacked the FED chairman and called him a greater enemy than Chinese President XI. Again, the Chinese ramped up the tariff issue by announcing their intentions to raise tariffs on U.S. exports in the months ahead. The world’s equity markets initially BROKE amid elevated trade war fears. However, in the immediate aftermath of Powell’s Jackson Hole speech the SPOOS regained all the losses sustained from the China news.

The markets were poised to go move higher as the Powell speech was deemed to be neutral on future Fed policy, or at least not as HAWKISH as the views of Fed presidents Esther George, Eric Rosengren and Patrick Harker. Powell remained in the Richard Clarida camp by citing the slowing global economy as a concern. He said, “We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government.”

This risk of geopolitical UNCERTAINTY was related to the three factors weighing on an otherwise favorable outlook: Slowing global growth, trade policy uncertainty, and muted inflation, which would provide enough reason to CUT rates and follow the lead of other central banks.

But Powell seemed to poke the president with this view:

“But fitting trade policy uncertainty into this framework is a new challenge. Setting trade policy is the business of Congress and the Administration, not that of the Fed. Our assignment is to use monetary policy to foster our statutory goals. In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy. There are, however, no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade.”

It did not take long for President Trump to respond to FED Powell and ramp up attacks on the central bank, as well as announce more tariff increases on the Chinese.

The trap for Powell is again that the FED responds to financial conditions, which are subject to fears of a trade war. Stock market selloffs generate BOND RALLIES, even in markets where yields are NEGATIVE. The drop in yields elevates the discussion about an impending RECESSION placing more pressure on the FED. It then fosters concerns in Europe and Asia that the BOJ and ECB will become more aggressive in their efforts to cut rates while injecting even more liquidity. So Powell is trapped on two fronts.

The G-7 met over the weekend in France where President Emmanuel Macron had pledged there would be no communique in order to avoid dissension among the leaders of the large democracies. Nerves are already frayed as Macron has thought to raise climate as the key issue, which included threats against the Brazilian government over the fires raging in the Brazilian Amazon.

Chancellor Merkel and others don’t wish to punish Brazil by rescinding the Mercosur trade agreement, as does Macron. There are also strains over Boris Johnson’s Hard Brexit stance. This plays well for Trump as it lessens the pressure on the China trade issue. If Trump is in a fractious mood watch for him to raise the issue of imposing tariffs on European exports to the U.S. Macron has already riled Trump over the issue taxes on U.S. tech firms.

If the President suggests imposing tariffs on Europe it will be a further blow to markets, and further forcing Powell to have to entertain concern about TIGHT FINANCIAL CONDITIONS for stock markets will be on the defensive. GOLD, SILVER and foreign currencies staged a sizable rally on Friday over concerns of President Trump pressing Powell for deeper rate cuts.

This is a difficult time for the world made more so by the failure of leaders to exercise restraint in the use of social media. Trump is an excessive abuser but others are also culpable. In deciding against the issuing of a G-7 communique, Macron offered this most duplicitous rationale: “This system is a perversity because it bureaucratises the thing. None of the leaders discusses them in advance. These are the quarrels of bureaucrats and the deep state. The communiques reflect the deep positions of the French bureaucracy up against the American bureaucracy.”

Macron is the epitome of the deep state coming from Ecole Nationale d’Administration, an Enarque having run France for the last 70 years. All this acrimony between leaders and sovereign debt yields continue lower as the last refuge of terrified investors and irresponsible central banks. Fiscal stimulus is needed while  frugality of words is desired.

***This is an issue of concern: The Germans have been challenged by many nations to embark upon a massive fiscal stimulus program so as to increase demand as its economy slows. Paul Krugman has a New York Times column castigating German policy makers for failing to ramp up spending.

But I posit this: Isn’t the German credit card securing negative rates across Europe actually fiscal stimulus? The German taxpayer being on the hook for the entire EU financial system acts as a call on German savings thus actually a stimulus by creating negative or very low interest rates even for Italy. Has Mario Draghi embarked on fiscal profligacy by utilizing German savings to backstop the ECB? When is monetary policy crossing the line and acting as fiscal stimulus. Hmm … the paradox of thrift maybe creating ever dire outlooks for stagnant economies suffering with negative rates.

This will be discussed further as pressure builds on the Germans to open the spigots for deficit spending.

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10 Responses to “Notes From Underground: When the Paradox Of Thrift Doesn’t Apply”

  1. raymack1999 Says:

    I have been waiting all weekend for your wisdom. thanks Yra! I have shared on all my social media.

  2. Judd Hirschberg Says:

    Everything you’ve discussed and more. Thanks for putting a big smile on everyone’s face last week!

  3. Guy Williams Says:

    Thank you Yra.  Great insights which helped me. Nonetheless, count me among the “terrified.” Warm regards, Guy

    • TraderB Says:

      What if President Trump were to propose a $1 Trillion Infrastructure package (Debt-Funded)?
      He would definitely NOT get bi-partisan support for this, correct? I am assuming the Democrats would rather wait until after the election, before juicing the economy with more debt.
      What if Trump were to propose a massive Clean Energy stimulus package? The Democrats would have to support that, right?
      How likely is it that the US Congress announces a stimulus package with stocks and 2,800+?

  4. asherz Says:

    STIMULUS. Get used to that word because we will all hear more and more of it. Even the thrifty burghers are talking of $50 billion deficit spending.. Infrastructure, new plants, renewable energy projects, cash for clunkers, cash for housing…it doesn’t matter. What’s another trillion here and there. Pretty soon you are talking about real money.
    I picture a man who is almost out of sight as the hole he is digging is so deep he no longer can climb out. His only solution is to keep digging till he comes up on the other side, China.

  5. ShockedToFindGambling Says:

    Yra…..great article.

    The talk of 50/100 year Treasuries is extremely concerning.

    It’s another kick the can down the road, and avoid dealing with the deficit problem.

    My guess is the USA gets a credit downgrade with the next serious recession.

  6. Bob Zimmerman Says:

    “Going to change my way of thinking”
    Album “Slow Train Coming”
    Bob Dylan 1979

  7. Don H Says:

    10:50 PM
    /GC A hold above 1545 targets 1570; IF 1545 fails to hold bid, then anticipate a deeper pullback.
    /ES IF Sellers hold this bounce below 2867, then 2790 target; A bid above 2867 before trading down wld allow squeeze continuation.
    My .02

  8. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Yes Yra…
    …isn’t it so very interesting that the industrial weakness finally rotating around to them has the parsimonious Germans considering fiscal stimulus?
    And of course there is little doubt that the rest of Europe would be happy to go along (i.e. has in fact asked for this for years.)
    That’s in addition to an ECB which already has its own example as well as the previous extreme action by the Fed that monetary stimulus alone will not work… hey, it’s already had negative rates for longer than should have been necessary if that was going to produce results.
    It took Trump’s tax and especially regulatory cuts to kick the relatively stronger US economy into gear. Just how ready is a dirigiste Europe for enough of this to produce results? We shall see.
    Thanks for another very insightful review of this highly complex situation-

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