Macro Digest: The cost of capital is everything – #SaxoStrats
- This is the end of interventionism, not capitalism
- Trickle-down wealth failed to trickle
- BoJ has finally acknowledged that QE doesn't work
- Japan is readying for helicopter money
- US to hit recession and Europe and EM will follow
“We are living the opposite – this is the end of interventionism or planned economy – anyone arguing this is the end of capitalism needs to check the definition of capitalism – capitalism is about the market distributing money and goods, what we have is the opposite: An almost desperate desire by politicians to keep hiding from the issue at hand: too much debt, too little productivity and too much government."
It is true though, but not due to capitalism, that social inequality can’t continue as is, but do remember the whole concept of QE or easy money is predicated on a “trickle down effect”. In other words to make the rich richer and through that increase economic activity. Of course, and I have written about this and the broken social contract many times, this doesn’t work because of…. too much planned economics and too much intervention in the marketplace…
What is even more interesting is that we have seen “the future’”. My basic premise is that Japan leads the world in economic policies. A few weeks ago the Bank of Japan finally acknowledged that easy money, QE, will not save the economy. This is major decision but what they will replace easy money with is interesting.
First they will target their 10-year government yield to be zero percent at all times – (from negative earlier this month) – this means de facto that they are preparing “helicopter money”.
Although this is only indirect, think about what a fixed 10-year yield does to discipline of politicians. The Bank of Japan has basically told the lawmakers in Tokyo: You can now expand the fiscal deficit at no extra cost! This endless ability to produce larger and larger deficits is not impacting market rates – hence more intervention is what’s coming.
When, and I think its only a matter of time, the US goes into recession in 2017 and takes emerging markets and Europe with it, the policymakers will follow Japan.
The true recipe for growth and less inequality of course remains the same I have written about for the past seven years: The mandate for change based on investment into education, infrastructure, productivity and more market-based economies.
The world is slowing down in terms growth, inflation, equality, trade flows, and hope. The change is coming, but not due to failure of capitalism. Rather, and like in 1989, it is coming due to planned economies' inability to create our future growth
Cost of capital
Yes, this is all about the cost of capital. Not allowing it to flow according to the principle of the marginal cost of capital distorts markets and society. One single regime unfortunately rules right now – overly easy money, ZIRP and QE will be phased out and replaced by….helicopter money!
This is not the solution but the wheels are in motion for its implementation.
What this means is:
A strong US dollar into Q1, 2017 based on a rise in the marginal cost of money , plus Fed action, plus safe haven….. It means a retest and MASSIVE channel in long-term US rates….
And global stock market valuations have broken below their 100-day simple moving averages:
The US dollar will be strong into Q1 based on a rise in the marginal cost of money, plus Fed action, plus safe haven flows… it means a retest and MASSIVE channel in long-term US rates… expect a recession by Q3, 2017.
– Edited by Clare MacCarthy
Steen Jakobsen is chief economist and CIO at Saxo Bank