Daily Archives: August 23, 2012

Midnight Musing: Can the US End Up Owning Itself?

We have been pondering the Fed’s control over interest rates, why it is possible and more importantly, what are the limits.

The Policy of Doom

We’ve finally found the long-awaited (due to a browser refresh issue?) Hoisington Investment Management Quarterly Review and Outlook, Second Quarter 2012. As usual, Dr. Lacy Hunt has produced a 4-page newsletter based on solid economic theory but written in a manner that a layman may understand. This one is centered on Interest Rates and Over-indebtedness. He is basing his discussion on three recent papers, especially research [that] includes the first systematic evidence of the association between high public debt and real interest rates. As he states:

both low long [bond] rates and the stagnant economic growth [the current US ‘recovery’] are symptoms of the excessive indebtedness [current sovereign debt levels] and/or low quality debt usage [government spending].

Although he relates the studies to the interest rate on the long bond, an important issue for investors, especially pension funds, there are more important broader implications for Western economies in general.

Flash Point: PMI Blues

Continuing the decline globally of PMI data noted in June, PMI PMS, and continuing in July, PMI Update: Dark Clouds and Risk of Rain On Our Parade, we have reports of further declines for August in China, China Flash Manufacturing PMI at 9-Month Low, New Export Orders Plunge at Sharpest Rate Since March 2009, and the eurozone, Eurozone PMI Declines 7th Month; German Private Sector Output Falls at Faster Rate; New Business Declines 13th Month.

Of the eurozone, Markit’s flash August reading edged slightly downward. Markit commented: The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012. The direct implication is a continued decline in economic output or GDP, notably in manufacturing. The broader implication is a global economic slowdown that is moving into a recession.

Quote of the Day: 20120823

Distributing insolvency only destroys the last remaining islands of solvency in a bankrupt world.

— Charles Hugh Smith in Spreading Insolvency Around Does Not Create Solvency

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