The words centrally planned economy have been thrown around a lot of late and refer to the way in which our economies are being managed and interfered with by government and central bankers during the crisis. If you have followed my rantings in the past you would be aware by now that governments of all the big economies in the world have been having proverbial money fights and seeing just who can pump more money into their economy in order to give it a jump start.
In economics, theorists often refer to incentive as the root of all things economics. As rational human beings we generally only engage in activities of commercial nature if there is an incentive for us to do so. Currently central bankers see an incentive in pumping money into their economies. Print money – flush it into the economy via asset purchases and the banking system and let it roll around and therefore stimulate economic activity (through the process of osmosis I guess) and encourage GDP growth.
Another factor in one’s incentive to pump your economy full off freshly printed money is to create inflation. As I have discussed before when there is a high level of inflation in the economy it does you no good as an individual to have savings in the bank as the relative value or purchasing power of your hard earned cash is eaten away. So rational thought suggests one should invest their cash in assets in order to gain a return that is higher than the rate of inflation and thereby either preserving your money or in best case scenario earning an above inflation return.
America places a high value on the stock market and is a very open market for retail customers who all believe in saving for retirement via their 401k through the stock market or invest in their future so to speak. So bearing this in mind perhaps the FED has an incentive to keep the stock market afloat especially this an election year. There is a term amongst traders called the plunge protection team and it generally refers to members of the FED or high-ranking officials making well-timed statements when it looks as if the market is getting a little shaky. The QE or money printing has been going for 2-3 years now and every time it finished and the market started to give it up low and behold a central banker would start talking about another round of fresh stimulus and magically the market would rally there by easing the pain being caused to many over-invested citizens…..voting citizens that is.
It’s not difficult to see how this can all end in tears. A market that is centrally planned by nature is not subject to the healthy and natural business cycles, a synthetic squeeze so to speak is occurring and can have very dangerous consequences in the longer term, but in the short term we will keep dancing till the music stops. If the FED were actually serious about kick-starting growth then they would focus more on how to get that money to businesses who need it to grow and not just depositing it with banks to prop up their balance sheets.
It’s ironic as it almost looks as if Europe is doing their very own plunge protection currently as well. However in reverse, Some of the more senior members of Europe namely Germany look to me to be orchestrating a bit of malaise and stagnation in the political processes for Europe. “Surely not” I hear you cry, but what would be Merkel’s incentive for doing so? Well a weaker single currency for a start would dramatically help her own country, especially as Germany is headed for the polls next year. Economic optimism is not exactly at the highs in Germany and their factory orders and industrial production is still well off the highs ( IP is actually negative currently). With China suffering from somewhat of a slowdown and the rest of Europe also who is Germany going to find to buy its outstanding and efficient products while the Euro is gaining in strength? While the Euro is currently gathering breath around the 1.30-31 mark it has been as low as 1.20 this year. That would have been a good time for German companies and they certainly made hay while the sun shone or didn’t shine to be more accurate.
Back in May, June and July when the Euro was languishing at the lows it was a busy enough period for the Germans, their new orders index showed the highest value this year. Business confidence scores (an important data point in Germany) were not at the highs but they were higher than where are they are now.
So perhaps do you think there is incentive for Frau Merkel and Co. to perhaps slow the rate of progress in the Eurozone, or in other words protect the motherland with a plunge? Naturally I am not accusing Merkel & co. of anything here and would very much like to believe this is mere folly made up from my over active imagination, but sometimes the rate of progress in Europe is so slow and back and forth it does feel that way. Surely this is not the face of a woman who would scheme like that……………….