So what's the next crisis? actually read the article and this article does not really expound upon some sort of next crisis.. I guess the crisis is that interest rates are so low?? awesome click-bait apparently..
1) Some kind of dollar, global reserve crisis that rocks the global economy for a while. Spurred on by the US debt and projected near future large budget deficits due to welfare and entitlement spending.
2) Broader bond market. I think this is a well understood threat, and doesn't require much elaboration.
3) A specific junk corporate debt crisis. About half of the major corporate defaults in 2015 were US companies, which have levered up significantly on the back of the Fed's super easy money policies.
4) Another significant drop backwards in the asset bubbles the Fed just got done re-inflating. If the Fed's policies fail to provide enough to sustain those huge asset classes (real estate and equities primarily), then when they tip over it'll pull the US economy down into a protracted recession. The global economy is practically in a rolling recession as it is, if the US goes next it would cause a lot more global pain (including amplifying the problems in China and Japan, both big exporters to the US). There's a real debate to be had about whether the Fed can ever actually create a scenario in which the intentionally inflated assets can sustain (stand alone without Fed props), or if they have to always deflate backwards with a hefty penalty for the market manipulation / forced capital misallocation (which then prompts even more dramatic action at each turn, to try to re-inflate).
cooperate profits are at record highs. A bond crisis would require either a crash in profits or a spike in rates, neither which show any signs of occurring.
The article is a short read, and the guy makes IMO prescient observations. E.g. here's one of them:
The zero interest-rate policy broke the social
contract for generations of hardworking Americans
who saved for retirement, only to find their
savings are not nearly enough.
" The zero interest-rate policy broke the social
contract for generations of hardworking Americans
who saved for retirement, only to find their
savings are not nearly enough."
But the evidence actually shows that a better returns can be had with stocks than cash (bills). Even with rates at 4%, stocks way outperform cash:
The problem is not that interest rates are too low, but rather people suck at personal fiance. But on the other had, the Paradox Of Thrift suggests that it's 'good' for the economy that too people don't save too much.
Those who have more wealth put it in stocks, bonds, or index funds. They seldom keep it in cash.
Those who have more wealth put it in stocks, bonds, or index funds. They seldom keep it in cash.
How old are the people? All I can give you is anecdotal evidence of quite a few older people I know. People aged between 50 and 80. Many have the bulk of their money in bank deposits. Quite a few people don't own a single stock or mutual fund. That's today.
And if you go back perhaps 50 years, then hardly anyone invested in stocks. The vast majority of people kept money in the bank or in real estate (their house or farm). I'm of course not talking about millionaires, I'm talking about average middle class people.
Would they have been smart to have more in stocks? Of course, but that's hindsight.
Even now I don't blame anyone for staying away from equities. In October 2007 the S&P 500 hit 1576. Then it bottomed at 666 in March 2009 (hard to forget that number!). Now it's 2056. It's easy to overlook that volatility if you have a steady six figure income. But when you're retired, when you'll never earn another dollar of income in your life, you tend to be more cautious.
I personally have almost all my money in equities and in real estate. Nothing in bank savings. But I'd never try to talk anyone into taking money out of the bank and putting it into the stock market. If they make money, they think they're geniuses. If they lose money, I'm a schmuck for giving them bad advice!
Listening to "marketplace" on NPR when the us federal reserve raised interest rates to 0.25%, they mentioned that actually there was a problem -- that they would need to pay banks to actually pay them to take the money from them at 0.25% interest rate since banks have some much liquid cash available now to lend each other that they don't need money from the fed. So "banks" are crazy awash in money now such that the interest rate being 0.25% and we need to pay banks to take the money, then that means the interest rate effectively is still at 0.0%. So what I see as the big problem is that banks have a ton of money, and I don't currently have anything to sell to the banks for 10X the price. :-) Tongue in cheek, but my point is that guess what.. that extra money that the banks are swimming in will probably be squandered in some way and somebody will get rich off of it.. I do wish they would pile up some of that money into venture capital companies specifically to get small companies to start and grow rather than giant banks sitting on literally 500 billion dollars of free money from the fed that they essentially never need to pay back.. or the interest rate is so freaking low they barely need to even pay any interest on it.. but if startups had access to even more money then that would be a great way to stimulate the economy more.. as much as I wish they would burn that kind of cash in the area where I live, people putting the money toward startup incubator areas at many different locations around the US would be a great way to stimulate job growth especially for the underemployed people in their 20s just out of college... and plus easy money for startups bring foreigners to the US because its hard to get that kind of cash in their country..
just thought of an idea to add to my previous post, so maybe for banks that are sitting on that big pile of cash the "easy money" that they got from the fed, we could say "hey well, we know you basically probably will essentially never pay us back on this, so if you loan the money to small businesses, then you can get a 10 year loan extension on that free money we loaned you... and pay no interest on the money that you loan back out to small businesses.."
