The Economy As We Know It: May 2015

By Brian Gongol

The economy as we know it

• Interest rates remain at low levels that have no precedent. Bonds aren't earning any significant return, nor are any other savings-like investments. In the words of Warren Buffett, "savers have just been killed" by low interest rates.
• Those exceptionally low interest rates are among the factors chasing money into the welcoming arms of a stock market that hasn't taken a breather since 2009. American stocks aren't cheap by normal measures -- and that worries Federal Reserve chair Janet Yellen.
• American companies have a total net worth of about $20 trillion, up by about a trillion from a year ago. Balance sheets are strong, but at least half of the increase can be traced to financial assets instead of investments in plant and capital -- the kinds of things that purchase future growth. Orders for durable goods, for instance, are only at their levels from just before the 2008/2009 financial panic, even though the trajectory for the economy at large has been upward since then.
• The velocity of money has never been lower in modern times (in other words, we need some spending to go around)
  • When that velocity speeds up, inflation will become a serious risk unless the Federal Reserve can pull the very large amount of money pumped into the economy off the table and raise interest rates
• If interest rates rise, investors (particularly older ones) may worry about those high stock valuations, sell shares ("taking gains"), and put that money into the "security" of bonds
  • Baby Boomers are probably becoming net sellers of stocks, not net buyers
  • Millennials and other young workers are unhealthily skeptical of the stock market
  • Demand from foreign investors is expected to create some demand on the opposite side of the exchange for American companies and assets (and shares of stock)
  • The effects on real estate could be interesting; low interest rates have certainly subsidized a lot of real-estate purchases and construction, which can be seen in both the spike and subsequent hangover in farmland prices in places like Iowa (also spurred on, of course, by the ethanol boom), as well as anecdotally -- as in the boom in construction of some pretty outlandish new high-rises in New York City
• The US dollar has strong buying power overseas, which is probably aggravating our already enormous trade deficits by incentivizing imports
  • Those trade deficits mean that foreign investors have a lot of American cash burning a hole in their pockets
• Global political and legal uncertainty makes the United States artificially more attractive to the rest of the world's investors, leading to sustained net capital inflows to the United States
• The energy boom being experienced right now is artificially cushioning our economy, and we don't know how long the energy-related stealth stimulus will last
• Low energy prices will serve to destabilize politics in Iran, Venezuela, Russia, and other countries, leading to unintended and unforeseen consequences

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