The Economy As We Know It: May 2015
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)
- 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
- The US dollar has strong buying power overseas, which is probably aggravating our already enormous trade deficits by incentivizing imports
- 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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