Wednesday, July 16, 2014

International Race to the Bottom

Here is an article from a few hours ago out of Sweden. 


The Swedish central bank is considering cut in interest rates. The ECB recently cut rates and there is continued talk of more rate cuts. The "strength" in the Euro has hampered recovery in the Eurozone by restricting exports.

That has been the ongoing competition in the world for at least 20 years now. The race to create domestic jobs by devaluing the domestic currency to stimulate exports. But it only works until every country catches on and does it. And then it is a race to the bottom.

Cutting interest rates encourages the taking on of debt by the public and private enterprise. If the debt is able to be worked off by increased exports, and thus flows of money into the country, the debt has been productive for the country. The country is richer.

But if the whole world tries the same thing it doesn't work. We can't all be net exporters.

The situation reminds me of the competition between large banks that led to the housing crisis and the financial debacle of a few years ago. The banks were in competition with each other and each had no choice but to continue to lower lending standards to stay ahead of the competition and to retain market share. And it led to ruin, and a bailout by the Federal government(s).

Who will bail out the world? Who will bail out a country when all countries are in the same pickle?
Can all countries end up in the same situation?
That question must presume a worldwide currency crisis. Can all currencies decline and precipitate financial collapse? That would be the result of a return of bond vigilance. But there must be a safe haven currency. The best of a bad lot, so to speak. What would it be? A currency must be backed by the economy of the country. What country?

And why do interest rates need to be cut if the world economy is picking up? The answer must be to discourage "rentier" money from being parked in interest bearing instruments. And to try to further stimulate demand with more debt. But demand and debt only go so far together, and then the realization on the individual level is that the money must be repaid or go bankrupt.

Which will it be?

And the elephant in the room, as far as indicators of demand go is the Baltic Dry Index.
It is going nowhere after six years of scraping along the bottom. If there was some pickup in world activity it seems it would show in dry shipping rates.

something is going to crack.
Sometime. LOL

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