Thursday, July 31, 2014


The stock indexes down sharply at the open today. The strong economic news yesterday and the increases in wages paid numbers this morning caused interest rates to rise, bonds to fall. But the weakness in stocks is only partly due to the prospect of rising interest rates and seems mostly to be a result of the increasing tension with Russia. A trade war with Russia, with the specter of a shooting war, as well as the increasing tension with China over trade and quality issues is putting a crimp in the international profits of international companies.

Stepping back. Does a trade war cause inflation the same as conventional shooting war does?

Over the longer term, as far as the Fed and interest rates go, I would be surprise if the Fed continued or proceeded with "tightening" if international tensions rise, and a trade war ensues. There is an election coming up in two years and that is traditionally a cause of easy monetary policy, but aside from that the Fed will take the future into account. And a looming trade war will cause them to put their obligation to tighten behind the mandate to maintain full employment.

This will cause the inflation that a war typically causes. Down the road. And in spades.
If this happens.

Just thinkin',


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