Shaken, rattled and rolled

You do have to wonder how much our financial advisors understand about anything when you can read a headline like this at the AFR:

YELLEN RATE HIKES RATTLE MARKETS

Could they have thought a quarter percent was too low? No, they are rattled because there may be three increases in 2017 and not just two. So let me quote from this morning’s press to point out that this should not be seen as a bolt from the blue:

Steve Kates, Associate Professor of Economics at RMIT, said it was good news for the US and could be for Australia if it followed suit by raising rates. “Low rates will kill you,” he wrote.

“[It’s] all part of economic resurrection. It may cost more to get your hands on money going forward, but it is also more likely that the higher cost of borrowing will help channel our savings into more productive projects.

“The belief that low interest rates are good for growth may be the worst delusion of all, causing one economy after another to fall into a low-productivity trap from which it is almost impossible to find a way out.”

What he had also said, and been saying for quite some time, was this:

That rates would go up at the first opportunity after the election was as certain as anything in economic policy can ever be. It was just as certain as knowing that with a Democrat President, that they would not be raised until after the election was over.

I did meet Yellen many years ago and we discussed fiscal policy of all things, so when I say to you that she has no idea how things actually work, it is from direct personal experience. These Keynesians are a hardy lot, never influenced by anything that actually happens in the world. Let me therefore take you to the very first para of this AFR article:

The Fed’s forecast of three interest rate rises in 2017 has rattled markets, raising fears that rising rates and bond yields could take the air out of high asset prices, including shares, that have been inflated by almost a decade of easy money from central banks around the world.

Are these people really that detached from how things work?

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14 Responses to Shaken, rattled and rolled

  1. PhilipG

    Low interest rates in Australia has stimulated neither spending nor investment…other than by Federal, State and Local governments…with low debt costs being necessary to offset to the substantial regulatory overreach cost of the last 10 years.
    As is being increasingly discussed…Trump will reverse the worst regulatory excesses and allow competition for real resources to drive the price of money….hence the proposed increases next year.

    But as to the argument that high rates are needed to redirect resources…first of all you need to create productive demand before the price of money becomes a factor…that is it it does not lead, but lags, the real economy. There appears to be little evidence that there is any life in the Australian real economy so a series of interest rate rises will go straight into the Banks’ bad debt provisions. Deregulate first and let the price of money follow.

  2. Petros

    Steve can you explain why they link share prices to easy money please? I’ve heard that so many times in the MSM. I’m not an economist. Serious question.

  3. Squirrel

    “Are these people really that detached from how things work?” – apparently yes, which is hardly surprising when you consider that, for a very long time, they have effectively been mollycoddled by indulgent regulators and thus provided with a very slanted (in their favour) playing field.

    How they will cope in a world in which they do no alway get what “the market is looking for” (the use of that phrase by the economic commentariat says so much), remains to be seen.

  4. Will

    Steve can you explain why they link share prices to easy money please? I’ve heard that so many times in the MSM. I’m not an economist. Serious question.

    First you need to understand that the government issues bonds at a face value and a coupon rate of return. Once issued, the price they are traded at can change on the secondary market. So if the government issues bonds for $100 with a coupon rate of 10%, and subsequently at a later time, because of quantum easing, issues bonds at a coupon rate of 5, the bond now trades on the secondary market for $200, to give a return of 5%.

    The government, through the Federal Treasury, influences interest rates via buying and selling government bonds.

    The price of equities on the share market reflects the government bond rate (now 5%) plus a risk margin of say 3%, so shares are expected to return 8%. If interest rates fall, the price of equities go up as the market is offering better returns (i.e. more than 8%); the price of equities is bid up. If interest rates on government bonds go up, equities need to maintain a risk margin so their price will fall as sellers desert equities for bonds.

    Once interest rates fall, and the price of assets (shares and property) rises to provide commensurate returns. This capital value will be lost as interest rates rise.

  5. Roger

    Oh Steve, you’re just one of the 2% of looney non-Keynesian economists according to Michael Pascoe.

  6. LBLoveday

    I have no idea about the accuracy of Mr Kates’ assertion that Yellen “has no idea how things actually work”, but it is very tenuous to base that assertion on “direct personal experience” in a meeting “many years ago”.
    I have learned much in the past “many years”; maybe Yellen also has.

  7. Bloody hell. I knew news.com.au was a bottom feeder, but quoting the Cat is beyond the pale.

  8. Have you noticed recently how one of the most certain threats the left comes up with every time is that markets will shit themselves (if the thing in question doesn’t go their way)? E.g. Brexit, Trump, Italian referendum. And how, in each case, the market has a brief dip and then recovers stronger when reality kicks in?

  9. Empire GTHO Phase III

    Bloody hell. I knew news.com.au was a bottom feeder, but quoting the Cat is beyond the pale.

    Only if you’re in residence.

  10. H B Bear

    Michael Pascoe – the mamamia of economics.

  11. H B Bear

    Hush mUnty you might learn something. Now go and get some updated poll numbers.

  12. Julian

    I’m a Financial Adviser and I subscribe to Eugene Fama. Thanks for coming.

  13. Fess

    I have stock market investments and deal with a broker. The broker and its financial investors have been telling me for three years that the depressed stock market will revive when the US increases interest rates. It seems the actual investment market has a very different view to the press ‘experts’. The MSM, including its financial wing, seems to have degraded so that they now report a sludge of gossip, half-baked opinion and propaganda.

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