Kicking the Can Down the Road, Until the Road is Full of Cans

     Government budget deficits (the excess of spending over revenue) in industrial countries have been growing as a percent of GDP for the past 20 years. Large deficits emerged after the oil crisis in the mid-1970s and widened dramatically after 1980, largely the result of government overspending rather than meager tax receipts. Government expenditures in industrial countries rose from 28 percent of GDP in 1960 to 50 percent in 1994. These deficits have sharply increased the public debt (the accumulated burden of yearly budget deficits), which jumped to 70 percent of GDP in 1995 from 40 percent in 1980, weakening government finances and draining resources from the economy. Aging populations and sluggish economic growth add urgency to this worrisome trend. Governments now have little choice but to restructure their spending programs. 

    A short history lesson: During the nineteenth and early twentieth centuries, fiscal deficits and surpluses were small in the major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), and a chart of fiscal balances would show a fairly stable trend line. WW1 altered the picture radically, as its participants emptied national treasuries and borrowed against the future in a desperate struggle to survive. Shortly after, during WW2, the participants basically repeated the fiscal experience. The normal peacetime condition of near fiscal balance gave way in almost every industrial country to large and obdurate fiscal deficits. 

    Currently, as a planetary economy (world/global) the debt ratio is 350%. On a smaller scale, it would be similar to an individual having an income of 50,000 a year but owes 175,000 to the bank. Not a great situation, but it is manageable. However, this is what is happening today...the individual continues to consume MORE of their income so they have to borrow more money from the bank every year on top of the 175,000 they already owe. The individual is now growing that debt 3x faster than they are growing their income. By the way the economy is starting to slow and the individual is not getting the raises they once did (GDP). Also the interest rates used to be only 1-3% but now they have gone up to 5-7%. Now the interest that they owe is becoming a big chunk of their income! Not good. Lets just say that individual is head of household for their family...and that individual has lots of family. They have brothers and sisters, grandparents, distant cousins who all owe each other money. The individual owes them and the other family members owe the individual. If some of the distant cousins go belly up then no big deal, but if some of the matriarchs or patriarchs of the family go bankrupt then there is a ripple effect. 

This family is a representation of countries around the world. I beg the question, since we have never experienced a global financial collapse (came close in 2008, 2020) why do we assume it will never happen? 300 trillion, 400 trillion, 500 trillion, 600 trillion? How much farther can we kick the can down the road? Maybe once we get there the road will be full of cans. I hope we find other pathways around the deficits. 

    

META announces second wave of layoffs: 10,000 Jobs to cut off.

Meta, the parent company of Facebook, Instagram, and Whatsapp, has announced an additional 10,000 layoffs. Meta has already fired off 11,000 workers in the first round of layoffs, which occurred in November of last year. According to Mark Zuckerberg, these layoffs are a part of a "year of efficiency," and in addition to the 10,000 jobs being slashed, 5,000 additional vacant positions will also be eliminated.

Since their earnings were 4% lower than the previous year, Mark said it was solely the result of the revenue's sharp slowdown. He also cited an increase in interest rates in the United States, global geopolitical risk, and increased regulation as factors slowing meta's growth and revenue. He further stated that layoffs like these could occur in the future.

Managing the Banking Crisis and Cooling the Economy

 We know that the FED's biggest concern lately has been stubborn and high inflation rates. In the past few days, they've had to take on another obstacle, a trio of bank failures. The central bank announced the Bank Term Funding Program earlier this week, which provides one-year loans to banks and other financial institutions that offer up collateral like US Treasuries. This would allow banks with unrealized losses to swap out typically safe investments for a loan of up to one year worth the original value of the assets they're putting up as collateral.

This program is a form of monetary easing designed for emergency use when the Fed needs to prevent the next SBV from failing. There are risks, but the Fed believes the benefits outweigh these. This is also a clear example of the Fed acting as a lender of last resort. 

The Fed is still of course working on managing inflation, and they believe that the program will only cause a "very minor delay" in getting back to the target inflation rate of 2%. The central bank is expected to continue increasing interest rates. However, the Fed's rate hikes actually factored into the SVB collapse. The higher cost of borrowing hurt the sector's profits and ability to raise funds which in turn forced tech companies to draw down on their bank deposits so they could fund operations. Although, this was not the leading cause of the collapse. It is important that this crisis is managed first before the Fed gets back to handling inflation rates.

https://www.cnn.com/2023/03/15/economy/fed-priority-cooling-economy-financial-stability/index.html

How does a bank collapse in 48 hours? A timeline of the SVB fall

Silicon Valley Bank collapsed Friday morning and was overtaken by federal regulators after experiencing the largest bank failure since Washington Mutual in 2008. 

The Silicon Valley bank used to be the go to bank for U.S. technology startups and was among the top 20 American commercial banks with $209 billion in total assets at the end of last year, according to the FDIC. 

Their fall began with the Fed sharply raising interest rates over the last year to cool inflation as they effectively snapped the momentum of borrowing costs for tech stocks that were helping the bank. In addition, these rising rates destroyed the value of the long term bonds the bank had bought when interest rates were almost nothing. They were getting an average yield of 1.79% on their $21 billion portfolio when the current 10 year U.S. treasury yield average is about 3.9%. 

Customers began to pull out at the same time that the bank had announced they had been selling securities at a loss and would sell $2.25 billion in new shares. The stock started tanking on Thursday and by Friday, trading in SVB shares was stopped while regulators shut the bank down and placed it under the Federal Deposit Insurance Corporation.

The Fed does not see this becoming a common problem in the future as they claim any other banks that may experience this are too small to "affect the broader system." All insured depositors will have full access to their insured deposits by Monday morning, according to the FDIC and all uninsured depositors will receive an “advance dividend within the next week.”

https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html

Federal Reserve Chair Jerome Powell warns inflation fight will be long and bumpy

At this moment in time, the United States citizens have faced an increased in prices across the country do from the increase of inflation in recent months. The Federal Reserve chairman, Jerome Powell, put out a warning saying that interests rates may have to increase as well to begin a shift on the current inflation rate. The FED has been moderating and trying to work to get the inflation back but Powell told the senators "Inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go. Over the last year, the central bank has raised the interest rates eight times. to try and lower the inflation rate. This past January, business began to higher more and consumer spending increased as inflation was beginning to work its way down. After Powell made his comments, markets are concerned as rates were only supposed to increase by .25% but are now being estimated to be in the 5% range. 

Do you think by raising the interests rates to 5% will help balance inflation in the US economy?

Economic and Ethical Impacts of the "Uyghur Forced Labor Prevention Act" on Xinjiang's Economy

The Uyghur Forced Labor Prevention Act was unanimously passed in the U.S. Senate in December 2021. The act was a direct attack on China's economy in response to evidence that China was using forced labor practices in its autonomous Xinjiang region.

The act went further than most import restriction strategies and tariffs. Firstly, it outlawed imports from the entire Xinjiang region, being explicit in its language that this included anything "manufactured wholly or in part." Most tariff restrictions only include final goods, so this act went beyond the normal scope of protectionist policy. Secondly, it implemented a plan for U.S. importers to follow to ensure that imports were produced ethically, which ensures due diligence on the behalf of American companies. It also burdened the importer to prove that the good was not produced in Xinjiang, a process that can be complicated and time-consuming, discouraging free trade.

Admittedly, only about 0.01% of the U.S.'s total imports come from Xinjiang as goods, which might cause concern. Is the act actually fulfilling its purpose? However, when one considers that the Xinjiang region is a large producer of the world's raw materials (i.e., Xinjiang produces 1/5 of the world's cotton), the impact becomes much more noticeable.

U.S. supply chains are expected to take a hit due to this act, but only in certain sectors. For instance, renewable energy (i.e., solar panels) will be hit especially hard, but agriculture will not because the U.S. has already prepared in advance to reduce dependency in this area.

As for forced labor, the act's impacts are not as certain. It will reduce U.S. dependence on products created in China, forcing Chinese manufacturers to adopt better labor policies. However, Xinjiang exports mostly to Central Asia and Russia. If the U.S. is to actually follow through with this plan to reduce forced labor, it should rally the international community to adopt similar protectionist policies.

If the Uyghur Forced Labor Prevention Act teaches us anything, it should be that economics is not as cut and dry as "free trade or bust." This act reduced free trade but could potentially improve the human rights situation in Xinjiang. Furthermore, it could set a precedent for countries going forward that people's livelihoods are more important than output, and that's a good thing.

https://www.csis.org/analysis/uyghur-forced-labor-prevention-act-goes-effect

ECONOMY Fed can’t tame inflation without ‘significantly’ more hikes that will cause a recession, paper says (for Feb.)

 https://www.cnbc.com/2023/02/24/the-fed-cant-tame-inflation-without-more-hikes-paper-says.html

The fed is not able to lower the inflation rate without raising the interest rates. While everyone thinks that inflation rates will begin to go down, the fed is not able to lower the inflation without the raising. Since the inflation rate has not been this high in over 41 years, the fed has been implementing high interest rate bursts to help what the inflation. As opposed to the past where the government would watch and see how the inflation affects everything, the fed said they are trying to jump on it quick and avoid long term issues. I think this is the best idea as of now. Even though it is hard times as of now, it is better to get over the hard times now and try to get it back down to a reasonable interest rate. 

NCAA March Madness expected to have $6.5 million economic impact on Milwaukee

 In the upcoming month of march madness, Milwaukee is supposed to hold about 18,000 college fans from all over the world. The event is expected to have a $6.5 million economic impact on the area, according to VISIT MilWhen the NCAA Men’s Basketball Tournament rolls into central Indiana in a few weeks, venues will be allowed to have up to 25% capacity, including a limited number of fans. It will be a huge economic boost to central Indiana hotels and restaurants. The high inflow of non-residents to the city will likely increase spending on area hotels, resturants, retail vendors, and rental car companies, in addition to public transportation and parking services. Higher inflow spending in the city means higher tac revenues for the local government, which is a positive for service boosting for local residents. Higher spending will also increase demand for labor, boosting employment opportunities and wages in the labor force. Higher employment and wages are expected as well because the workers spending their income on goods and services. 

Future of business owners in East Palestine

East Palestine is made up of a lot of small business in which the owners live in the community. Several business owners were surveyed and all talked about how they felt about the train crash. These people were owners of a greenhouse and hot dog shop, an insurance company owner, a man who started an escape room and a woman who sells rubber bracelets. Many of these owners already getting feedback from people that they’re not coming to there business for fear of what’s happening. They are all concerned about the future and the stigma that will hang over East Palestine for a long time.

Business believe they need a tremendous marketing campaign. The village is looking for a new village manager. That person has to be somebody who’s on top of marketing, who understands business, who understands how to get out of the situation they are name. Business owners in East Palestine, Ohio, have hit out at rail operator Norfolk Southern over the company's response to one of its trains derailing in the town on February 3. Plenty of companies have "lost a lot of business" due to the derailment, one business owner added: "I'm just concerned about the aftermath, what's going to happen months or years down the road. The real estate in East Palestine has hit rock bottom. Nobody's buying in this town, and you can't sell anything since the accident.

Do you think business will be able to bounce back from this environmental disaster?

Money Doesn’t Make America’s Economy Go Around

Some people believe that the amount of money in circulation is what primarily determines the US economy. They hold that decreasing the money supply will stop inflation, which was brought on by the Federal Reserve's recent increase in the money supply. This viewpoint, however, is inaccurate and oversimplified.

One factor that has an impact on the economy is the money supply, but there is little correlation between it and actual economic results. The willingness of both individuals and financial institutions to borrow money is crucial. Money's velocity, or how quickly it moves around, is influenced by the actions of numerous financial intermediaries and their clients

In 2008, the Fed changed its monetary policy, further complicating the relationship between bank reserves and the cost of credit. Because of this, even though the money supply increased significantly during the Fed's quantitative easing programs, inflation didn't spike.

Various factors, such as changes in demand, fiscal stimulus, and low interest rates, contribute to inflation. While quantitative easing helped to boost the economy, its influence on inflation has been overstated. The impact of quantitative tightening on inflation will also be minimal, and short-term interest rates play a bigger role in determining people's propensity to borrow and spend money.

Source: https://www.bloomberg.com/opinion/articles/2023-02-28/money-supply-doesn-t-explain-us-inflation