5/1/2016

Raising Interest Rates Opinion

Is it possible that consumption behaves perversely with respect to interest rates beyond a certain point?

If the Fed lowers interest rates, people say, “wow, it is better to consume now than to save,” and then people consume. But what if those people want to save for retirement and the Fed pushes down interest rates really low. Then those people say, “Wow, I really can’t meet my savings goal (the compound interest is too low). I am going to be on the streets when I am old, so I better put more money in my savings account now.” That is the perverse effect of low interest rates.

You could get savings increase rather than decrease. And as far as investment goes, it is not clear that the key constraint on investment is interest rates. It may be aggregate demand. People tend to invest when they think demand for goods are high. But if there is this perverse effect of interest rates on consumption than you are not helping aggregate demand. The constraints on investment may be other than the cost of capital. So, in other words, you are pushing down interest rates but you are not having the effect you desire of increasing aggregate demand.

So should the Fed continue raising interest rates? For sure because we haven’t seen all the moves so far pay off. And at some point, like the generals in World War I, sending people over the trench and seeing them mowed down, you start asking whether this tactic actually works. And you can’t keep saying more, more, and more. So we’re about at that place where we need to ask is more the answer? That doesn’t mean less is the immediate answer. The problem with monetary policy is that changes matter. From where you are, you change very abruptly, you cause a lot of disruption. You have to have a measured pace of change. But it is probably not towards more accommodation.

China to Induce Corporate Defaults

China posted its worst weekly decline in 3 weeks due to improving economic data that will prevent further stimulus, which will trigger corporate defaults.  At least 7 firms missed note payments this year already topping 2015. The government might holdback on bailing companies out of defaults in order to unsaturated the market and lessen supply.

Google and Microsoft to Settle Disputes

Microsoft and Google reached an agreement to stop running to regulators with complaints about each other and settle their squabble internally. Google says “Our companies compete vigorously, but we want to do so on the merits of our products, not in legal proceedings.” This might be due to the heat Google has been taking with the EU antitrust laws concerning pre downloading Google apps on the android. FairSearch and ICOMP are two antitrust groups that fight Google. Microsoft left membership to those groups. Google is facing charges for its search engine shopping ads in an antitrust manner.

Regulations in China Hurts Apple

China just shut down Itunes movie store and ibooks in their market. Further moves to curtail apple products can hurt apple sales especially because China is apple’s second largest market. Apple values customer security and the Chinese government said “They are interested in protecting the content that the Chinese people see, policing its national security and favoring indigenous giants such as Huawei, Alibaba and Tencent," For years, there has been a limit to the success of American technology companies in China. Capture too much market share or wield too much influence, and Beijing will push back.

Apple has largely been an exception to that trend. Yet the Silicon Valley company is now facing a regulatory push against its services in China that could signal its good relations in the country may be turning. in addition, the Chinese government proposed an antiterrorism law two years ago that would require foreign companies to turn over encryption keys — the codes that enable otherwise-scrambled information to be viewed — for security reasons. Though the language was ultimately dropped, analysts said the government wants to have access to all communications within China. There have been some signs of trouble ahead. Mr. Xi has presided over a deep freeze on the Internet, increasing censorship and taking aim at online tools used to circumvent China's system of online filters, known as the Great Firewall. He has also added new policy tools to keep tabs on electronic communications. Mr. Xi heads a committee of top leaders set up to streamline tech and Internet policy and turn the country into a "cyberpower." Carl Icahn said that China's government could "come in and make it very difficult for Apple to sell there ... they can do pretty much what you want there."

Uber to Keep Drivers as Independent Contractors

Uber reached an 100 million dollar settlement that would classify its drivers as independent contractors because employees cost a lot more to compensate. This would require Uber to allow its drivers to ask for tips. This eliminates the cash free Uber experience that is a value proposition of the business. But losing these cases at trial could have forced the company to reclassify drivers as employees, leading to potentially billions of dollars in additional costs, such as health benefits and auto expenses, and jeopardizing its long-term prospects for profitability.

Puerto Rican Debt Crisis

Puerto Rico is expected to miss a $422 million payment to bondholders due Monday, with Gov. Alejandro Padilla predicting default. Analysts say chances are low that Puerto Rico will pay $2 billion in additional debt by a July 1 deadline. The defaults will complicate the island’s efforts to restructure its total debt, which amounts to $72 billion. They could also force the territorial government to curtail public services, like health care and electricity, while slashing government jobs and pensions for retirees.

Raising Interest Rates Opinion 

Among the various factors that play an important role in the policymaker's decision to increase interest rates, the dollar and its impact on exports is a key consideration. As interest rates rise, the dollar strengthens against key trading partner currencies. This has a negative impact on net exports and weakens GDP growth. Exports support nearly 12 million jobs in the United States and exporters pay 18% higher wages (on an average) than non-exporters. The US is a consumption based economy, and there needs to be a higher focus on production and exports. The Trans-Pacific Partnership is important from the perspective of boosting exports, but it does require support from a relatively weaker dollar in order for U.S products to be competitive oversees.