You know, as an economist, I am a pretty good piano player. I struggle every morning, marinating in the news cycle, to try to understand what’s happened to the US economy and what its impact will be or might be upon the business of commercial real estate finance. We apparently are inching up on the point where the Fed may or may not do something, but as we discussed in this column a while back, the Fed’s idiosyncratic love affair with transparency is creating a cacophony of voices both in and outside of government that make even that threshold question hard to answer. It would seem we ought to pay attention, but, as the fed-heads and the commentariat continuously randomly blather and bloviate it’s just all noise, so what’s the point? I have been and remain fundamentally confused and in all the chatter I don’t see much wisdom or insight.
Here are just some of the things that are making me crazy today:
- Is there really a zero bound interest rate? What in the world happens when one pays a borrower to borrow money? Does that make any sense at all? I just can’t wrap my brain about what that says about the economy and how it survives for more than a moment. A negative interest rate seems like one of those sub-atomic particles that zoom around the tube at CERN and as rapidly formed, rapidly disappear. Given that there’s some evidence of inflation, the current levels of real interest rate are even more startling. Because I don’t understand it, I don’t even have a glimmer of a clue what it presages for the US economy in the short to medium term, it’s worrying.
- The relationship between interest rates, price levels and GNP is curiouser and curiouser. If I had more faith in the old Newtonian certainties about the market, then, I supposed I would think that if the Fed begins to increase the Fed Funds rate, the dollar would strengthen. If the dollar continues to strengthen, the economy will slow and therefore the conditions under which the Fed should begin tightening will go away? How does one get out of that cycle? And we really want to, right? Right? And while I’m at it, why is a strong dollar so bad for us? We are one of the least export dominated economies in the world and we run nosebleeding-like import trade imbalances month after month after month. So, if we’re buying more than we’re selling, shouldn’t the strong dollar have a more positive impact than negative? Silly me. I apparently don’t know nothing about birthing babies.
- Why isn’t everyone’s hair on fire because they cannot possibly figure where this economy is going? Since the days when we whacked each other over the head with rocks as our principal form of dispute resolution, people have tried to figure out the future based on rational, common sense projections based on where we are now. I cannot remember a time when there was less certainty about the here and now. I think we should all be very scared by that, but we don’t appear to be, and that scares me more.
- How about the geopolitical environment? China, Russia, the Mid-East, etc. It just doesn’t seem to matter much. Is that odd? I’m really not sure, but history teaches us, we ignore such risks at our peril.
- Is Europe a problem, or not? I’ve been fairly consistently of the view that Europe remains broke and all the “you’ll have to take it from my dead hands” bravado of Mr. Draghi and his cohorts is, like the emperor’s new clothes: a fix only as long as everyone pretends it’s a fix. Grexit looms, but maybe Grexit isn’t so bad. I’ve gotten the sense in the last month or so that Grexit is not actually the risk but the plan for the leadership of Europe. That sort of seems right to me. It will be a lesson to all those other radical populists across the continent that breaking with the Germans, no matter how annoying they might be, is a financial disaster for the citizenry. QE doesn’t fix things; at least these things. It merely masks the reality of broken economies with an ultimately untenable tsunami of liquidity. Perhaps, and we might argue about this for generations, the first QE stabilized the US economy in the early days of the Great Unpleasantness, but I think it is increasingly clear that QE2 through QE4 didn’t do much for the actual economy. The EC is not fixing what’s fundamentally wrong and the denouncement can be delayed, but not avoided. Does it matter to us? Couldn’t tell you.
- While we’re talking about QE, it seems to me that, while it didn’t do much good for the US economy, unwinding it could do a lot of harm. Low interest rates, the $4 trillion Fed balance sheet and the massive expansion of the money supply increasingly seems like the Hotel California – you can check in, but you just can’t check out.
- It’s a wonderment to me whether all that stuff done to the economy and the markets since the start of the Great Unpleasantness to fix the structural vulnerabilities of our banking system, including Dodd-Frank, Volcker, the CFPB, the endlessly complex new CFTC derivative rules, Risk Retention and the like, and their European and global analogs actually do anything? Oh, yes; I forgot. They do do something – they clearly increase the cost of capital and decrease the size and liquidity of capital markets. Does that make our capital markets safer, or just less efficient? When I think about this question my thoughts hearken back to the federal government’s efforts to create a high speed rail system in the northeastern United States with the development of the Acela. Our mommy state government compulsively worried about risk, so larded the new trains with safety “fixes” that these trains dubbed “Le Cochon” (the Pig) failed in its essential purpose of being high speed rail. As we have often obsessed before in this column, the urge to regulate will, if given full license, keep us all in bed all day long. I suspect that our markets have not gotten a great deal safer from this regulatory deluge, but have certainly gotten less efficient and less liquid. That, as a moral certainty, damages the economy with attendant bad outcomes, both political and social. Is it indeed another wreath laid at the foot of the monument to the Policies of Unintended Consequences.
Well, those are only some of the things that disturb me every morning when I read The Wall Street Journal or The Financial Times and listen to CNBC on the way to work. When confronting the always daunting but necessary task of trying to look ahead to understand the financial landscape, we have been largely confronting conditions which we had at least seen before, as the cycle does what the cycles do. In effect, we’d seen the movie. We could argue what the future would hold, but at least we understood where we were starting. Job losses turn to job gains and then eventually reverse. Money loosens then tightens, inflation rates rise and fall. It’s a cycle. Current conditions are inputs to future economic conditions. As I now don’t understand these inputs, that’s fundamentally pretty spooky.
Oh well, I have a business to run and if I don’t think about it too much, it looks like pretty clear sailing. I think I’ll go back to the work on my desk, suppress all these amorphous anxieties and enjoy the ride for a little bit longer.