Treece Blog: Assigning economic painWritten by Ben Treece | | firstname.lastname@example.org
Treece Investment recently received a newsletter from John Mauldin, an economist based out of Dallas whom we follow closely.
In his piece, he outlined how several different nations have responded to struggling domestic economies and what the impacts of those actions were.
I found his assertions to be quite interesting and wanted to touch on those this week.
Unfortunately, there is no one clear path that allows all parties involved to avoid any negative repercussions. Once all factors have been properly analyzed, nations must decide what route is best for them and their economy, which involves allocating financial hardship to the public sector, the private sector or personal savings.
Mauldin outlined three separate models in his newsletter: the Japanese, the Finnish and the Swedish.
Japan has been in a deflationary economy since the late ’80s, which can take a devastating toll on a nation’s GDP.
Between the late ’80s and 2011, Japan’s economic policy involved protecting equity and debt stakeholders via government funds (i.e., bailouts), and its economy has failed to fully recover for more than 20 years.
These bailouts protect equity and debt stakeholders, but hurt the overall economy as the recovery time takes far too long.
Recently, Japan has elected to double the size of their monetary base in an attempt to fix their problems. This falls more closely in line with the Finnish model.
Finland’s policy involves a sharp devaluation of their currency.
While this results in a decrease in the nation’s debt burden by whatever percentage the currency is devalued, it also encourages exporting as domestically produced goods become more affordable on a global scale.
While the exporting industries benefit (assuming you have other nations to export to), personal savings are negatively impacted.
The Swedes have pursued a policy of allowing business winners to thrive and allowing failing businesses to go through a structured bankruptcy proceeding.
The United States clearly has bankruptcy courts and proceedings as well; however, during the past two decades we seem to have fallen in love with the idea of structured federal bailouts as opposed to Chapter 7 and 11 bankruptcies.
While the Swedish model has proven time and again to be the best long-term solution, wiping out bond and stock holdings of business entities can have a negative short-term impact on the perceptions of a nation’s economy
The United States has attempted a combination of the three models in recent years, with the Swedish model being most prevalent pre-2008, the Japanese model from 2008-10 and the Finnish model from 2010-present.
Unfortunately for our economy, another policy that has been pursued is the zero interest-rate policy. With this policy, banks can borrow from the Federal Reserve for nothing and loan to consumers or even back to the Fed and profit on the rate spread.
However, those holding CDs and fixed annuities are hurt by falling interest rates, while tradable debt (i.e., long-term fixed-rate government debt) benefits from falling rates. Retirees who rely on fixed-rate income (e.g., CDs) have seen their lifestyles devastated by rates dropped in an effort to save the lending institutions.
Allowing rates to increase signals to the private sector that money is no longer as cheap as it once was, and we will likely see corporations and individuals rushing to lock in low interest rate loans. This would be one surefire way to spark a stagnant economy.
One thing is for certain: The economic policies that the United States have attempted since the 2008 crisis have proven ineffective at increasing domestic GDP.
Unless something is done, we can expect to see what Japan has seen for the past 20 years, stagnant economic growth. O
Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp. (www.TreeceInvestments.com) and a stockbroker licensed with FINRA, working for Treece Financial Services Corp. The above information is the express opinion of Ben Treece and should not be construed as investment advice or used without outside verification.