THE PERMANENT SLUMP DEBATE
by Karl Arnold Belser
4 December 2013




I read the article Debating Whether the US is in a ‘permanent Slump  by John Carney, the senior editor of CNBC that reinforces my observations in this blog that the world economy has entered a steady state. He asks “Do We Need Bubbles” to have a good economy. Carney’s conclusion is that without bubbles interest rates will remain low for a very long time because this is the correct pricing of money given the economy.

The kernel of the argument is that the US population growth is slowing such that there are fewer new people to buy products, that technical innovation in consumer products has slowed such that people really don’t have “new” things to buy (low demand), and that technical innovation in manufacturing has increased (robots) such that the cost of goods is decreasing without job growth. If people have less money to spend and there are fewer new goods to buy, the result systemically and for the long term will be low demand and a flat economy.

I think that there is today a general fear that interest rates will rise because the low rates have caused stock and bond prices to rise dramatically. I suspect that people now are getting rid of debt and developing a larger than normal cash position because of this uncertain future. This kind of conservative mental model would be a further indication of slow future economic growth.

Retired people need to have investment income in order to live. For example, I have investments in large capitalization, high dividend shares with a global presence and closed end bond funds that use leverage to achieve a reasonable return on money. These investments would be decimated if interest rates rise dramatically. I am currently choosing to “hang tough” With these investments and I hold a large amount of cash for robustness in case interest rates do rise. This is how I am currently managing the uncertain future.

   
Last updated December 7, 2013
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