Reasonably Thinking

Buttonwood (of the Economist) has a great article this week exploring the conundrum of low bond yields with high gold prices.  It is primarily an information piece that explains relationships between gold and inflation as well as between bond spreads/yields and growth.  I’ve read this multiple times and am keeping it handy for future reference.

http://www.economist.com/node/16381320?story_id=16381320

 Interesting views on the US Dollar’s decline:

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14513934

Here is one of The Economist’s lead stories this week.  The broader topic, international trade, seems so predictable, but somehow I always enjoy reading different versions of the same story:  free trade benefits the masses, yet politicians are strong-armed into protectionist policies, which hurt the consumer and are bad for the economy, but assists with their reelection efforts.  The ramifications that the author mentions below have the potential, though not yet immediate, to be scary.

The depths of the article explain the fallacies of the US’s recent protectionist policies on steel (G. W. Bush) and tires (Obama).  On economic principles, I generally support international free trade and oppose both policies.  I even wrote a paper in college expressing such an opinion back in 2002 (regarding the steel industry).

http://www.economist.com/opinion/displaystory.cfm?story_id=14450332

“…Evidence of a weak president being pushed leftward might cause investors to worry whether he will prove similarly feeble when it comes to reining in the vast deficits he is now racking up; and that might spook the buyers of bonds that finance all those deficits. Looming large among these, of course, are the Chinese. Deteriorating trade relations between the world’s number one debtor and its number one creditor are enough to keep any banker awake at night.”

A short article on the wealth effect.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14365068

Preview:

…Put another way, every $1 increase in home values led to a rise of 25-30 cents in borrowing. That is far bigger than some long-standing estimates of the wealth effect from rising asset values, which are in the 3-5 cent range… Funds raised against rising home equity were not used to pay down other debts. And fewer households invested in financial assets, such as shares and bonds, when house prices were rising. All this suggests that almost all of the $1.45 trillion the authors estimate was borrowed against rising home equity was used for spending.
This suggests huge over-borrowing. Prospects for a sustained recovery look dim if households that are most inclined to spend are mired in negative equity.

(I calculate that $1.45T to be about 10% of GDP that will not recur as it was borrowed from the future, and probably not yet repaid).