The financial marks are in the midst of a convulsion. Economic reality is reasserting itself. The markets are learning that they depend on aggregate demand, not simply how well the 1% does. I'm hesitant to make any predictions based on the financial markets. Humans are not good at predicting what the markets will do next, and only somewhat better at predicting what the economy in general will do that. That said, now would be an excellent time to push the progressive economic platform.
Several years ago, the markets came to an almost religious acceptance that debt to GDP ratios over 90% meant economic catastrophe. Like any good con, it told market participants what they wanted to believe: namely that kicking poor people was a good thing. Of course, this has certain problems for social stability. As a result, money poured into the bonds of highly stable first world countries. Interest rates fell. In fact, interest rates fell so low that corporations that borrow money as part of running their business (this would be all of them) saw their profits reach record levels. It wasn't that the economy got good, so much as labor and interest costs collapsed.
In fact interest rates got so low that US Government 10 year bonds paid less than the expected rate of inflation. In the 1990s commodities prices reached a cyclical low. Rising commodities prices, along with the view that hyperinflation was right around the corner, caused investors to speculate in commodities. This produced increasing real returns on commodities. And then the resource curse kicked in. Because commodities prices had nothing to do with economic reality, commodities producing areas started electing politicians equally divorced from reality.
And now the music has stopped and it has all come to an end.
Yesterday the Fed announced that it would stop buying US debt by the middle of next year. The markets are panicing. In recent weeks investors have come to realize that the whole high debt / hyperinflation thing is not going to happen. Buying debt of a country that is not willing to invest in stimulating aggregate demand and boosting its economy seems a much worse idea. Many foreign investors have decided that they will not lend money at less than the rate of inflation to a nation that will turn around and use that money to monitor their electronic communications. For some this comes for an insistence on privacy. From others it comes from a worry that their governments may shoot them if they lend money to somebody spying on their home nation. To top it all off, bond yields were simply too low. In any event, the market was set for a perfect storm, which seems to be happening.
After yesterdays fed announcement, the market has decided that the only thing that if forbidden in our political discussion over the economy are things that might actually work. Bond yields are shooting up. The ten year US inflation protected bond is now above water. It no longer makes sense to hold commodities as an inflation hedge when you can buy a bond that will protect you from inflation, and pay a positive return. Because interest rates are rising, corporate profits are expected to fall, meaning the stock market is tanking.
There is a very good chance that things could get bad fast. High commodities prices that have driven employment in red states are falling. At the same time these states have been systematically destroying their automatic stabilizers. This will likely lead to high red state unemployment, and unfortunately higher national unemployment. To make matters worse the Fed has made it clear that it will end the current round of QE when unemployment reaches 7.0 percent. I expect that this will take longer than the Fed things. At the same time, the central bank has promised employers that as soon as they start hiring the Fed will take action to make the economy worse. This is unlikely to help the job situation any.
This is an unique situation. The 1% is looking at falling income inequality as a result of the 1% loosing vast sums of money. It is possible that, if a sell off in all asset classes continues, the nations four largest banks may suffer destabilizing losses. This is a time where progressives should and must argue that the only way to save the situation is a rising tide that float alls boats.
Progressive ideas have been boycotted by the corporate media for years. The media's corporate masters are now facing the prospect that things don't look so good for them. This would be an excellent time to argue that the economic situation has reached the point that the only answer is to do what we know from experience will work: a return to the New Deal. Direct government jobs, government stimulus of the economy, massive public works (including a roll out of renewable energy), increases to social security payment, student loan debt relief and increased labor rights. Only government can give the financial markets the long term stimulus they need to recover. Any tax increases that might come as a result, and any increases will not take place until the economy stabilizes, will be less than the loses suffered by investors by a continuation of the status quo. Push strongly now and the corporate wing of the Republican party may find itself forced to go along with it.
My suggestion then is that the Progressives in congress, if they still exist, draft a stimulus bill quickly then vigorously defend it in the media. While the immediate market collapse that we are seeing today will, likely, abate in the next few days a prolonged downtrend is very possible. Now is the time to argue that a rising tide float all boats, and must do so before we are all dashed on the rocks.