Monday, October 14, 2013

Next Year’s Economy (2013)

It seems more and more likely that next year’s economy will be a lot like this year’s economy. At the Fed, we will see a changing of the guard of sorts, with one monetarist Fed chair being swapped out for another. Their policy isn’t on a track to changing anytime soon, being that it is explicitly tied to some measure of employment.

Nothing about the American consumer says ‘good loan candidate’ to a bank, so more of the same from them as far as keeping deposits with the Fed. Past initial speculative interest, the housing market doesn’t seem to have the core demand that stems from new household formation to warrant much more in the way of price appreciation.

The Federal government does seem to be trying to break up the monotony however. Borrowing costs have been relatively low due to the magical expanding balance sheet of the Fed. But, with the Federal government currently closed for business, and the clock counting down on the Treasury’s ability to borrow to cover its cash shortfalls, Americans may be facing higher interest rates. This is relevant because almost every aspect of American life is influenced, impacted, or otherwise affected by the cost of borrowing.

Without cheap money, Americans won’t consume or invest as much, which for an economy that has on average about 70% of its production driven by consumer spending, this could lead to a recession.

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