“Kee” Points with Jim Kee, Ph.D.

Stocks:  The S&P 500 finished with its fifth straight week of gains, ending at an all-time high amidst easing global tensions brought about by a September 5th cease-fire agreement with the Ukraine and pro-Russia rebels.


US:  Last week’s payroll report indicated that 142,000 non-farm jobs were created in August, well below consensus expectations of 223,000 (Bloomberg). But remember,monthlypayroll numbers have very little meaning; it is the average of the past three months that tells you themost about the economy and job creation going forward, and that number is 207,000. That points to continued expansion in the US, which is consistent with last week’s non-manufacturing Purchasing Manager’s Index (PMI) number of 59.6% - the highest reading sinceinception of the non-manufacturing or “services” index in January of 2008. The US is clearly the growth engine of the developed world. Europe and Japan are clearly struggling.


Three points on monetary policy:  The European Central Bank (ECB) cut short-term interest rates and alluded to further actions down the road. There is much mention of concern over deflation in Europe, though I see deflation as a symptom of economic weakness rather than a cause. But it does fit with a Euro that has remained too strong, and policies to bring the Euro down should help exports from Germany, Europe’s struggling growth engine. Here are three things to keep in mind regarding monetary policy in the current environment:


You need to know that the press is asserting expectations on the part of the ECB monetary policy beyond what the ECB itself is proclaiming, just ashappened with the Fed here in the US. Central bankers aren’t pitching accommodative policy as a magic growth elixir, just one part of the policy mix. ECB President Mario Drahgi has been pretty clear on that (i.e. the need for fiscal policy changes/reform), so 12 months from now when the headlines talk about the surprise failure of global central banks to deliver strong growth,just remember that it is a fabricated “surprise” based upon poor business journalism.


The “global liquidity glut” and “global search for yield” were characteristics of the world economy before the 2007-09 crash and before the unprecedented policy actions of the world’s central banks. That means that interest rates around the world were already low. Andas Stanford economist Ronald McKinnen pointed out a year ago in the Wall Street Journal, monetary policy aimed at producing lower rates and yields have far less of an impact on economic activity when they are moving from low to lower (or low to zero!) than when they are moving from high to low.


Monetary policy is best used for pursuing monetary objectives, namely inflation and/or exchange rate targets. Non-monetary objectives, like growth, investment and employment, are best addressed using fiscal policy actions (the constellation of tax, spending, and regulatorypolicies).


Finally, the BRICs emerging market countries (Brazil, Russia, India, China, and South America) have formed their own development bank (the New Development Bank) similar to the World Bank and International Monetary Fund for the purposes of providing lending for infrastructure projects. The “BRICs Bank,” as it is often referred to, is intended to foster cooperation among the world’s five leading emerging countries which comprise 40% of the world’s population. It is expected to be operational in two years and will be based in Shanghai. India is expected to hold the presidency for the first six years, followed by Russia (The Financial Express).