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Why the World Economy is Slowing – And What You Should Do

 By Shlomo Maital  

             graph: Federal Reserve, Wells Fargo, Washington Post

What in the world is going on? It’s time to try to make some sense of it.

The Dow-Jones stock index takes its biggest plunge of the year. Bond markets are jumpy. And everyone talks about the inverted yield curve.   What is going on?

Let’s try to understand all this.

    The ‘yield curve’ is simply a chart or table, showing the rate of interest you make on your investment, and the length of time you invest the money. In normal times, the longer the time you commit your money, the higher the return or yield. It’s just natural. A longer time period means more risk.

    But once in a while, the normal order of things gets turned upside down. And that is what is happening now. Why?

     When investors are afraid that a recession – an economic slowdown — is brewing, they anticipate that Central Banks will have to lower interest rates in response. So they buy longer-term bonds to ‘lock in’ current higher rates, in the knowledge that soon those rates will come down.

   That rise in demand for, say, 10-year bonds, raises the price of the bonds, by the law of supply and demand, and when the price of a bond goes up, then its rate of interest goes down. Why? If the bond coupon is $3 for a $100 bond, and if you pay $110 for the bond, your return is 3/110 or only 2.7%. Higher bond price, lower yield.

   That is what is happening now. The last global recession was in 2008, after the financial crash and panic of 2007/8. The current global expansion has lasted 10 years. It’s one of the longest such expansions. It is long in the tooth. It is the nature of business that after booms, come busts, big or small. And it seems time for a bust.

   As the graph above shows, since 1980 every single time the long-term yield or interest rate falls below the short-term rate, there has been a recession, within a few months.

   Other signs confirm this. China’s economy is slowing, growing slower than it has for decades. Europe is slowing – Germany is in recession already, Britain will be in recession after a crash-out Brexit, Italy is again in deep hot water. The US economy is also slowing, buoyed only by consumer spending. Business investment is low, because of uncertainty over the trade war, and the belief China will hope for a Trump defeat in 2020 and is simply waiting it out. So when Europe, China AND the US economies slow – there are no locomotives to pull the global economy out of the mud.

   This is bad news for President Trump. His overall approval rating is way below 50%. But his approval rating on the US economy alone is well above 50%. An economic slump could cost him re-election.  And he knows it.

     Trump has been fiercely critical of Jay Powell, Chair of the US Federal Reserve (central bank). For once, maybe only once, he is kind of right. Last September, the Fed raised interest rates slightly, by 25 basis points (0.25%) to current levels, the highest since April 2008. Whooops… not wise, when a slowdown is imminent, and when the Fed may hence have to do a sharp U-turn that lowers its credibility.

       For us working people, what does all this mean? Cut back on your spending somewhat. Set aside some money. The recession may be short, it may be long, or it may not happen. But chances are it will. Good to have a cushion on hand, if it comes. You never know.

 

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How to Be a Good Person In Two Difficult Stages

  By Shlomo Maital

Amos Oz

    American writer and humorist James Thurber once observed, in a serious moment: It’s more important to know some of the questions than to know all the answers.

    And years later, Nobel Laureate Richard Feynman observed, “I would rather have questions that can’t be answered than answers that can’t be questioned.”

   So, here is a question that is hard to answer – maybe even, one that can’t be answered.

   How can I be a good person? A better person?

     One of my big disappointments (of many) with business schools, is that they teach people how to be good managers, bottom-line driven, and not how to be good persons too.   The results are often disastrous (take, for instance, Oxycontin and Purdue Pharma).

   So, from the vantage point of my grey hair and over seven decades on this earth, here is my ‘take’ on the title question. And my answer, for certain, can and must be severely questioned.

     Becoming a good, and better, person, is a two-stage process.

   Stage One, or Grade One. Follow what the late author Amos Oz once said:   ‘We can fold all the moral imperatives, the Ten Commandments, and the human virtues, into a single commandment: Thou shalt not inflict pain. That is all. Do not hurt.’

   Cause no pain. This is the Ten Commandments folded into one. Oz died last December. He wrote many wonderful books and should have won a Nobel Prize. In her eulogy his daughter Fania Oz-Sulzberger quoted his ‘cause no pain’ words.  

   It’s hard to complete Grade One successfully. It’s complicated. What if, sometimes, you need to cause pain, to prevent more pain later? As doctors and surgeons may do?

   So, let’s say you pass Grade One. What is Grade Two?

   It is the core principle of startup entrepreneurship.

   Make meaning. How? Create value. Make people happy. Or more broadly:   Make people happier, smarter, healthier, wiser, more secure….

   Make people happy. Don’t just cause no pain. Cause happiness. Actively.

   And that idea too is complex. Make people happy – how? In any way? Do I lie to them, when truth would cause pain?

   Being a good person is really hard.   But I’ve found, probably way too late in life, that if you avoid hurting people and actively find small ways daily to make people happy – you yourself find a great deal of happiness and meaning in life.

     Now, why didn’t I figure that out sooner?

 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
August 2019
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