Despite imminent inflation, why a gun-shy Fed?
While on business in London last week, I made a short detour to spend the weekend in Scotland. In brief, Scotland was amazing, with the Highlands offering natural landscapes that are practically otherworldly and I definitely recommend Scotland for any travelers' bucket list. While in Scotland, I noticed that the ATM machines generally dispense pounds sterling that do not look like those used in England and Wales. A quick internet search later and I realized the "pounds" I had been given in exchange for dollars in my bank account, were NOT actually legal tender.
The pounds I had withdrawn were issued by Clydesdale bank, one of three private banks with the authority to issue the notes. The images on the notes both differ from those used by other pounds sterling in the United Kingdom, as well as among the three Scottish banks. There is no image of Queen Elizabeth II or other sovereign, which is generally not the case in kingdoms. So what are the implications of them not being legal tender? Not being legal tender means, I could not demand that an individual accept the notes as payment for an outstanding debt. While a non-issue in terms of everyday financial transactions, this got me to thinking, how soon will it be until a global currency crisis erupts in which either very professional counterfeits will force governments to go completely paperless, or alternative currencies like bitcoin completely replace national currencies? How soon before the paperless e-currencies can be hacked? What is the future of payments?
My guess as to why the Scottish banknotes differ is probably based on Scotland's desire for a sense of increased autonomy. While in practice, Scotland is very much a part of the U.K., nearly half of the population voted to secede. Steps such as "their own" currency may help in diffusing tensions among communities that wanted to secede and give them an added sense of "national" pride. Perhaps this is a step that can be taken to diffuse tensions in other parts of the world. There are some countries, however, where it is illegal to even make such a recommendation and therefore I will not do so now and allow you, the reader, to connect the dots.
The dominance of the U.S. dollar over the pound sterling, especially in the aftermath of Brexit, appears likely to continue. Last week, comments by Federal Reserve (Fed) Chairwoman Janet Yellen set the stage for a near certain rate increase in the near future, which would further strengthen the greenback against the pound and other currencies. The Federal Open Market Committee, which decides the Federal Funds rate, is expected to raise interest rates at least two times during 2017, the first increase of which will probably be in March. Yellen remarked that while the U.S. economy is healthy and unemployment is at near full-employment, fiscal policies of the Trump administration may increase inflation and thus warrant an increase. Currently the Federal Funds rate is a 25 basis point band between 50 basis points and 75 basis points. Two increases during 2017 would mean a 100 percent increase in the rate as the minimum increase in the rate is historically 25 basis points. Such an increase would put the federal funds rate over 100 basis points by the end of 2017. I think this is a very conservative estimate and should be priced into dollar strength at this point.
With a Republican-controlled congress, U.S. President Donald Trump will most likely be able to advance the fiscal spending programs he has promised the country. Infrastructure spending, the cornerstone of his fiscal spending agenda, if executed, would also garner the support of democrats. So with increased spending a near foregone conclusion, will inflation follow? Yellen's comments that the Fed is watching developments in fiscal spending lead us to believe the Fed fears a softening in the economy, even with infrastructure spending. Even after spending $2 trillion to $3 trillion, is it possible that inflation will not heat up because of depressed demand? Is there a global crisis brewing?
I believe the answers to both of these questions are yes. Continued income inequality coupled with global conflict in hot spots around the world may mean the Trump presidency will see the decline of the U.S. consumer, the locomotive of the world. Without U.S. consumer spending, the U.S. economy near collapses and with it, the global economy. Perhaps now is a good time to invest in real estate in the Highlands.
The pounds I had withdrawn were issued by Clydesdale bank, one of three private banks with the authority to issue the notes. The images on the notes both differ from those used by other pounds sterling in the United Kingdom, as well as among the three Scottish banks. There is no image of Queen Elizabeth II or other sovereign, which is generally not the case in kingdoms. So what are the implications of them not being legal tender? Not being legal tender means, I could not demand that an individual accept the notes as payment for an outstanding debt. While a non-issue in terms of everyday financial transactions, this got me to thinking, how soon will it be until a global currency crisis erupts in which either very professional counterfeits will force governments to go completely paperless, or alternative currencies like bitcoin completely replace national currencies? How soon before the paperless e-currencies can be hacked? What is the future of payments?
My guess as to why the Scottish banknotes differ is probably based on Scotland's desire for a sense of increased autonomy. While in practice, Scotland is very much a part of the U.K., nearly half of the population voted to secede. Steps such as "their own" currency may help in diffusing tensions among communities that wanted to secede and give them an added sense of "national" pride. Perhaps this is a step that can be taken to diffuse tensions in other parts of the world. There are some countries, however, where it is illegal to even make such a recommendation and therefore I will not do so now and allow you, the reader, to connect the dots.
The dominance of the U.S. dollar over the pound sterling, especially in the aftermath of Brexit, appears likely to continue. Last week, comments by Federal Reserve (Fed) Chairwoman Janet Yellen set the stage for a near certain rate increase in the near future, which would further strengthen the greenback against the pound and other currencies. The Federal Open Market Committee, which decides the Federal Funds rate, is expected to raise interest rates at least two times during 2017, the first increase of which will probably be in March. Yellen remarked that while the U.S. economy is healthy and unemployment is at near full-employment, fiscal policies of the Trump administration may increase inflation and thus warrant an increase. Currently the Federal Funds rate is a 25 basis point band between 50 basis points and 75 basis points. Two increases during 2017 would mean a 100 percent increase in the rate as the minimum increase in the rate is historically 25 basis points. Such an increase would put the federal funds rate over 100 basis points by the end of 2017. I think this is a very conservative estimate and should be priced into dollar strength at this point.
With a Republican-controlled congress, U.S. President Donald Trump will most likely be able to advance the fiscal spending programs he has promised the country. Infrastructure spending, the cornerstone of his fiscal spending agenda, if executed, would also garner the support of democrats. So with increased spending a near foregone conclusion, will inflation follow? Yellen's comments that the Fed is watching developments in fiscal spending lead us to believe the Fed fears a softening in the economy, even with infrastructure spending. Even after spending $2 trillion to $3 trillion, is it possible that inflation will not heat up because of depressed demand? Is there a global crisis brewing?
I believe the answers to both of these questions are yes. Continued income inequality coupled with global conflict in hot spots around the world may mean the Trump presidency will see the decline of the U.S. consumer, the locomotive of the world. Without U.S. consumer spending, the U.S. economy near collapses and with it, the global economy. Perhaps now is a good time to invest in real estate in the Highlands.