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On November 8 Americans Will Decide Whether To Rescue The Bankers Or The Consumer

Trump and Hillary are miles apart on this issue.  A top Russian economist explains very simply what is at stake.

This post first appeared on Russia Insider

The author is a leading Russian economist, publicist, and TV and radio host. (Wikipedia - Russian only)

Sometimes referred to as the "Russian Paul Krugman", he writes prolifically, and has a very large audience in Russia.  His articles typically receive hundreds of thousands of views.  He is known for explaining complex economic ideas in clear terms non-specialists can understand.  

<figcaption>Lloyd Blankfein, the head of Goldman Sachs.  On November 8 the American voter will decide whether to bail him out (again)</figcaption>
Lloyd Blankfein, the head of Goldman Sachs. On November 8 the American voter will decide whether to bail him out (again)

He is a former senior economist in the presidential administration and a frequent speaker at international conferences.

You can find his other articles written for RI here.

Recently, the Fed decided not to change interest rates.  Various reasons were given, but as we know, there are two “parties” in the US, one which favors monetary easing, and the other, tightening, and each has arguments for their case.  Economists are divided on how to proceed.

They disagree on precisely this: which economic policies can facilitate growth in our times?  A brief look at the last 50 years provides some context.

In the 70s, household incomes fell, most of all from 1972-73, and with them, spending.  Starting in 1981, (Reaganomics!), spending began to rise, but income, hardly at all.  Economic growth was due to increased consumption driven by a rise in household debt, and from 2008 on, in government debt.  If we look at real disposable household income, it is the same today as it was in the early 60s.  Today, average household debt is 120% of annual income, whereas up until 1981 it never exceeded 65%.  Note too, that in 1981, the discount rate was 19%, whereas today it is practically zero.

Today, consumption can only increase if someone hands out money.  This money cannot be earned by companies, because consumers are unable to buy additional products.  So the only way is to increase debt.  But lowering interest rates is impossible because they are already at zero.  So there are two options: 1) print money and hand it out to people through the banks, with the understanding that this money will not be returned, or 2) restructure the existing debt, both personal and corporate, in the hopes that then people will start to consume.  In order to do this, interest rates would have to be raised to at least 3-4%, with the banks taking a major hit, because their customers cannot service their loans at those rates…

Voila the collision of interests between the people and the banks.  Unsurprisingly, the two US candidates disagree on this issue.  Clinton is for option 1, i.e. more monetary easing (helping the banks), and Trump is for tightening (helping the people).  The choice, of course, lies with the American voter.  

Janet Yellen understands this very well, and has the sense not to deprive the American people of this important decision.  

So we will have to wait until after the elections for her decision on whether to increase rates or embark on another round of quantitative easing.

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