New Metrics Needed in New Economy
The current long-term fixed-income market might be the new norm, but standard economic metrics are leaving economists and central banks flying blind, argues one financial professional.
”The old way of looking at economic statistics no longer apply,” said Justin Land, portfolio manager at Wasmer Schroder & Co.
The new digital economy has turned basic economic theory on its ear, he notes. “Economic theory has always been bounded by supply and demand. When demand outstrips supply, prices go up. However, this is the first time in human history where we have items with infinite supply, which drives prices down.”
The incremental cost of a company selling a first copy and the millionth copy of an e-book is nothing, according to Land. “And the company likely will drop the e-book’s price to make its 10 millionth sale.”
The digital economy calls into question how economists measure inflation and productivity gains by introducing new consumer behaviors, which existing models do not reflect, he insisted.
“If I get a raise, that doesn’t mean I will go to the grocery store more frequently,” he explained. “I’ll purchase something I’ve never purchased before.”
Such purchases would not be reflected in inflation measurements since they were outside the basket of good and services used to calculate inflation.
“The economic assumption is that the contents of the basket would be constant, but they absolutely are not,” said Land.
The new digital economy also has made measuring productivity even more difficult.
“Today’s productivity calculations really are based on assumptions for a manufacturing economy,” he noted. “This is the first time that we have productivity gains that are not tied to economic causes.”
“If I wanted directions while traveling, I’d go to Google Maps on my smartphone rather than have the staff at the front desk draw me a little map,” Land explained. “This is a zero-cost good since Google does not make revenue directly from Google Maps and it doesn’t show up in the productivity gain numbers.”
The absence of these numbers give The Federal Reserve an incomplete picture of the economy and struggling over whether or not to raise interest rates a quarter point and possibly risk of increasing inflation.
In the meantime, the Fed’s continued zero interest-rate policy may have arrested the growth of inflation but the low rates have introduced financial asset inflation instead.
“A decade ago I could get an investor $50,000 in income from $1 million-portfolio, but now that has shrunk to $15,000 or $20,000 annually,” he said. “Most people with those assets do not have a $20,000 lifestyle. As a result they are chasing riskier and riskier assets as they chase for returns.”
The order book was the largest for a sovereign green transaction.
RBC Capital Markets paid more than $800,000 to resolve charges that it engaged in unfair dealing in munis.
Electronification of the municipal bond market also presents a large opportunity.
The success of Northbound trading showed electronic execution is way forward for the bond market.
Investors will be able to better assess the economic stability and creditworthiness of issuers.