Читать книгу Balanced Asset Allocation - Lee Bill - Страница 11

The ability to borrow money slightly complicates the mechanics of the machine. If borrowing were not allowed in the system, then buyers would only buy what they could afford to pay using existing money. There would be no deleveraging because leverage would not exist. The economy could be more stable, although it may operate below its potential because capital would not flow as efficiently. With borrowing, a buyer is able to spend tomorrow's income today. If I want to buy a good, service, or financial asset and do not wish to (or cannot) pay with cash, then I can simply promise to pay for it in the future. I have created credit. This is what typically happens when you buy a house, swipe your credit card at the grocery store, or promise to pay your friend back if he buys you lunch. In each case you have created credit. Your balance sheet has been leveraged, and the amount of debt you owe and your debt service have just increased. A simple way to summarize these concepts is to say spending must be financed either from money or credit (so spending = money + credit).

With leverage an economy can grow more than it would otherwise because buyers can use both money and credit to make purchases. If they don't have enough money, they can use credit to buy what they couldn't afford to pay for with current funds. Because your spending is someone else's income, when you buy more using credit, then others earn more than they would otherwise. Then their increased earnings lead to increased spending and so on. The economy grows because it is simply the sum of all the transactions. Figure 1.1 displays this general cycle.

Figure 1.1 Basic Cycle of Economic Growth

The central bank plays a key role in managing this process. The Federal Reserve (known as the Fed) is the central bank of the United States; other major economies around the globe have their own central banks. The objective of the central bank is to try to smooth out fluctuations in the economy. Fluctuations can be measured in terms of both economic growth and price stability or inflation. The Fed does not want the economy to weaken too much because reduced spending feeds into falling incomes, which begets more spending cuts. The Fed also does not want prices to rise too quickly. If there is too much money chasing too few goods, services, and financial assets, then upward pressure is exerted on prices, which can be harmful to an economy if it goes too far. In short, the Fed seeks the goldilocks economy (moderate growth and low inflation – not too hot, not too cold, just right).

How does the Fed try to maintain economic and price stability? The main policy tool the Fed uses is to control short-term interest rates. Whenever the economy is weakening or inflation is too low, the Fed can stimulate more borrowing by lowering short-term interest rates. When inflation is too high or the economy is growing faster than desired, then the Fed can raise interest rates to curtail borrowing. Recall that total spending must be financed by money or credit. The supply of money is relatively fixed most of the time. However, the supply of credit constantly changes and is largely influenced by interest rates. All else being equal, the lower the interest rate you are being charged the more money you would borrow and the higher the rate the less you would borrow. When credit is cheaper, the growth of credit typically increases and vice versa. When the Fed wants to stimulate more borrowing to support the economy or to increase inflation, it lowers rates to a level that encourages sufficient borrowing to achieve the desired outcome.

This interrelationship is why we have the familiar business cycle: The economy weakens, the Fed lowers rates, credit expands, spending picks up, and the economy improves. Eventually inflation pressures may build and the cycle reverses: The Fed raises rates, credit contracts, spending declines, the economy weakens, and inflation subsides. These cycles typically last three to seven years and are easily recognizable because of both their frequency and the relatively short time frame between inflection points. Investors have seen these cycles so many times that they have a good understanding of the pattern and how they work. Few are surprised when the cycle turns because they have firsthand experience with this dynamic. Figure 1.2 displays the normal business cycle.

Figure 1.2 The Normal Business Cycle

Most investors, economists, and even lay people are probably familiar with the above-described parts of the economic machine. What follows next is much less understood, and in fact the concepts that will be presented have been completely missed by many economists and certainly by most investors.