Tag Archives: economy

IMF praises Switzerland’s handling of the pandemic

According to the International Monetary Fund (IMF), Switzerland has navigated the COVID-19 pandemic well up to now and has been able to limit the decline in economic output. Economic measures should now be geared towards a strong and sustainable recovery. The IMF expects Swiss growth to reach 3.5% in 2021. It sees pension reforms and climate change as long-term challenges.

In 2020, the Swiss economy contracted by 2.9%, less than other European advanced economies. According to the IMF, the impact was cushioned by the solid public and household finances, competitive export industries, the large and well-capitalised financial sector, low dependency on contact-intensive sectors, the well-resourced healthcare system and targeted containment measures. The swift emergency measures exceeding 10% of GDP to provide targeted support for households and businesses were also crucial in curbing the economic slowdown.

Given the ongoing uncertainty and fiscal policy leeway, the IMF recommends maintaining targeted support for demand until the recovery is secured. In view of the still subdued outlook for inflation, the IMF additionally advises keeping monetary policy accommodative. In the event of large capital inflows into Switzerland and strong appreciation pressure on the Swiss franc, this could also include forex market interventions.

The Swiss banking sector entered the COVID-19 crisis with strong buffers and has incurred only limited losses so far. The IMF recommends continuing to keep an eye on real estate price developments, monitoring financial market participants’ risk controls and buffers, and taking early action if needed.

In order to preserve jobs, the IMF believes that crisis-related support measures in the labour market should be maintained until a sustained recovery is under way. At the same time, it cautions that keeping support measures too long could impede necessary structural adjustments.

In the longer term, the IMF recommends supporting digital and sustainable growth with efficient and targeted measures. The required investments, including in the energy system, transport and building renovation, must take account of synergies with ongoing programmes and ensure high effectiveness and efficiency of expenditure.

Finally, the IMF considers more far-reaching reforms to secure pension benefits in the longer term to be important, especially in view of rising life expectancy. Among other things, the retirement age should be raised more significantly and linked to life expectancy.

The IMF delegation conducted this year’s Article IV Consultation from 17 March to 7 April 2021 via video conferences, following the cancellation of last year’s evaluation because of the pandemic. The regular evaluation of the economic and financial situation of its member states within the scope of the Article IV Consultation is a core element of the IMF’s economic policy monitoring activities.

Jerome H. Powell: Semiannual Monetary Policy Report to the Congress

Chairman Brown, Ranking Member Toomey, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report.

At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities. Today I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread. The resurgence in COVID-19 cases, hospitalizations, and deaths in recent months is causing great hardship for millions of Americans and is weighing on economic activity and job creation. Following a sharp rebound in economic activity last summer, momentum slowed substantially, with the weakness concentrated in the sectors most adversely affected by the resurgence of the virus. In recent weeks, the number of new cases and hospitalizations has been falling, and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.

Household spending on services remains low, especially in sectors that typically require people to gather closely, including leisure and hospitality. In contrast, household spending on goods picked up encouragingly in January after moderating late last year. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. The overall recovery in economic activity since last spring is due in part to unprecedented fiscal and monetary actions, which have provided essential support to many households, businesses, and communities.

As with overall economic activity, the pace of improvement in the labor market has slowed. Over the three months ending in January, employment rose at an average monthly rate of only 29,000. Continued progress in many industries has been tempered by significant losses in industries such as leisure and hospitality, where the resurgence in the virus and increased social distancing have weighed further on activity. The unemployment rate remained elevated at 6.3 percent in January, and participation in the labor market is notably below pre-pandemic levels. Although there has been much progress in the labor market since the spring, millions of Americans remain out of work. As discussed in the February Monetary Policy Report, the economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers and for African Americans, Hispanics, and other minority groups. The economic dislocation has upended many lives and created great uncertainty about the future.

The pandemic has also left a significant imprint on inflation. Following large declines in the spring, consumer prices partially rebounded over the rest of last year. However, for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft. Overall, on a 12-month basis, inflation remains below our 2 percent longer-run objective.

While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year. In particular, ongoing progress in vaccinations should help speed the return to normal activities. In the meantime, we should continue to follow the advice of health experts to observe social-distancing measures and wear masks.

Monetary Policy

I will now turn to monetary policy. In the second half of last year, the Federal Open Market Committee completed our first-ever public review of our monetary policy strategy, tools, and communication practices. We undertook this review because the U.S. economy has changed in ways that matter for monetary policy. The review’s purpose was to identify improvements to our policy framework that could enhance our ability to achieve our maximum-employment and price-stability objectives. The review involved extensive outreach to a broad range of people and groups through a series of Fed Listens events.

As described in the February Monetary Policy Report, in August, the Committee unanimously adopted its revised Statement on Longer-Run Goals and Monetary Policy Strategy. Our revised statement shares many features with its predecessor. For example, we have not changed our 2 percent longer-run inflation goal. However, we did make some key changes. Regarding our employment goal, we emphasize that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for low- and moderate-income communities. In addition, we state that our policy decisions will be informed by our “assessments of shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”1 This change means that we will not tighten monetary policy solely in response to a strong labor market. Regarding our price-stability goal, we state that we will seek to achieve inflation that averages 2 percent over time. This means that, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. With this change, we aim to keep longer-term inflation expectations well anchored at our 2 percent goal. Well-anchored inflation expectations enhance our ability to meet both our employment and inflation goals, particularly in the current low interest rate environment in which our main policy tool is likely to be more frequently constrained by the lower bound.

We have implemented our new framework by forcefully deploying our policy tools. As noted in our January policy statement, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial further progress has been made toward our goals. These purchases, and the associated increase in the Federal Reserve’s balance sheet, have materially eased financial conditions and are providing substantial support to the economy. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.

Since the onset of the pandemic, the Federal Reserve has been taking actions to support more directly the flow of credit in the economy, deploying our emergency lending powers to an unprecedented extent, enabled in large part by financial backing and support from Congress and the Treasury. Although the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) facilities are no longer open to new activity, our other facilities remain in place.

We understand that our actions affect households, businesses, and communities across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.

Jerome H. Powell: Getting Back to a Strong Labor Market

Chair Jerome H. Powell

At the Economic Club of New York 

Today I will discuss the state of our labor market, from the recent past to the present and then over the longer term. A strong labor market that is sustained for an extended period can deliver substantial economic and social benefits, including higher employment and income levels, improved and expanded job opportunities, narrower economic disparities, and healing of the entrenched damage inflicted by past recessions on individuals’ economic and personal well-being. At present, we are a long way from such a labor market. Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity.

The Labor Market of a Year Ago

We need only look to February of last year to see how beneficial a strong labor market can be. The overall unemployment rate was 3.5 percent, the lowest level in a half-century. The unemployment rate for African Americans had also reached historical lows (figure 1). Prime-age labor force participation was the highest in over a decade, and a high proportion of households saw jobs as “plentiful.”1 Overall wage growth was moderate, but wages were rising more rapidly for earners on the lower end of the scale. These encouraging statistics were reaffirmed and given voice by those we met and conferred with, including the community, labor, and business leaders; retirees; students; and others we met with during the 14 Fed Listens events we conducted in 2019.2

Many of these gains had emerged only in the later years of the expansion. The labor force participation rate, for example, had been steadily declining from 2008 to 2015 even as the recovery from the Global Financial Crisis unfolded. In fact, in 2015, prime-age labor force participation—which I focus on because it is not significantly affected by the aging of the population—reached its lowest level in 30 years even as the unemployment rate declined to a relatively low 5 percent. Also concerning was that much of the decline in participation up to that point had been concentrated in the population without a college degree (figure 2). At the time, many forecasters worried that globalization and technological change might have permanently reduced job opportunities for these individuals, and that, as a result, there might be limited scope for participation to recover.

Fortunately, the participation rate after 2015 consistently outperformed expectations, and by the beginning of 2020, the prime-age participation rate had fully reversed its decline from the 2008-to-2015 period. Moreover, gains in participation were concentrated among people without a college degree. Given that U.S. labor force participation has lagged relative to other advanced economy nations, this progress was especially welcome (figure 3).3

As I mentioned, we also saw faster wage growth for low earners once the labor market had strengthened sufficiently. Nearly six years into the recovery, wage growth for the lowest earning quartile had been persistently modest and well below the pace enjoyed by other workers. At the tipping point of 2015, however, as the labor market continued to strengthen, the trend reversed, with wage growth for the lowest quartile consistently and significantly exceeding that of other workers (figure 4).

At the end of 2015, the Black unemployment rate was still quite elevated, at 9 percent, despite the relatively low overall unemployment rate. But that disparity too began to shrink; as the expansion continued beyond 2015, Black unemployment reached a historic low of 5.2 percent, and the gap between Black and white unemployment rates was the narrowest since 1972, when data on unemployment by race started to be collected. Black unemployment has tended to rise more than overall unemployment in recessions but also to fall more quickly in expansions.4 Over the course of a long expansion, these persistent disparities can decline significantly, but, without policies to address their underlying causes, they may increase again when the economy ultimately turns down.

These late-breaking improvements in the labor market did not result in unwanted upward pressures on inflation, as might have been expected; in fact, inflation did not even rise to 2 percent on a sustained basis. There was every reason to expect that the labor market could have strengthened even further without causing a worrisome increase in inflation were it not for the onset of the pandemic.

The Labor Market Today

The state of our labor market today could hardly be more different. Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared. Employment in January of this year was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath (figure 5).

After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948.5 Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce. At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January. In addition, the Bureau of Labor Statistics reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January (figure 6).

Unfortunately, even those grim statistics understate the decline in labor market conditions for the most economically vulnerable Americans. Aggregate employment has declined 6.5 percent since last February, but the decline in employment for workers in the top quartile of the wage distribution has been only 4 percent, while the decline for the bottom quartile has been a staggering 17 percent (figure 7). Moreover, employment for these workers has changed little in recent months, while employment for the higher-wage groups has continued to improve. Similarly, the unemployment rates for Blacks and Hispanics have risen significantly more than for whites since February 2020 (figure 8). As a result, economic disparities that were already too wide have widened further.

In the past few months, improvement in labor market conditions stalled as the rate of infections sharply increased. In particular, jobs in the leisure and hospitality sector dropped over 1/2 million in December and a further 61,000 in January. The recovery continues to depend on controlling the spread of the virus, which will require mass vaccinations in addition to continued vigilance in social distancing and mask wearing in the meantime.

Since the onset of the pandemic, we have been concerned about its longer-term effects on the labor market. Extended periods of unemployment can inflict persistent damage on lives and livelihoods while also eroding the productive capacity of the economy.6 And we know from the previous expansion that it can take many years to reverse the damage.

At the start of the pandemic, the increase in unemployment was almost entirely due to temporary job losses.7 Temporarily laid-off workers tend to return to work much more quickly, on average, than those whose ties to their former employers are permanently severed. But as some sectors of the economy have continued to struggle, permanent job loss has increased (figure 9). So too has long-term unemployment. Still, as of January, the level of permanent job loss, as a fraction of the labor force, was considerably smaller than during the Great Recession. Research shows that the Paycheck Protection Program has played an important role in limiting permanent layoffs and preserving small businesses.8 The renewal of the program this year in the face of another surge in COVID-related job cuts is an encouraging development.

Of course, in a healthy market-based economy, perpetual churn will always render some jobs obsolete as they are replaced by new employment opportunities. Over time, workers and capital move from firm to firm and from sector to sector. It is likely that the pandemic has both increased the need for such movements and brought forward some movement that would have occurred eventually.9

Getting Back to a Strong Labor Market

So how do we get from where we are today back to a strong labor market that benefits all Americans and that starts to heal the damage already done? And what can we do to sustain those benefits over time? Experience tells us that getting to and staying at full employment will not be easy. In the near term, policies that bring the pandemic to an end as soon as possible are paramount. In addition, workers and households who struggle to find their place in the post-pandemic economy are likely to need continued support. The same is true for many small businesses that are likely to prosper again once the pandemic is behind us.

Also important is a patiently accommodative monetary policy stance that embraces the lessons of the past—about the labor market in particular and the economy more generally. I described several of those important lessons, as well as our new policy framework, at the Jackson Hole conference last year.10 I have already mentioned the broad-based benefits that a strong labor market can deliver and noted that many of these benefits only arose toward the end of the previous expansion. I also noted that these benefits were achieved with low inflation. Indeed, inflation has been much lower and more stable over the past three decades than in earlier times.

In addition, we have seen that the longer-run potential growth rate of the economy appears to be lower than it once was, in part because of population aging, and that the neutral rate of interest—or the rate consistent with the economy being at full employment with 2 percent inflation—is also much lower than before. A low neutral rate means that our policy rate will be constrained more often by the effective lower bound. That circumstance can lead to worse economic outcomes—particularly for the most economically vulnerable Americans.

To take these economic developments into account, we made substantial revisions to our monetary policy framework, as described in the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy.11 This revised statement shares many features with its predecessor, including our view that longer-run inflation of 2 percent is most consistent with our mandate to promote maximum employment and price stability. But it also has some innovations.

The revised statement emphasizes that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities. Recognizing the economy’s ability to sustain a robust job market without causing an unwanted increase in inflation, the statement says that our policy decisions will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”12 This means that we will not tighten monetary policy solely in response to a strong labor market. Finally, to counter the adverse economic dynamics that could ensue from declines in inflation expectations in an environment where our main policy tool is more frequently constrained, we now explicitly seek to achieve inflation that averages 2 percent over time. This means that following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.

Our January postmeeting statement on monetary policy implements this new framework.13 In particular, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities by $80 billion and $40 billion per month, respectively, until substantial further progress has been made toward our maximum-employment and price-stability goals.

The Broad Responsibility for Achieving Maximum Employment
Seventy-five years ago, in the wake of WWII, the United States faced the challenge of reemploying millions amid a major restructuring of the economy toward peacetime ends.14 Part of Congress’s response was the Employment Act of 1946, which states that “it is the continuing policy and responsibility of the federal government to use all practicable means . . . to promote maximum employment.”15 As later amended in the Humphrey-Hawkins Act, this provision formed the basis of the employment side of the Fed’s dual mandate. My colleagues and I are strongly committed to doing all we can to promote this employment goal.

Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector. The potential benefits of investing in our nation’s workforce are immense. Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families.16 I am confident that with our collective efforts across the government and the private sector, our nation will make sustained progress toward our national goal of maximum employment.

Richard H. Clarida: U.S. Economic Outlook and Monetary Policy

Vice Chair Richard H. Clarida

At the C. Peter McColough Series on International Economics Council on Foreign Relations, New York, New York 

It is my pleasure to meet virtually with you today at the Council on Foreign Relations.1 I regret that we are not doing this session in person, as we did last year, and I hope the next time I am back, we will be gathering together in New York City again. I look forward to my conversation with Steve Liesman and to your questions, but first, please allow me to offer a few remarks on the economic outlook, Federal Reserve monetary policy, and our new monetary policy framework.

Current Economic Situation and Outlook
In the second quarter of last year, the COVID-19 (coronavirus disease 2019) pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. Economic activity rebounded robustly in the third quarter and has continued to recover in the fourth quarter from its depressed second-quarter level, though the pace of improvement has moderated. Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level, supported in part by federal stimulus payments and expanded unemployment benefits. In contrast, spending on services remains well below pre-pandemic levels, particularly in sectors that typically require people to gather closely, including travel and hospitality. In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained, as many people were able to return to work. Inflation, following large declines in the spring of 2020, picked up over the summer but has leveled out more recently; for those sectors that have been most adversely affected by the pandemic, price increases remain subdued.

While gross domestic product growth in the fourth quarter downshifted from the once-in-a-century 33 percent annualized rate of growth reported in the third quarter, it is clear that since the spring of 2020, the economy has turned out to be more resilient in adapting to the virus, and more responsive to monetary and fiscal policy support, than many predicted. Indeed, it is worth highlighting that in the baseline projections of the Federal Open Market Committee (FOMC) summarized in the latest Summary of Economic Projections (SEP), most of my colleagues and I revised up our outlook for the economy over the medium term, projecting a relatively rapid return to levels of employment and inflation consistent with the Federal Reserve’s statutory mandate as compared with the recovery from the Global Financial Crisis (GFC).2 In particular, the median FOMC participant projects that by the end of 2023—a little less than three years from now—the unemployment rate will have fallen below 4 percent, and PCE (personal consumption expenditures) inflation will have returned to 2 percent. Following the GFC, it took more than eight years for employment and inflation to return to similar mandate-consistent levels.

While the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished. The two new SEP charts that we released for the first time following the December FOMC meeting speak to these issues by providing information on how the risks and uncertainties that surround the modal or baseline projections have evolved over time. While nearly all participants continued to judge that the level of uncertainty about the economic outlook remains elevated, fewer participants saw the balance of risks as weighted to the downside than in September. Although a little more than half of participants judged risks to be broadly balanced for economic activity, a similar number continued to see risks weighted to the downside for inflation.

The Latest FOMC Decision and the New Monetary Policy Framework
At our most recent FOMC meetings, the Committee made important changes to our policy statement that upgraded our forward guidance about the future path of the federal funds rate and asset purchases, and that also provided unprecedented information about our policy reaction function. As announced in the September statement and reiterated in November and December, with inflation running persistently below 2 percent, our policy will aim to achieve inflation outcomes that keep inflation expectations well anchored at our 2 percent longer-run goal.3 We expect to maintain an accommodative stance of monetary policy until these outcomes—as well as our maximum-employment mandate—are achieved. We also expect it will be appropriate to maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.

In addition, in the December statement, we combined our forward guidance for the federal fund rate with enhanced, outcome-based guidance about our asset purchases. We indicated that we will continue to increase our holdings of Treasury securities by at least $80 billion per month and our holdings of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward our maximum-employment and price-stability goals.

The changes to the policy statement that we made over the fall bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August.4 In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC’s estimates of “shortfalls [emphasis added] of employment from its maximum level”—not “deviations.” This language means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels. With regard to our price-stability mandate, while the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate. To this end, the new statement conveys the Committee’s judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it “seeks to achieve inflation that averages 2 percent over time,” and—in the same sentence—that therefore “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” As Chair Powell indicated in his Jackson Hole remarks, we think of our new framework as an evolution from “flexible inflation targeting” to “flexible average inflation targeting.”5 While this new framework represents a robust evolution in our monetary policy strategy, this strategy is in service to the dual-mandate goals of monetary policy assigned to the Federal Reserve by the Congress—maximum employment and price stability—which remain unchanged.6

Concluding Remarks
While our interest rate and balance sheet tools are providing powerful support to the economy and will continue to do so as the recovery progresses, it will take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.

1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. I would like to thank Chiara Scotti for her assistance in preparing these remarks. Return to text

2. The most recent SEP is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

3. See the FOMC statements issued after the September, November, and December meetings, which are available (along with other postmeeting statements) on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

4. The statement is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htmReturn to text

5. See Jerome H. Powell (2020), “New Economic Challenges and the Fed’s Monetary Policy Review,” speech delivered at “Navigating the Decade Ahead: Implications for Monetary Policy,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo. (via webcast), August 27. Return to text

6. See Richard H. Clarida (2020), “The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution,” speech delivered at the Peterson Institute for International Economics, Washington (via webcast), August 31; and Richard H. Clarida (2020), “The Federal Reserve’s New Framework: Context and Consequences,” speech delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington (via webcast), November 16. 

Federal Reserve issues FOMC statement – December 16, 2020

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

Implementation Note issued December 16, 2020

RBA Minutes of the December Monetary Policy Meeting

Members participating

Philip Lowe (Governor and Chair), Guy Debelle (Deputy Governor), Mark Barnaba AM, Wendy Craik AM, Ian Harper AO, Steven Kennedy PSM, Allan Moss AO, Carol Schwartz AO, Catherine Tanna

Others participating

Luci Ellis (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), Tony Richards (Head, Payments Policy Department)

Anthony Dickman (Secretary), Ellis Connolly (Deputy Secretary), Alexandra Heath (Head, International Department), Bradley Jones (Head, Economic Analysis Department), Marion Kohler (Head, Domestic Markets Department)

Michele Bullock (Assistant Governor, Financial System), for the paper on the future of money

International economic developments

Members commenced their discussion of the global economy by noting that some potential COVID-19 vaccines were reported as having a high efficacy rate and were nearing approval for emergency use in the United States, United Kingdom and the European Union. It was noted that should these vaccines prove effective in practice and be made widely available on a timely basis, this would reduce downside risks to the medium-term economic outlook.

Nevertheless, infections had risen notably in a number of large advanced economies since September. Hospitalisation rates had exceeded earlier peaks in many countries, and stress was being placed on some healthcare systems. Many governments had responded by tightening containment measures, including the re-introduction of full or partial lockdowns. This had contributed to a welcome reduction in the flow of new cases in Europe in recent weeks, while in the United States, where restrictions had been less stringent, numbers of new cases were yet to slow appreciably.

Members noted that global economic activity had bounced back faster than anticipated in the September quarter, but the tightening in containment measures in the December quarter had resulted in a loss of economic momentum. In Europe, some economies were now expected to contract in the December quarter. Members observed that, once most restrictions were lifted, the level of GDP in many economies had tended to recover to around 4 to 5 per cent below pre-pandemic levels. This sizeable shortfall reflected the remaining restrictions on some services industries as well as risk aversion and cost-cutting by firms, which had weighed on employment and investment.

In Asia, differences in the industry composition of economies explained some of the variation in recovery paths. Economies with large automotive industries had experienced a slower recovery in industrial production, compared with those whose exports of technology and electronics are more important. It was also noted that the composition of fiscal stimulus in China had contributed to the very strong rebound in industrial production there.

Members noted that housing prices in a number of advanced economies had been surprisingly resilient this year, and some economies had seen a notable increase in housing prices in recent months. New Zealand had experienced strong ongoing housing demand from population growth, expatriate buying interest and an earlier easing in lending standards. By comparison, these factors had been less relevant in Australia and, partly as a result, the increase in housing prices in Australia this year had been considerably smaller than in a number of other advanced economies.

Members discussed how global developments had affected Australian trade since the pandemic. Early in the pandemic, weak external demand had depressed exports, while supply disruptions had affected imports (as they had in a number of economies). The imposition by Chinese authorities of import bans and other obstacles to imports of some Australian products, particularly agricultural products and, more recently, coal, had also had an effect. However, it was also noted that Chinese demand for Australian iron ore exports remained firm.

Domestic economic developments

Turning to the domestic economy, members noted that the recovery had established reasonable momentum, aided by the lifting of restrictions in Victoria. Expectations for GDP growth in the September and December quarters had been upgraded over the preceding month, and employment had also recovered faster than anticipated. At the same time, members noted that there continued to be a significant amount of spare capacity in the labour market and the economy more generally. The recovery was still expected to be uneven and protracted, with inflation remaining low. Substantial policy support would therefore be required for a considerable period.

In reviewing recent data, members noted that the rebound in household consumption was well under way and evolving broadly as expected following a record contraction in the June quarter. A bounce-back in spending in Victoria had assisted this, consistent with more consumption possibilities opening up in that state. Indicators such as retail trade, new car sales and payments information indicated that the recovery in consumption would continue in the December quarter; high household savings was also likely to support consumption in the period ahead. At the same time, the ability of households to consume some services would continue to be constrained by pandemic-related restrictions. By the end of the year the level of consumption was still expected to be lower than a year earlier, in line with the experience of some other economies.

Members noted that conditions in the domestic housing market were improving but uneven. Regional housing prices had increased by more than those in capital cities since the onset of the pandemic. There was also considerable variation in changes in housing prices across the capital cities, with conditions in Sydney and Melbourne more subdued than elsewhere in the country. In addition, within Sydney and Melbourne in particular, conditions in the detached housing market were firmer than for higher-density markets. Overall, national housing prices had increased only a little since the outbreak of the pandemic.

Members agreed that an important factor in national housing market conditions had been the slowdown in population growth as a result of the closure of international borders; this had been more consequential in Australia than in many other economies. Members discussed how the decline in net overseas migration had affected conditions in the rental market in particular, with rents falling and rental vacancy rates in inner-city Sydney and Melbourne around their highest levels in many years. Rental vacancy rates were much lower in Perth, where growth in new supply had been relatively modest in recent years and international students accounted for a smaller share of rental housing demand.

Members noted that the recovery in the labour market was more advanced than expected, with employment having grown strongly in October. This was despite a tapering in the JobKeeper program and some restrictions on activity remaining in place in Melbourne during most of the month. Victoria accounted for around half of nationwide employment growth in October, in part because of the pick-up in employment in construction and manufacturing in that state as restrictions began to be eased. Related to the stronger employment outcomes, members also noted that the rebound in the participation rate had been surprisingly swift.

Despite these positive developments, members noted that the unemployment rate had ticked up in recent months and that broader measures of labour underutilisation remained high. Hours worked were around 4 per cent lower than before the pandemic, and many employed workers were still on reduced or zero hours. The recovery in employment and average hours worked for full-time workers had been much more subdued compared with those working part time. Members agreed that, on the whole, there was still a significant amount of spare capacity in the labour market and that this would remain a key policy challenge for some time.

A further indication of spare capacity in the labour market was low wages growth. Members noted that growth in the wage price index slowed to 0.1 per cent in the September quarter to be just 1.4 per cent in year-ended terms. This was the slowest wages growth in the two-decade history of the series. Over recent quarters, the slowdown in growth in wages set in individual agreements largely reflected wage freezes for many private sector employees and some, mostly temporary, wage reductions. The slowdown in award wages growth in the September quarter had been even more pronounced than in individual agreements, in part reflecting deferred increases for many awards. Members also observed that if new collective agreements (mostly enterprise bargaining agreements) were established at lower rates of growth than expiring agreements, this would place further downward pressure on wages growth. It was noted that a substantial tightening in the labour market would be required to lift wages growth and inflation outcomes over the medium term.

Members noted that non-mining business investment was expected to have declined further in the September quarter and the outlook remained weak. Surveys of businesses’ investment intentions indicated that expenditure on machinery and equipment and on non-residential construction would remain weak, although not as weak as expected a few months earlier; investment in machinery and equipment would have declined further in the absence of policy measures designed to encourage some firms to bring forward investment. Members discussed the risk that a prolonged period of weak capital investment could weigh on the economy’s productive capacity over time.

Members concluded their discussion of domestic economic conditions by noting that the unprecedented degree of fiscal and monetary policy stimulus since the outbreak of the pandemic had played a key role in supporting the economy. As part of the national fiscal response, state and territory governments had recently announced welcome additional increases in expenditure; this, combined with lower revenues, had seen the consolidated state and territory budget deficit for 2020/21 increase to around 5 per cent of output. The consolidated deficit across the Australian and state governments in 2020/21 was expected to be around 15 per cent of GDP, a substantial increase from 2019/20. Members agreed that national fiscal settings will provide significant support to the recovery in the period ahead.

International financial markets

Members observed that financial conditions were highly accommodative globally. News of progress in developing effective vaccines had boosted equity markets and had lowered credit risk premiums further during November, notwithstanding rising COVID-19 case numbers and tighter lockdown measures in many jurisdictions.

In the advanced economies, expectations for any further reductions in central banks’ policy rates had been scaled back, partly because of upward revisions to the economic outlook and partly because other policy tools were providing significant stimulus and could be scaled up if needed. At its most recent policy meeting, the US Federal Reserve had judged that immediate adjustments to the pace and composition of its asset purchases had not been necessary. The European Central Bank had signalled that it was likely to expand some of its programs at its upcoming meeting, but a further reduction in its negative policy rate was no longer anticipated by market participants. The Bank of England had announced an expansion of its asset purchase program in November and the Reserve Bank of New Zealand had introduced a program for providing long-term loans to banks. In contrast to previous months, market pricing had suggested that negative policy rates were unlikely to be adopted in either of these two economies.

Yields on long-term government bonds in the advanced economies had risen a little in response to the positive news on COVID-19 vaccines, but had remained at very low levels. Central bank bond buying programs had provided some offset to the effect on yields stemming from other influences, including the ongoing high level of government bond issuance. Members noted that, relative to GDP, the size of the Bank’s balance sheet was at the lower end of the range observed in other countries, although it was now rising steadily under the bond purchase program that had commenced in November.

Members noted that a range of asset prices had been supported by the more positive global outlook and the very accommodative stance of monetary policy. Spreads between corporate and government bond yields had narrowed further. Globally, equity prices had increased strongly following the vaccine developments, rising by at least 10 per cent in many cases, including in Australia. A reduction in uncertainty following the outcome of the US election, and better-than-expected earnings reports in advanced economies, had also supported equity prices.

Chinese government bond yields had increased and the Chinese renminbi had appreciated in recent months. Relatively higher interest rates and China’s recent inclusion in some global benchmark indices had encouraged continued inflows into Chinese bond markets. Also, Chinese authorities had continued to improve foreign access to these markets. Reflecting the better outlook for global growth and trade, many emerging market economies had experienced significant portfolio inflows and appreciating exchange rates.

The US dollar had depreciated during November in response to the improved medium-term outlook for global growth; on a trade-weighted basis it was a little below its level at the start of 2020. The same factors had supported commodity prices and seen the Australian dollar appreciate in November; on a trade-weighted basis the exchange rate had remained around 2 per cent below its peak in early September.

Domestic financial markets

Members noted that the most recent policy package had been working as expected. Money market rates had declined to be close to zero and the yield on the 3-year Australian Government bond had fallen to levels consistent with the Board’s target, aided by the Bank purchasing $5 billion of that bond in November. In addition, $19 billion of longer-dated government bonds had been purchased under the bond purchase program.

The bond purchase program had put downward pressure on bond yields and contributed to a lower exchange rate than otherwise. Yields on 10-year Australian Government Securities (AGS) had declined relative to 10-year government bond yields in other advanced countries in anticipation of the Bank’s bond purchase program. Since the announcement of the program, yields on 10-year AGS had remained at similar levels to those on 10-year US Treasury securities. The spread of semi-government bond yields relative to AGS had increased a little following the release of the state government budgets, but yields had remained at historically low levels. The markets for AGS and semi-government debt had continued to function smoothly.

Members observed that average outstanding interest rates on housing and business loans had declined to historic lows. Since the start of November, announcements of reductions in borrowing rates had largely been for fixed-rate housing loans as well as business loans under the Government’s Coronavirus Small and Medium Enterprises Guarantee Scheme. Some banks had also reduced rates on a range of deposit products.

Demand for housing finance had increased in recent months, particularly for loans to owner-occupiers, and credit to investors had stopped declining. Members noted that, in contrast, demand for business credit had remained weak and business credit had declined since May, unwinding the increase over March and April, when businesses had drawn on credit lines for precautionary reasons. Payments into offset and redraw accounts had remained high in October.

The future of money

Members considered a special paper on the future of money and changes in the way payments are made. They discussed the longer-term trend towards the use of electronic payment methods by households and the apparent acceleration in this trend as a result of the pandemic. Members noted that the shift from cash to electronic payments is further advanced in Australia than in a number of other countries. However, demand for cash as a store of value had continued to grow in Australia and most other advanced economies.

Members discussed different possible design features for a retail central bank digital currency (CBDC) and the associated public policy issues. They noted that there has been significant innovation in the Australian payments system in recent years, including the provision of real-time account-to-account payments that are available on a 24/7 basis. A retail CBDC might assist with some particular use cases, but it could fundamentally change the structure of the financial system and introduce new financial stability risks. It therefore did not appear that a public policy case for a retail CBDC currently existed in Australia. Members noted that there could be stronger arguments in favour of a wholesale CBDC and that it was important for the Bank to continue to conduct research in this area and monitor developments in other jurisdictions.

Considerations for monetary policy

In considering the policy decision, members observed that the global outlook remained uncertain. Infection rates had risen sharply in Europe and the United States and the recoveries in these economies had lost momentum or even reversed. However, the news about vaccines had been positive, which should support the recovery of the global economy. The recovery was also dependent on ongoing support from both fiscal and monetary policy. In labour markets in most countries, hours worked were noticeably below pre-pandemic levels. Inflation remained very low and below central bank targets.

In Australia, the economic recovery was under way and recent data had generally been better than expected. Consumer spending had risen as restrictions were eased, business and consumer confidence had lifted and housing markets had generally proved resilient. Employment had been recovering strongly and the peak in the unemployment rate was likely to be lower than the 8 per cent rate expected a month earlier. Nevertheless, the recovery was still expected to be uneven and protracted, and it remained dependent on significant policy support and favourable health outcomes. It would take some time for output to reach its pre-pandemic level and an extended period of high unemployment was in prospect. The high unemployment rate and excess capacity across the economy more broadly were expected to result in subdued wages growth and inflation over coming years. Given this environment, the Board viewed addressing the high rate of unemployment as an important national priority.

Following the significant policy changes made at the Board’s recent meetings, members decided to maintain the existing policy settings. Members agreed that the Board’s policy measures had lowered interest rates across the yield curve, which was assisting the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. The Term Funding Facility (TFF) was also supporting the supply of credit to businesses. The Board’s decisions were complementary to the significant steps taken by governments in Australia to support jobs and economic growth.

Since the start of the year, the Bank’s balance sheet had increased by around $130 billion. Authorised deposit-taking institutions had drawn down $84 billion of low-cost funding through the TFF and had access to a further $105 billion under the facility. Over the preceding month, the Bank had purchased $19 billion of government bonds under the bond purchase program and a further $5 billion of AGS in support of the 3-year yield target. The Bank remained prepared to purchase bonds in whatever quantity required to achieve the 3-year yield target. Members noted that the Australian banking system, with its strong capital and liquidity buffers, had remained resilient and was helping the economy traverse the current difficult period.

Given the outlook for both employment and inflation, members acknowledged that monetary and fiscal support will be required for some time. The Board remains committed to not increasing the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would have to be materially higher than recent levels. This would require significant gains in employment and a return to a tight labour market. Given the outlook, the Board does not expect to increase the cash rate for at least 3 years. The Board remains of the view that it would be appropriate to remove the yield target before the cash rate itself were increased.

Members agreed to keep the size of the bond purchase program under review. At its future meetings, the Board will closely monitor the effects of the bond purchases on the economy and on market functioning, as well as the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

The decision

The Board reaffirmed the existing policy settings, namely:

  • a target for the cash rate of 0.1 per cent
  • an interest rate of zero on Exchange Settlement balances held by financial institutions at the Bank
  • a target of around 0.1 per cent for the yield on the 3-year Australian Government bond
  • the expanded Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses, with an interest rate on new drawings of 0.1 per cent
  • the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the 6 months following the Board meeting on 3 November 2020.

Statement by Philip Lowe, RBA Governor: Monetary Policy Decision AUD

At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic. With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs. Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago. Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.

The elements of today’s package are as follows:

  • a reduction in the cash rate target to 0.1 per cent
  • a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent
  • a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent
  • a reduction in the interest rate on Exchange Settlement balances to zero
  • the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.

Under the program to purchase longer-dated bonds, the Bank will buy bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split. These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian Government securities. Further details of the auctions are provided in the accompanying market notice.

The Reserve Bank of Australia remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target. Any bonds purchased to support this target would be in addition to the $100 billion bond purchase program.

At today’s meeting, the Board also considered an updated set of economic forecasts. The global economy has been recovering from the initial virus outbreaks, with the recovery most advanced in China. Even so, output in most countries remains well short of pre-pandemic levels and recent virus outbreaks pose a downside risk to the outlook, particularly in Europe.

In Australia, the economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria. It will, however, take some time to reach the pre-pandemic level of output. In the central scenario, GDP growth is expected to be around 6 per cent over the year to June 2021 and 4 per cent in 2022. The unemployment rate is expected to remain high, but to peak at a little below 8 per cent, rather than the 10 per cent expected previously. At the end of 2022, the unemployment rate is forecast to be around 6 per cent.

This extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022. In the most recent quarter, year-ended CPI inflation was 0.7 per cent and, in underlying terms, inflation was 1¼ per cent.

The Board views addressing the high rate of unemployment as an important national priority. Today’s policy package, together with the earlier measures by the RBA, will help in this effort. The RBA’s response is complementary to the significant steps taken by the Australian Government, including in the recent budget, to support jobs and economic growth.

The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. At the same time, the RBA’s Term Funding Facility is contributing to low funding costs and supporting the supply of credit to the economy. To date, authorised deposit-taking institutions have drawn $83 billion under this facility and have access to a further $104 billion.

Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least three years. The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

Investing in China’s Stock Exchanges

China is the world’s second-largest economy, with a population of 1.4 billion contributing around 30 per cent of global growth in the last eight years.

China made impressive economic and social developments the previous years, but the market reforms are incomplete, and it’s per capita income remains at 25% of the average of the high-income countries. Chinese Government forecasts that it will eliminate absolute poverty by 2022. Statistics show that there are an estimated 372.8 million people below the “upper middle income” international poverty line of $5.50 a day.   

The Chinese economy has registered an impressive growth the last decade but now faces a major threat as USA has imposed tariffs to Chinese products. Chinese companies now facing increasing market-access challenges in the US, especially in B2B markets. A recent example is the ban of Huawei Technologies and ZTE from the telecom-infrastructure market, but also, federal government restricting its purchases of goods and services from Chinese companies but also discourages its core vendors from buying from China.

According to many analysts, China will overtake the U.S. by 2030 to become the No. 1 economy by GDP in the world.  China’s size and GDP growth rate, which hit 6.6% in 2018 and forecasts setting the growth rate at 6.3% for 2019, it’s not a surprise that global traders and investors are interested in China stocks and China funds.

Investing in Chinese companies involve risks such as currency risk (forex), volatility, regulatory risks, and country risk. Traders can buy stocks listed on the main Chinese stock exchanges, the Hong Kong Stock Exchange, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. There are also many Chinese companies, that are listed in US Stock Exchanges through ADR’s.

Shenzhen Composite Index Technical Analysis

The Shenzhen Composite Index (SZSE Composite) is trading at 1631.88 registering gains for the second day in a row after yesterday the SZSE Composite tested successfully the 50-day moving average and managed to rebound keeping the bullish momentum for the index as now it trades above all major moving averages. On the upside immediate resistance stands at 1,696 the high from September 11th 2019, while the next resistance is at 1,798 the high from April 8th 2019.

Shanghai Composite Technical Analysis

The Shanghai Composite Index trading at 2,947 gaining 18.20% since the beginning of 2019 while for the 12-month period is adding 14.10%. In the daily chart, the momentum is positive as the index is trading above all major daily moving averages. The index found support at 2,920 the 100-day moving average. On the upside, first resistance for the Shanghai Composite Index stands at 3,042 the high from September 16th, while the next barrier will be the high from April 22nd at 3,274. On the flipside support for the index stands at 2,885 the 200-day moving average while next support is at 2,764 the low from August 15th.

Magnum opus: Humanity at crossroads

Every production phase or civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate that humanity is at a crossroads: up to a third world war or will humanity create new heaven on earth.

When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution. Transitions are social transformation processes that cover at least one generation (= 25 years). A transition has the following characteristics:

  • it involves a structural change of civilization or a complex subsystem of our civilization
  • it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other
  • it is the result of slow changes (changes in supplies) and fast dynamics (flows)

Examples of historical transitions are the demographical transition and the transition from coal to natural gas which caused transition in the use of energy. A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.







Figure: demographical transition

Four transition phases

In general transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  1. a pre development phase of a dynamic balance in which the present status does not visibly change
  2. a take off phase in which the process of change starts because of changes in the system
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  1. the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

The S curve of a transition

Figure: Four phases in a transition best visualized by means of an S – curve: Pre-development, Take off, Acceleration, Stabilization

Spreading process of transitions

The process of the spreading of transitions over civilizations is influenced by a number of elements:

  • physical barriers: oceans, deserts, mountain ranges, swamps, lakes
  • socio cultural barriers: difference in culture and languages
  • religious barriers
  • psychological barriers

The Neolithic transition was the most   transition for mankind. This first agricultural revolution (10000 – 3000 BC) forms the change from societies of hunter gatherers (20 – 50 people) close to water with a nomadic existence to a society of people living in settlements growing crops and animals. A hierarchical society came into existence. Joint organizations protected and governed the interests of the individual. Performing (obligatory) services for the community could be viewed as a first type of taxation. Stocks were set up with stock management, trade emerged, inequality and theft. Ways of administering justice were invented to solve conflicts within and between communities and war became a way of protecting interests.

The Neolithic revolution started in those places that were most favorable because of the climate and sources of food. In very cold, very hot or dry areas the hunter gatherer societies lasted longer. Several areas are pointed out as possible starting points: southern Anatolia, the basins the Yangtze Kiang and Yellow river in China, the valley of the Indus, the present Peru in the Andes or what is now Mexico in Central America. From these areas the revolution spread across the world.

The start of the Neolithic era and the spreading process are different in each area. In some areas the changes are relatively quick and some authors therefore like to speak of a Neolithic revolution. Modern historians prefer to speak of the Neolithic evolution. They have come to realize that in many areas the process took much longer and was much more gradual than they originally thought.

Three drastic transitions

When we look back over the past two centuries, we see three transitions taking place with far-reaching effects.

  1. The first industrial revolution

The first industrial revolution lasted from around 1780 tot 1850. It was characterized by a transition from small scale handwork to mechanized production in factories. The great catalyst in the process was the steam engine which also caused a revolution in transport as it was used in railways and shipping. The first industrial revolution was centered around the cotton industry. Because steam engines were made of iron and ran on coal, both coal mining and iron industry also flourished.

Britain was the first country that faced the industrial revolution. The steam engine was initially mainly used to power the water pumps of mines. A major change occurred in the textile industry. Because of population growth and colonial expansion the demand for cotton products quickly increased. Because spinners and weavers could not keep up with the demand, there was an urgent need for a loom with an external power unit, the power loom.

A semi-automatic shuttleless loom was invented, and a machine was created that could spin several threads simultaneously. This “Spinning Jenny”, invented in 1764 by James Hargreaves, was followed in 1779 by a greatly improved loom: ‘Mule Jenny’. At first they were water-powered, but after 1780 the steam engine had been strongly improved  so that it could also be used in the factories could be used as a power source. Now much more textiles could be produced. This was necessary because in 1750, Europe had 130 million inhabitants, but in 1850 this number had doubled, partly because of the agricultural revolution. (This went along with the industrial revolution; fertilizers were imported, drainage systems were designed and ox was replaced by the horse. By far the most important element of the agricultural revolution was the change from subsistence to production for the market.)

All those people needed clothing. Thanks to the machine faster and cheaper production was possible and labor remained cheap. The textile industry has been one of the driving forces of the industrial revolution.

Belgium becomes the first industrialized country in continental Europe. Belgium is “in a state of industrial revolution” under the rule of Napoleon Bonaparte. The industrial centers were Ghent (cotton and flax industries), Verviers (mechanized wool production), Liège (iron, coal, zinc, machinery and glass), Mons and Charleroi. On the mainland, France and Prussia followed somewhat later. In America the northeastern states of the United States followed quickly. After 1870 Japan was industrialized as the first non-Western country. The rest of Europe followed only around 1880.

The beginning of the end of this revolution was in 1845 when Friedrich Engels, son of a German textile baron, described the living conditions of the English working class in “The condition of the working class in England“.

  1. The second industrial revolution

The second industrial revolution started around 1870 and ended around 1930. It was characterized by ongoing mechanization because of the introduction of the assembly line, the replacement of iron by steel and the development of the chemical industry. Furthermore coal and water were replaced by oil and electricity and the internal combustion engine was developed. Whereas the first industrial revolution was started through (chance) inventions by amateurs, companies invested a lot of money in professional research during the second revolution, looking for new products and production methods. In search of finances small companies merged into large scale enterprises which were headed by professional managers and shares were put on the market. These developments caused the transition from the traditional family business to Limited Liability companies and multinationals.

The United States (U.S.) and Germany led the way in the Second Industrial Revolution. In the U.S. there were early experiments with the assembly line system, especially in the automotive industry. In addition, the country was a leader in the production of steel and oil. In Germany the electricity industry and the chemical industry flourished. The firms AEG and Siemens were electricity giants. German chemical companies such as AGFA and BASF had a leading share in the production of synthetic dyes, photographic and plastic products (around 1900 they controlled some 90% of the worldwide market). In the wake of these two industrial powers (which soon surpassed Britain) France, Japan and Russia followed. After the Second Industrial Revolution ​​more and more countries, on more continents, experienced a more or less modest industrial development. In some cases, the industrialization was taken in hand by the state, often with coarse coercion – such as the five-year plans in the Soviet Union.

After the roaring twenties the revolution ended with the stock exchange crash of 1929. The consequences were disastrous culminating in the Second World War.

  1. The third industrial revolution

The third industrial revolution started around 1940 and is nearing its end. The United States and Japan played a leading role in the development of computers. During the Second World War great efforts were made to apply computer technology to military purposes. After the war the American space program increased the number of applications. Japan specialized in the use of computers for industrial purposes such as the robot.

From 1970 the third industrial revolution continued to Europe. The third industrial revolution was mainly a result of a massive development of microelectronics: electronic calculators, digital watches and counters, the compact disc, the barcode etc.

The acceleration phase of the third industrial revolution started around 1980 with the advent of the microprocessor. The development of the microprocessor is also the basis of the evolution and breakthrough of computing. This had an impact in

many areas: for calculation, word processing, drawing and graphic design, regulating and controlling machines, simulating processes, capturing and processing information, monetary transactions and telecommunications. The communication phase grows enormously at the beginning of the new millennium: the digital revolution. According to many analysts now a new era has emerged: that of the information or service economy. Here the acquisition and channeling of information has become more important than pure production.

By now computer and communication technology take up an irreplaceable role in all parts of the world. More countries depend on the service sector and less on agriculture and industry.

Effects of three industrial revolutions

The first (and second revolution) transformed an agricultural society into an industrial society where mechanization (finally) relieved man of physical labor. The craft industry could not compete with the factories that put products of the same or even better quality on the market at a lower price. The result was that many small businesses went bankrupt and the former workers went to work in the factories. The effects of industrialization were seen in the process of rapid urbanization of formerly relatively small villages and towns where the new plants came. These turned into dirty and unhealthy industrial cities. Still people from the country were forced to go and work there. Because of this a new social class emerged: the workers, or the industrial proletariat. They lived in overcrowded slums in poor housing with little sanitation. The average life expectancy was low, and infant mortality high. The elite accepted the filth of the factories as the inevitable price for their success. The chimneys were symbols of economic power, but also of social inequality. You see this social inequality appear after each revolution. The gap between the bottom and the top of society becomes very large. Eventually there are inevitable responses that decrease this gap. It could be argued that the Industrial revolutions have created the conditions for a society with little or no poverty.

The third revolution transformed an industrial society into a service society. Where mechanization man relieved of physical labor, the computer relieved him of mental labor. This revolution made lower positions in industry more and more obsolete and caused the emergence of entirely new roles in the service sector.

The emergence of a stock market boom

In the development and take-off phases of the industrial revolution many new companies emerged. All these companies went through more or less the same cycle simulataneously. During the second industrial revolution these new companies emerged in the steel, oil, automotive and electrical industries, and during the third industrial revolution the new companies emerged in the hardware, software, consulting and communications industries. During the acceleration phase of a new industrial revolution many of these businesses tend to be in the acceleration phase of their life cycle, more or less in parallel.

Figure: Typical course of market development:  Introduction, Growth, Flourishing and Decline


There is an enormous increase in expected value of the shares of companies in the acceleration phase of their existence. This is the reason why shares become very expensive in the acceleration phase of a revolution.

There was also an enormous increase in price-earnings ratio of shares between 1920 – 1930, the acceleration phase of the second revolution, and between 1990 – 2000, the acceleration phase of the third revolution.

Figure:  Two industrial revolutions: Shiller PE Ratio (price / income)
Splitting shares fuels price-earnings ratio

The increase in the price-earnings ratio is amplified because many companies decide to split their shares during the acceleration phase of their existence. A stock split is required if the market value of a share has grown too large, rendering the marketability insufficient. A split increases the value of the shares because there are more potential investors when they are cheaper. Between 1920 – 1930 and 1990 – 2000 there have been huge amount of stock splits that impacted the price-earnings ratio positively.

Date Company Split
December 31, 1927 American Can 6 for 1
December 31, 1927 General Electric 4 for 1
December 31, 1927 Sears, Roebuck & Company 4 for 1
December 31, 1927 American Car & Foundry 2 for 1
December 31, 1927 American Tobacco 2 for 1
November 5, 1928 Atlantic Refining 4 for 1
December 13, 1928 General Motors 2 1/2 for 1
December 13, 1928 International Harvester 4 for 1
January 8, 1929 American Smelting 3 for 1
January 8, 1929 Radio Corporation of America 5 for 1
May 1, 1929 Wright-Aeronautical 2 for 1
May 20, 1929 Union Carbide split 3 for 1
June 25, 1929 Woolworth split 2 1/2 for 1

Table 1: Share Splits before the stock market crash of 1929


Date Company Split
January 22,1990 DuPont 3 for 1
May 14,1990 Coca-Cola Company 2 for 1
May 22, 1990 Westinghouse Electric stock 2 for 1
June 1, 1990 Woolworth Corporation 2 for 1
June 11, 1990 Boeing Company 3 for 2
May 12, 1992 Coca-Cola Company 2 for 1
May18, 1992 Walt Disney Co 4 for 1
May 26, 1992 Merck & Company 3 for 1
June 15, 1992 Proctor & Gamble 2 for 1
May 5, 1993 Goodyear Tire & Rubber Company 2 for 1
March 15, 1994 AlliedSignal Incorporated 2 for 1
April 11, 1994 Minnesota Mining & Manufacturing 2 for 1
May 16, 1994 General Electric Company 2 for 1
June 13, 1994 Chevron Corporation 2 for 1
June 27, 1994 McDonald’s Corporation 2 for 1
September 6, 1994 Caterpillar Incorporated 2 for 1
February 27, 1995 Aluminum Company of America 2 for 1
September 18, 1995 International Paper Company 2 for 1
May 13, 1996 Coca-Cola Company 2 for 1
December 11, 1996 United Technologies Corporation 2 for 1
April 11, 1997 Exxon Corporation 2 for 1
April 14, 1997 Philip Morris Companies 3 for 1
May 12, 1997 General Electric Company 2 for 1
May 28, 1997 International Business Machine 2 for 1
June 9, 1997 Boeing Company 2 for 1
June 13, 1997 DuPont Company 2 for 1
July 14, 1997 Caterpillar Incorporated 2 for 1
September 16, 1997 AlliedSignal 2 for 1
September 22, 1997 Proctor & Gamble 2 for 1
November 20, 1997 Travelers Group Incorporated 3 for 2
July 10, 1998 Walt Disney Company 3 for 1
February 17, 1999 Merck & Company 2 for 1
February 26, 1999 Alcoa Incorporated 2 for 1
March 8, 1999 McDonald’s Corporation 2 for 1
April 16, 1999 AT&T Corporate 2 for 1
April 20, 1999 Wal-Mart Incorporated 2 for 1
May 18, 1999 United Technology Corporation 2 for 1
May 27, 1999 International Business Machine 2 for 1
June 1, 1999 Citigroup Incorporated 3 for 2
December 31, 1999 Home Depot 3 for 2

Table 2: Share Splits during the period 1990-2000


Share Splits keep letting the Dow Jones Index explode

The Dow Jones Index was first published on May 26, 1896. The index was calculated by dividing the sum of all the shares of 12 companies by 12:

Dow12_May_26_1896 = (S1 + S2 + ………. + S12) / 12

On October 4, 1916, the Dow was expanded to 20 companies; 4 companies were removed and 12 were added.

Dow20_Oct_4_1916 = (S1 + S2 + ………. + S20) / 20

On December 31, 1927, two years before the stock market crash in October 1929, for the first time a number of companies split their shares. With each change in the composition of the Dow Jones and with each share split, the formula to calculate the Dow Jones is adjusted. This happens because the index, the outcome of the two formulas of the two baskets, must stay the same at the moment of change, because there can not be a gap in the graph. At first a weighted average was calculated for the shares that were split on December 31, 1927.

The formula looks like this: (American Can, split 6 to 1 is multiplied by 6, General Electric, split 4 to 1 is multiplied by 4, etc.)

Dow20_dec_31_1927 = (6.AC + 4.GE+ ……….+S20) / 20

On October 1st, 1928, the Dow Jones grows to 30 companies.

Calculating the index had to be simplified at this point because all the calculations were still done by hand. The weighted average for the split shares is removed and the Dow Divisor is introduced. The index is now calculated by dividing the sum of the share values by the Dow Divisor. Because the index for October 1st, 1928, cannot suddenly change, the Dow Divisor is initially set to 16.67. After all, the index graph for the two time periods (before and after the Dow Divisor was introduced) should still look like a single continuous line.  The calculation is now as follows:

Dow30_oct_1_1928 = (S1 + S2+ ……….+S30) / 16.67

In the fall of 1928 and the spring of 1929 (see Table 1) 8 more stock splits occur, causing the Dow Divisor to drop to 10.77.

Dow30_jun_25_1929 = (S1 + S2+ ……….+S30) / 10.77

From October 1st, 1928 onward an increase in value of the 30 shares means the index value almost doubles. From June 25th, 1929 onward it almost triples compared to a similar increase before stock splitting was introduced. Using the old formula the sum of the 30 shares would simply be divided by 30.

Figure: Dow Jones Index before and after Black Tuesday


The extreme rise in the Dow Jones in the period 1920 – 1929 and especially between 1927 – 1929, was primarily caused because the expected value of the shares of companies that are in the acceleration phase of their existence, was increasing enormously. The value of the shares is strengthened further by stock splits and as icing on the cake this value of the shares was  enlarged again in the Dow Jones Index, because behind the scenes the formula of the Dow Jones was adjusted due to stock splits.

During the acceleration phase of the third industrial revolution, 1990 – 2000, history has repeated itself. In this period there have again been many stock splits, particularly in the years 1997 and 1999.

Year DJIA Sum 30 Shares
in $




1990 2810 1643 0.586 5
1991 2610 1318 0,505 0
1992 3172 1782 0.559 4
1993 3301 1535 0.463 1
1994 3754 1675 0.447 6
1995 3834 1425 0.372 2
1996 5117 1770 0.346 2
1997 6448 2100 0.325 10
1998 7902 1985 0.251 1
1999 9181 2228 0.243 9
2000 11497 2317 0.201

Table 3: Summary DJIA, Dow Divisor and amount share splits between 1990-2000
The formula that was used on January 1, 1990 to calculate the Dow Jones:

Dow30_jan_1_1990 = (S1 + S2+ ……….+S30) / 0.586

The formula that was used on December 31, 1999 was to calculate the Dow Jones:

Dow30_dec_31_1999 = (S1 + S2+ ……….+S30) / 0.20145268

On December 31, 1999 on an increase of the 30 stocks again nearly three times as many index points, the same value increase on January 1, 1990.

Stock market indices are mirages

What does a stock exchange index like DJIA, S&P 500 or AEX mean?

The Dow Jones Industrial Average (DJIA) Index is the oldest stock index in the United States. This was a straight average of the rates of twelve shares. A select group of journalists from The Wall Street Journal decide which companies are part of the most influential index in the world market. Unlike most other indices the Dow is a price-weighted index. This means that stocks with high absolute share price have a significant impact on the movement of the index.

The S & P Index is a market capitalization weighted index. The 500 largest U.S. companies as measured by their market capitalization are included in this index, which is compiled by the credit rating agency Standard & Poor’s.

The Amsterdam Exchange index (AEX) is the main Dutch stock market index. The index displays the image of the price development of the 25 most traded shares on the Amsterdam stock exchange. From a weighted average of the prices of these shares, the position of the AEX is calculated.

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

  • An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit.
    After a period of 25 years the value of the original set of apples is compared to the value of a set of pears. At the moment only 6 of the original 30 companies that made up the set of shares of the Dow Jones at the start of the acceleration of the last revolution (in 1979) are still present.
  • Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:
    Dow1985 = (S1 + S2 + ……..+S30) / 1
    Dow2017 = (S1 + S2 + …….. + S30) / 0,146

In the nineties of  the last century many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed (which I think is wrong). An increase in share value of 1 dollar of the set of shares in 2017 results is 7.6 times more points than in 1985. The fact that in the 1990’s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 21000 points. If we used the 1985 formula it would be at 2747 points.

  • The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take-off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition.
    From 1980 onwards 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft) , the engines of the latest revolution, were added to the Dow Jones and 5 financial institutions, which always play an important role in every transition.
    This is actually a kind of pyramid scheme. All goes well as long as companies are added that are in their take-off phase or acceleration phase. At the end of a transition, however, there will be fewer companies in those phases. The last 18 years were 21 companies replaced in the Dow Jones, a percentage of 70%.

Overview modifications Dow Jones from 1997:

21 winners in  —   21 losers out, a figure of 70%

March 19, 2015: Apple replaced AT & T. In order to make Apple suitable for the Dow Jones, there was a share split of Apple seven for one on June 9, 2014

September 23, 2013: Hewlett-Packard Co., Bank of America Inc. and Alcoa Inc. replaced Goldman Sachs Group Inc., Nike Inc. and Visa Inc.
Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36. Bank of America has dropped from $50 in 2007 to $14.48.
But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

HP is trading at an approximate price of $22, BoA at $14 and Alcoa at $8 (sum total of $44). These shares will be replaced by Goldman Sachs at $164, Nike at $67 and Visa at $184 (sum total of $415) which is 9.4 times more. This means that the new sum of the 30 stocks have a value of $2,349 (1978 – 44 + 415) and, therefore we expect that the Dow Divisor will be adjusted from 0.130216081 to 0.154631 to get back to the original 15,191 index points (15,191 x 0.154631 = $2,349).

Given the above, had the three old shares increased by 10% each in price in the past the Dow 30 would have increased by 33.8 points in total (10% x 44 divided by 0.130216081 = 33.79 points) assuming there was no change in the price of the other 27 stocks.

As of September 23rd, however, a corresponding 10% increase in the price of each of the new shares would contribute 268.4 points to the rise of the Dow 30 (10% x 415 divided by 0.154631 = 268.38) or 7.94 times more points.

The influence of the 3 losers was: $44 of $1,978. This is 2.2% of the Dow Jones Index.
The influence of the 3 winners becomes: $415 of $2,349. This is 17.67% of the Dow Jones Index.

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.
Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.
 Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Dow.

September 22, 2008: Kraft Foods Inc. replaced American International Group. American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.
Altria was split into two companies and was deemed no longer suitable for the Dow.
 Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.
AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

March 17, 1997:  Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Figure: Changes in the Dow Jones over the last two industrial revolutions


Figure: Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

Central banks hold out stock exchanges?

Calculating share indexes as described above and showing indexes in historical graphs is a useful way to show which phase the industrial revolution is in.

The third industrial revolution is clearly in the saturation and degeneration phase. This phase can be recognized by the saturation of the market and the increasing competition. Only the strongest companies can withstand the competition or take over their competitors (like for example the take-overs by Oracle and Microsoft in the past few years). The information technology world has not seen any significant technical changes recently, despite what the American marketing machine wants us to believe.

During the pre development phase and the take-off phase of a transition many new companies spring into existence. This is a diverging process. Especially financial institutions play an important role here as these phases require a lot of money. The graphs showing the wages paid in the financial sector therefore shows the same S curve as both revolutions.

Figure: Historical excess wage in the financial sector

Investors get euphoric when hearing about mergers and take overs. Actually, these mergers and take overs are indications of the converging processes at the end of a transition. When looked at objectively each merger or take over is a loss of economic activity. This becomes painfully clear when we have a look at the unemployment rates of some countries.

New industrial revolutions come about because of new ideas, inventions and discoveries, so new knowledge and insight. Here too we have reached a point of saturation. There will be fewer companies in the take off or acceleration phase to replace the companies in the index shares sets that have reached the stabilization or degeneration phase.

In a (threatening) recession, the central bank tries to stimulate the economy by lowering interest rates. Loans are thus cheaper, allowing citizens and businesses to spend more. In the event of sharply rising unemployment and falling prices, however, this does significantly less. This is also the case as the official interest rates are lower, or even fall to essentially zero. Regardless of the interest rate (big) loans are not concluded and expensive purchases will be delayed. Further rate cuts or even an interest rate of zero may not lead to an increase in economic activity and falling demand leads to further price declines (deflation). The central bank may decide in that case to increase the money supply (quantitative easing). A larger money supply actually leads to price increases and disruption of the deflationary spiral. In the past the printing presses would be turned on but nowadays the central bank buys government bonds, mortgage bonds and other securities and finances these transactions by increasing the personal balance. There are no extra physical bank notes printed. The mechanism works by means of central banks buying bonds in the market or directly from banks. Banks are credited for the purchase amount in the accounts held with the central bank. In this way, banks obtain liquidity. In response to this liquidity banks can then provide new loans.

Figure: The quantitative easing policy of the Fed (US central bank) and its effect on the S & P 500

Due to the combination of interest rate policy and quantitative easing by central banks a lot of money has flowed the stock markets since 2008 and has in fact created a new, fictional bull market. This is evident in the price-earnings ratio chart (Shiller PE Ratio), which has risen again since 2008. But central banks now have no more ammunition to break the deflationary spiral.  At the end of the 2nd industrial revolution in 1932 the PE Ratio dropped to 5. Currently, this ratio, partly due to the behavior of central banks, is 23.

Figure: Two industrial revolutions: price-earnings ratio (PE ratio Shiller)

Will history repeat itself?

Humanity is being confronted with the same problems as those at the end of the second industrial revolution such as decreasing stock exchange rates, highly increasing unemployment, towering debts of companies and governments and bad financial positions of banks.

Figure: Two industrial revolutions and the debt of America

Transitions are initiated by inventions and discoveries, new knowledge of mankind. New knowledge influences the other four components in a society. At the moment there are few new inventions or discoveries. So the chance of a new industrial revolution is not very high. History has shown that five pillars are indispensable for a stable society.

Figure: The five pillars for a stable society: Food, Security, Health, Prosperity, Knowledge.

At the end of every transition the pillar Prosperity is threatened. We have seen this effect after every industrial revolution.

The pillar Prosperity of a society is about to fall again. History has shown that the fall of the pillar Prosperity always results in a revolution. Because of the high level of unemployment after the second industrial revolution many societies initiated a new transition, the creation of a war economy. This type of economy flourished especially in the period 1940 – 1945.

Now, societies will have to make a choice for a new transition to be started.
Without knowledge of the past there is no future.


Wim Grommen


  • Geschiedenis Werkplaatssite van Wolters-Noordhoff en Wikipedia
  • Prof J. Rotmans, e.a. (2000), “Transities & Transitiemanagement: de casus van een emissiearme energievoorziening”
  • Dow Jones Industrial Average Historical Components, S&P Dow Jones Indices McGraw Hill Financial
  • Dow Jones Industrial Average Historical Divisor Changes, S&P Dow Jones Indices McGraw Hill Financial
  • W. Grommen, (november 2007), “Nieuwe beurskrach, een kwestie van tijd?”, Technische en Kwantitatieve Analyse,  (20 – 22)
  • W. Grommen, (January 2010), “Beurskrach 1929, mysterie ontrafeld?”, Technische en Kwantitatieve Analyse,  (22 – 24)
  • Grommen, (March 2011), “Huidige crisis, een wetmatigheid?”, Hermes, 49, (52 – 58)
  • Grommen, (January 2013), paper “The present crisis, a pattern” gepresenteerd op International Symposium The Economic Crisis: Time For A Paradigm Shift
  • W. Grommen, (November 2014), “The Dow Jones Industrial Average , A Fata Morgana”, TRADERS’ Magazine,  (14 – 18)
  • Grommen, (April 2015), “Stock Splitting And The Market Crash 1929”, ValueWalk
  • Grommen (August 2015), “Stock Market Boom and Crash, the Cause and Effect of Extreme Market Movements” , TRADERS’ Magazine, (28 – 30)


Stock Market Crash, A Historical Pattern? by Wim Grommen

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EURUSD in 14-years Low

EURUSD in 14-years Low

EURUSD pair is trading at its lowest in 14 years, hitting the low at 1.0366 following the US Federal Reserve latest monetary decision. Investors view that the US economy will pick up pace in 2017.  Also ECB extended monetary stimulus in the EU by more than expected last week boosting further the USD. Central Banks around the world are in the easing path, while the US FED is announcing more tightening.

Sentiment towards the pair is bearish.

Technical indicators have reached oversold territory for EURUSD in the daily chart. Any upward move towards 1.0600 will be seen as selling opportunity from the traders.