United States: The Fed´s lowering of interest rates strengthens the certainty of the proximity of a new crisis

The policy change of the Fed that took place on July 31 was announced by J. Powell at the G20 meeting of Central Banks in Japan on the weekend of June 8 and 9. There, in an environment of concern about the progress of the trade war between the United States and China, the reduction of trade and the cooling of world economic growth, the president of the Fed announced to his colleagues in Europe and Japan that “he would do everything necessary” to maintain the growth of recent years in the US economy.

It was not long before Powell was forced to fulfill that promise, and on July 31, after eleven years, the Fed lowered its reference interest rate by 25 points, leaving the door open for its next mid-September meeting to proceed with another reduction.

Beyond the pressures that Trump has been exerting for this to happen and for the decrease in the cost of credit to be even more pronounced, the fact is that the reduction coincides with a fall in the growth of the US economy, that has fallen from 3.1% the first quarter of this year to 2.1% in the second quarter, which sounds an alarm for the Central Bank of that country.

Trump simultaneously terminated the fragile truce he had agreed with China at the G20 summit in Japan and again threatened to raise tariffs to $ 300 billion in products imported from China that were still free of sanctions from next September 1. China responded with a devaluation of its currency by expanding the battlefield from the commercial and technological fields to the currency arena. The noises of a new crisis in the world economy that is approaching can be heard in the background of these movements.

Flat, disappointing and declining growth

Perhaps the most concerning data that led to lowering the rate in the United States is the disappointing growth of its economy. Although it is true that it is going through the longest period of growth since the crisis began, it is just as true that this growth is also the lowest, and therefore it is disappointing. The colossal elimination of taxes for corporations implemented by Trump between 2017 and 2018 were simply not enough. Their effect was exhausted without boosting production. Nor does this reduction in rates applied by the Fed appear to have a positive impact. It actually caused a negative reaction in the international financial market.

The fact is that the lack of productive investment, engine of economic growth, continues to slow down and was the lowest in the second quarter of 2019. The impact of the tariff war has also resumed these days, aggravated by the devaluation of the Chinese currency on August 5, which leads, according to all analysts, to a more pronounced slowdown of the world economy.

On the other hand, this slow down also begins to be felt in the US labor market, last May was the month of least job creation, marking what could be a trend. The same with the weak salaries, whose participation in US GDP has fallen by 15% since the 2009 crisis. Under these conditions, a perspective of recession approaches in the United States and there are already specialists who place the end of this 2019 as a possible emergence of that crisis.

Europe and Japan do not recover either

Without assessing the shadow of Brexit that covers Europe and the consequences on its economy, the other G7 countries, that is, the rest of the European imperialist countries and Japan, also show no signs of recovery. On the contrary, the main European country, Germany, reveals clear symptoms of drops in the main productive indicators. Thus the indices of May show the fifth consecutive month of contraction in the industrial sector, dragged by the fall of its automotive industry.

On the other hand, economic activity in Japan also continues to fall, so much so that the main indicator used by the Government of that country, the Economic Conditions Index, has qualified the situation as “getting worse” and, though this does not automatically mean a fall into recession, “there is growing concern about an economic recession,” according to a representative of Barclays investment fund.

In this regard, it is necessary to highlight that the G7 countries, with the exception of the United States, have been maintaining a policy of interest rates close to 0%, since they were lowered eleven years ago during the outbreak of the 2008 crisis. Perhaps the most Emblematic case is that of Japan, whose Central Bank maintains a negative interest rate and has bought almost all of the government’s debt and much of the country´s corporate debt to try to dump money on investment and consumption, without achieving its objectives.

The emerging economies are in recession or one step away from it

Beyond the imperialist economies and China, important so-called emerging economies of the G20, are already in recession. This is the case of Argentina, Turkey and Pakistan, while others of the largest such as Brazil and South Africa are on the brink of technical recession, and the dynamic toward recession seems unstoppable, taking into account the resurgence of the US-China trade war.

However, the thing that demonstrates that the economists of these countries have not understood the world of the Long Depression that we have been going through since 2008, is that they bet on reductions in interest rates in the United States re-opening the flow of dollars, even if at least to stimulate financial speculation towards their countries. What is really happening is the opposite: a strengthened dollar, which seeks refuge in long-term bonds of the US Treasury, even though the yield may become negative. This happens because the certainty of the proximity of a new peak of the global economic crisis is growing in the world.

Carlos Carcione