BALTIMORE – We’ve made two bold predictions in these Diaries.
First, that the Fed will never make good on its promise to “normalize” interest rates.
Second, that Donald J. Trump will not follow through on his threats of a trade war with China, either.
As to the first, it looks as though we may be proven right – long before we expected to be. From Bloomberg:
U.S. stocks rallied the most in three weeks, the dollar fell, and emerging-market assets surged after a dovish tone from the Federal Reserve chairman fueled speculation the central bank is closer than thought to pausing on rate hikes.
Stocks that had fallen the most during the six-week slump in American equities led gains after Jerome Powell said rates are “just below” the range of a neutral policy, potentially removing one of the biggest overhangs. Aside from the Treasury market, where yields turned lower but only by a few basis points, moves in other asset classes were just as heady…
Dangerous Distortions
By 2016, the Fed had been making its Mistake #1 – in a big way – for seven years, following the crisis of 2008. That is, it was holding interest rates down too low for too long.
Low interest rates discourage saving and make debt more attractive. As a result, savings rates fell to record lows, corporate debt levels rose 50%, and federal debt doubled.
Seeing the dangerous distortions multiplying, the Fed switched to Mistake #2 – raising rates in an attempt to mitigate the damage. Higher rates would also put it in a better position for Mistake #3 – a panic into much lower rates when the next crisis hits.
We guessed that the next crisis would come long before the Fed ever got its rates back to “normal.” This economy was suckled on abnormal – near zero – rates. Now, it depends on them.
So do the reputations, wealth, and power of the elite – including Donald J. Trump himself.
And the closer the Fed gets to “normal” rates of 3%-4%, the faster the next major crisis approaches.
Great Negotiator
And here we are… still no crisis… the key rate is still only between 2% and 2.25%, while the inflation rate (CPI) is 2.5%… The Donald is on the Fed’s back for raising rates… and Fed chief Powell’s knees are already quaking.
On Wednesday, investors, anticipating EZ money forever, bid up the Dow by more than 600 points. And our guess is that they will bid it up even further when our second prediction turns out to be true, too.
Economic advisor Larry Kudlow set the stage for President T.’s meeting with the Chinese president on Friday. From CNBC:
“There’s a good possibility a deal can be made,” Kudlow said at a press briefing on Tuesday afternoon, noting that Trump personally called Xi to “get things started.”
Certain conditions still need to be met in order to resolve the standoff between the world’s two largest economies, Kudlow said.
Remarkable Fantasy
The remarkable conceit behind both items is the same – that politicians and bureaucrats should muscle into private transactions.
If you are borrowing money, for example, you could perfectly well work out an interest rate with a lender based on the supply and demand of real savings.
But the feds butt in. First, the Fed creates pseudo savings – credit – and lends it out at whatever rate it chooses. Thus, it distorts the whole yield curve (where interest rates are plotted out)… and enfeebles the whole economy with misinformation and miscalculations.
And then, President T. piles on. He says he is “not even a little bit happy” with Fed chief Jerome Powell and his higher rates. Mr. Trump thinks he knows better than lenders and borrowers – or the members of the Federal Open Market Committee – where rates should be. And he wants them lower, even though they are still negative in real terms.
As for the China issue, private businesses could very well truck with whomever they wanted on whatever terms they agreed. If the deal isn’t win-win, they don’t have to do it. There’s no need for the feds to get involved.
But along comes the real estate developer and reality TV star, Donald J. Trump. He says he should decide how much Americans should pay for Chinese imports… and that he should dictate the terms of trade – not just America’s trade policies, but China’s policies, too!
Today, we will discover that it didn’t really matter so much after all. Yes, a deal will most likely be made. Mr. Trump may or may not be a stable genius, but he’s no fool. He has more to lose than anyone.
A big blow-up in trade with China would be followed by a big selloff on Wall Street… and a recession on Main Street. The Great Negotiator won’t want to take the blame for that.
Instead, whatever is said in Buenos Aires during the G20 summit this weekend, Mr. Trump will declare victory… and things will go on as they did before, just as they did after the NAFTA negotiations.
The comedy continues… The Swamp spreads.
Regards,
Bill
Category: Geopolitics