The new year and final year of the Obama presidency has had a rocky beginning. The government’s Bureau of Economic Analysis reports that Gross Domestic Product (GDP) grew at an anemic 0.7% last quarter. The New York Stock Exchange’s popular DOW average has been buoyed since the 2008 crash by relentless stimulation from the U.S. Federal Reserve Bank with its controversial Quantitative Easing program that has caused the national debt to approach $18 trillion (that’s trillion with a “t”). It appears that the result of all this is a stagnant economy, the president’s recent boasting notwithstanding.
In addition to its Quantitative Easing efforts, which effectively prints new money creating a debt to be paid by future generations, the Fed, under the leadership of successive “dovish” chairpersons, have targeted overnight interest rates at zero for almost seven years. In other words, the Fed viewed the U.S. economy to be so fragile that it feared a meager 25 basis points (0.25%) increase in interest rates would cripple any recovery. Further, a record 47 million Americans still, apparently, need free government food stamps to keep from starving. In effect, the Fed made the rich richer, the middle class poorer and the poor more populous and dependent on the government.
Now for the bad news. The rest of the world is slowing, too. China’s robust economy of the past decade has slowed to “only” 6.9% – a pace that the U.S. can only dream of now. However, it is the slowest growth rate for the Chinese economy in the past 25 years. Conditions in Europe are dire as well. With the low birth rate of European women (well-below the 2.1 required to sustain a country or ethnic group), Europe is now allowing immigration from the Middle East – and all its associated problems – in an effort to bolster its workforce. The world’s central bankers, now out of their Keynesian ammunition, are looking to manipulate currency reserves as a way to avoid a potential global deflationary environment. The Economist wonders if it is 2008 all over again.
And what about interest rates? Using the yield on 10-Year notes issued by central banks as a benchmark, the rate in Switzerland this morning is now at -0.31%. That’s a negative 0.31%! In other words, investors must pay the Swiss to hold their money. Japan – that paragon of a modern industrialized country with a low birth rate (1.26 per female of childbearing age) and low growth (0.49% GDP growth on average from 1980 to 2015) now offers a 10-year bond yield of negative 0.02% for your hard-earned cash.
The U.S. Treasury’s 10-Year note yield has recently dipped to 1.73% and former Fed chairman Ben Bernanke has suggested that the Fed consider negative interest rates as a new tool to stimulate the faltering U.S. economy. What better way could there be to mitigate the potentially disastrous effect on the U.S. budget of having to pay interest on our staggering debt? In effect, it says to investors, “don’t give us your money, spend it.” Undoubtedly, at some point in the future we will be begging for money by offering double-digit interest rates as the Fed did in the early 1980s. It’s a brave new world.