NEW YORK – The minutes released Thursday from the September meeting of the Federal Open Market Committee, the policy-setting body of the Federal Reserve, show the Fed backed off raising interest rates because of concern the global economic slowdown was impacting the much-touted Obama “economic recovery.”
The FOMC minutes from the Sept. 16-17 meeting echo concerns published this week by the International Monetary Fund that also warned a global economic meltdown is looming as world debt builds to record heights amid a slowdown in global economic growth.
The widely followed economic blog ZeroHedge.com reported Sept. 29 that global stock markets have wiped out $13 trillion in wealth. World market capitalization has fallen back below $60 trillion for the first time since February 2014 as concerns grow that central bank monetary policy in the United States and the European Union aimed at holding interest rates at or near zero have lost their ability to stimulate economic growth.
The Dow closed on Thursday above 17,000, at 17,050, up 138.46 for a gain of 0.82 percent.
Thursday’s triple-digit gain reflected investor enthusiasm that the Fed decision in September to keep interest rates at or near zero would provide sufficient liquidity to continue stimulating the stock market, even while indicating fear of a global economic slowdown that would eventually depress stock prices.
Obama ‘economic recovery’ falters
ZeroHedge.com pointed out that amid “monetary policy mumbo-jumbo” and “endless rate cuts,” the expansion of corporate balance sheets around the world have seen an 18 percent collapse in the last four months, the largest contraction since the demise of Lehman Brothers that presaged the global economic collapse at the end of George W. Bush’s presidency in 2008.
What the IMF and BIS are warning is that the global economy is slowing, caused by oil-producing countries, including OPEC, earning less from the sale of oil, compounded by slowing growth in China as the decades of “miracle” Chinese economic growth appear to be coming to an end.
If global economic growth continues to slow, the next problem is that the “Obama recovery” in the United States has been prompted by the near doubling of U.S. debt during the Obama presidency to over $18 trillion. The Federal Reserve, meanwhile, has been printing money used to purchase U.S. Treasury debt to keep interest rates low.
The concern is that an increase in interest rates by the Fed would trigger a stock market crash of historic proportions.
However, until the Federal Reserve starts increasing interest rates, governments in the developed economies, including the European Union, have little or no incentive to stop piling up government debt to historically frightening levels.
Meanwhile, the IMF sees no immediate end in sight to the government debt crisis as social welfare governments in the United States and the European Union continue to see entitlement benefits exceed tax revenues – a problem that can only be expected to worsen if global economic growth continues to slow.
‘Alarming global debt’
The International Monetary Fund’s “World Economic Outlook” published this week is pessimistic, projecting the $73.5 trillion global economy will grow at 3.1 percent this year, a figure bank economists expect to be revised downward in the coming months.
“Recent market developments such as slumping commodity prices, China’s bursting equity bubble and pressure on exchange rates underscore these challenges,” the IMF explained in a “Global Financial Stability Report,” also released this week.
In particular, the IMF is concerned that oil prices have remained at under $50 a barrel, with the United States assuming once again a role as a major oil exporter, reflecting technological breakthroughs that have revolutionized the extraction of energy from shale oil.
Additionally, the IMF quote references the decision of the Chinese government to devalue the yuan by 3 percent on Aug. 11, prompted by a downturn of the Chinese economy and the Chinese stock market that in turn led to a global stock market selloff.
“The prospect of the U.S. Federal Reserve gradually raising interest rates points to an unprecedented adjustment in the global financial system as financial conditions and risk premiums ‘normalize’ from historically low levels alongside rising policy rates and a modest cyclical recovery,” the IMF continued, referencing the Fed’s decision last month not to raise interest rates.
The IMF warning echoes a warning the Swiss-based Bank of International Settlements issued in September that global debt levels are so high now the global economy is exposed to a major collapse if the Fed should reverse policy and begin raising rates.
Claudio Borio, the chief economist at BIS, expressed his alarm at the dangerously high level of global debt by warning, “We are not seeing isolated tremors, but the release of pressure that gradually accumulated over the years along major fault lines.”
Treasury debt selloff
The Wall Street Journal this week reported central banks around the world are selling U.S. government bonds at the fastest pace in history, causing the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis of 2008.
Foreign government net sales of U.S. Treasury debt maturing in at least a year hit $123 billion for the 12 months ending in July. It was the biggest decline since data started to be collected in 1978, reversing last year’s trend in which central banks purchased a net $27 billion of U.S. Treasury debt.
China, the biggest foreign owner of U.S. Treasury debt, is currently engaged in an historic selloff of U.S. Treasuries to prevent the yuan from weakening beyond the level of 6.40 yuan per dollar.
China’s central bank reported that currency reserves fell $43.3 billion last month to $3.51 trillion as funds left the country in the fifth consecutive monthly drop after registering a record $93.9 billion plunge in August.
The most recent Treasury data shows China owned $1.241 trillion in Treasury debt at the end of July, down from a peak of $1.317 trillion in November 2013.
China’s selloff of foreign exchange reserves as a strategy to prop up the value of the yuan is a further indication that government economic intervention is required to prevent catastrophic economic declines.