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Is the Federal Reserve finally waking up?

Is the Federal Reserve finally waking up?

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Does the Federal Reserve finally begin to realize their low interest policy has failed? For example in the minutes from the September meeting of the Federal Open Market Committee there is an interesting item: “A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector.” And that was not the only quote that indicates some participants have the opinion low interest rates for an extended period of time are detrimental to a sound economy. The success or failure of central banks’ monetary policies greatly affect the global economy; hence, the health of the maritime shipping industry.

Of course, raising interest rates will not do anything to stimulate economic growth, but keeping them low has not either. The current situation is not a monetary problem; national governments must increase spending to increase employment. In virtually all cases this spending should be on infrastructure projects. The U.S. Federal Reserve does not appear to want to address this solution at all. Sadly, Fed chair Janet Yellen, and her predecessor Ben Bernanke, have continued the destructive policy of near-zero interest rates. Bernanke was too in love with his PhD thesis which studied the Great Depression; he should have reversed policy as soon as the financial situation was stabilized and it became clear that good high-paying jobs were not being created. President Obama should never have reappointed him and should never have appointed Yellen, who had been supportive of the same policy.

The Federal Reserve chair and other central bank chairs should check their egos at the door and realize when monetary policies cannot solve certain problems. Chairs should realize the power they have in publicly turning the problem over to national legislatures. Bernanke, and later Yellen, should have told Congress that rates were going back up and Congress needed to improve the economy with massive public works projects in the range of several trillion dollars. In other words, Congress needed to get money to workers instead of loaning several trillion dollars to Wall Street for little or no interest. An excellent measure of the global economic condition is the growth of China’s exports. And China’s September export numbers were very disappointing.

It is astounding that Mario Draghi has followed the same path. He is simply too weak to stand up against Angela Merkel, who has lead the European Union down the road of austerity and meager growth.

In analyzing the September FMOC minutes, one is left with a sinking feeling. While an increase in interest rates will help minimize the temptation for foolish managements to open their orderbook, that lesson has already been learned by virtually all maritime executives. The problem now is the need for massive infrastructure projects by national governments in order to give economic growth a real shot in the arm. The low interest rate policies by central banks has had the negative effect of lessoning the pressure on legislatures to fund the needed large projects. The review of the minutes indicate that there is no interest in the Federal Reserve chair to step up and prod Congress.

Clearly the only hope owners have now is to step up scrapping to reduce capacity. Otherwise we will continue to hear projections of recovery always being two years away. A moving target that is never achieved.

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Katherine Harine

Several decades experience in geopolitical analysis related to strategic military systems.

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2 Comments

  1. George
    October 25, 2016 at 8:36 am

    your words of sanity are welcome/ i sense that the post-crisis new normal will collapse as a structure under its own burden

    few will not admit the absurdity of some $12bn of negative yielding securities worldwide, as well as that easing the monetary base through the transmission channel of banks is not efficient, all the more so in an economy with a debt overhang

    In a nutshell, i would expect significant transfers of wealth in the mid-term, with central banks self caged in the confines of their policy innovations that have proven futile

  2. James Thatcher
    October 25, 2016 at 1:28 pm

    What a wonderful example of why Keynesian economics does not work. We’re not in a situation where the more a government spends the better the economy will do – and frankly your illustrations to suggest so are depressing.

    Let’s go back to economic business cycles and look at what kind of economy we’re in right now. There is a lack of confidence in several major currencies (including the GBP, EUR, and the USD); you have consolidation occurring not only in our industry, but several others; you have governments that are unwilling to expend the political capital to encourage business growth and security by stating clearly defined rules and polices to “win.”

    This is not an issue of the government doesn’t spend enough on public programs, it is an issue that the overall economy is on the verge of depression due to oversaturation within various industries. This is actually a common cycle event – as the increase in generic goods and commoditized items begins to satisfy demands the only vector left is cost, thus sellers must sell at a reduced cost to gain business (or reduce their inventory) and margins decrease; this decrease leads to less spending of various items including employees. With a reduction/freeze in employees there is less strength to purchase, and with a reduction of strength to purchase there is a weakened economy – hence there is less shipped (because goods aren’t being purchased) and we have what is classically called a death spiral.

    There is no easy way out of this, but keeping an interest rate at (or close to) 0% is an argumentative way of rebounding an economy because borrowers will spend more if they can leverage the income vs the cost of capital. The problem is that there has been a lower rate for a period too long (which you elude to) and borrowers are reacting as to be this as the new “normal.” – if you raise the interest rates (as you have suggested), this will cause an even larger disruption in the market and the “death spiral” will turn into a “death whirlpool” – gaining speed and leading directly to a very long depression. Government intervention is also not the right decision as this will lead to companies “giving up” and letting the government sort it out. The better solution long term is to ride the spiral and allow the market to self correct. If you try and “help” it along you will actually cause a worse disaster than just allowing the market to fix it self over a period of time.

    But, that’s just my $0.02…