The Path Forward

It is becoming increasingly obvious that we are stuck in an ultra-low interest rate environment and into the foreseeable future. Central banks around the world are keeping rates very low ... even in negative territory ... to keep stimulating their economic growth and foreign trade. This almost universal strategy has forced the American Federal Reserve Bank to stop interest rate hikes ... and its monetary tightening by reducing its balance sheet.

The consequences of this development suggests three things:

1) The United States is losing its ability to lead world-wide economic policy. We started to ‘normalize’ interest rates and, when the rest of the world did not follow suit, we backed off. We thought we were the monetary pied piper ... but we have learned that this is not the case.

2) Being that interest rates should remain so very low, this means that world-wide debt will grow beyond reasonable bounds. This suggests that a debt crisis is baked into our future. And it also suggests that funds holders ... like banks and senior citizens ... will not be advantaged like in past business cycles.

3) When the next economic turndown does occur, the Fed has little or no room to play the dove. If interest rates are still essentially zero, there is not a lot of room to go lower ... even if they are taken into negative territory. And, if the Fed’s balance sheet is still so bloated, there is not a lot of room to inject more money into the economy.

Yes, the current tariff wars complicate these monetary decisions enormously. But, one hopes that today’s lopsided trade balances resolve themselves before the next recession hits ... or the next debt crisis rears it’s ugly head.

I’m holding my breath ...