More Dire News will Slow Fed’s Hand on Rate Rise

I suffered a double-whammy today. Last night I spotted news from the World Economic Forum (WEF) that reported worldwide productivity was in a slump and that growth, driven from productivity improvements, was much needed to help solve our economic slump. Second, this morning in the US print edition of the Financial Times, the IMF was quoted (from its newly released bi-annual Financial Stability Report) saying that an interest rate rise in the US will likely drive some corporate debtors in emerging countries to fail as dollar denominated debt servicing charges could quickly engulf them.

CNBC Article Sept 29 2015: Weaker productivity growth hits global economy: WEF

The fact is clear: a global GDP figure of 2% won’t cut it. Such a level does not spin off or create enough additional wealth that governments can fund their excessive spending levels and still pay all their welfare, pension, and social service commitments. The world needs a growth engine and quick. We are already into a “lost decade” like Japan and there is literally no sign we are ever going to leave it. We don’t need more government spending in terms of picking winners and losers with political investments; we need lower taxes, corporate and income taxes, and cuts in welfare and social services, and now. If we can get to 4% GDP growth, we can blast our way out of this rut and try to tackle the debt issues later.

I love this quote from the article: “Increasing productivity, therefore needs to be at the core of the policy agendas of governments and international.” Increasing productivity is demonstrably not at the center of any government policy. The US should consider:

  • Tax breaks for R&D
  • Relaxed immigration VISA rules for qualified and needed skills
  • Lower tax rates to support the repatriation of offshore profits
  • Realigned investment in industry/college, vocational collaboration

This can be paid for by the following:

  • Reduced secondary education subsidies (will save money and lower secondary education costs and so lower student debt)
  • New simplified tax code to rebalance contributions, reduced loopholes, and reductions of welfare payments for well-off

The US government has and remains stuck in a schism whereby it flip flops from redistribution arguments and lobby-driven demands. This has to change.

US Print edition of the Financial Times, Sept 30 2015: IMF Issues Warning on risks of Fed Rise

The US interest rate issue is a killer too. It seems we have nearly a “lost decade” behind us already, and the policies designed to get us out of it has created several bubbles: the US stock market for one, and now according to the IMF, corporate debt in emerging economies. It seems many firms have grown accustomed to low debt and to they have binged and are now on the edge of keeling over if debt service levels rise. The very polices, designed to stave of disaster of the last crisis, have sown the seeds of the next.  

Worse, higher interest rates will also make US debt servicing more expensive. There is another risk. As China ‘delevers’ its US debt holdings to protect its own currency, there will be pressure on the US to raise interest rates to keep selling federal debt attractive. As China’s economy continues its slow down, this domino effect will continue – even if the US does not want to raise rates. Thus the Fed is in a bind – a big one. There is no easy way out. About the only way out is to focus on growth strategies in a make-or-break attempt to outgrow the debt/interest rate challenge. If not, we might lose the lot.

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One thought on “More Dire News will Slow Fed’s Hand on Rate Rise

  1. Pingback: Dark Economic Storm Clouds are Gathering | andrewgwhitedotcom

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