“…Lowering rates when the economy is as strong as the numbers make it out to be is practically unheard of. And, according to textbook economics, lowering interest rates during a boom is a sure recipe for disaster.
The trouble is, as someone who studies financial booms and busts, I know that not lowering rates may be even worse. That’s because the corporate sector is dangerously over-indebted, creating a financial bubble.
A hike in borrowing costs could kick-start a cascade of bankruptcies in a financial contagion that would derail the U.S. economy.
“On the surface, the U.S. economy appears to be humming along just fine… Look under the hood, however, and things look very troublesome.
“Numerous trade wars have cost U.S. companies, farmers and consumers dearly. The manufacturing industry – once America’s job engine and ostensibly the sector the trade war was supposed to support – is seeing its worst year since 2009.
“And looking abroad, the situation is even worse, with the global economy slowing and the International Monetary Fund warning there’s little ammunition left to fight a recession.
“While that’s bad, we haven’t gotten to the scary part yet…
“All American companies are currently sitting on a record US$15.5 trillion in debt, equivalent to about two-thirds of U.S. GDP. Unfortunately, this debt was not primarily used to finance expansion and growth but more commonly to jack up stock prices through dividends, stock buybacks and acquisitions.
“The problem will come when the party stops – when interest rates begin rising and companies, particular the ones that took more risks, can’t refinance or pay back their debts. This is what turns a credit boom into a financial crisis, as happened in 2008.”
“The Fed’s capital injections will only grow less effective as primary dealers prioritize their liquidity mandates over short-term lending markets, the analysts said.
“”With year-end coming up, this is all likely to get much worse, in our view, before it gets better.””
“The downturn in shale drilling has been so steep and brisk that oilfield companies are taking the unprecedented step of scrapping entire fleets of fracing gear….
“Whereas in previous market slumps, fracers parked unused equipment to await a revival in demand, this time it’s different: Gear is being stripped down for parts or sold for scrap.”
“The number of cars built in Britain fell again in September as a slowdown in global demand and political uncertainty held the industry back.”
“German business confidence has fallen to its lowest ebb since the start of the financial crisis, according to a survey of 28,000 companies. …
“Firms blamed their troubles on a shortage of skilled workers, slackening demand from countries such as the US, China and Britain, and Berlin’s austere fiscal policy.”
“One of Christine Lagarde’s most important tools for stimulating inflation might be falling out of favor even before she gets to wield it as European Central Bank president.
“Doubts over negative interest rates are beginning to surface among policy makers on the continent where they first appeared half a decade ago. A growing contingent of officials at the ECB in Frankfurt are starting to wonder if they cause more harm than good…”
“Calls are mounting for Lebanon to impose formal restrictions on the movement of money to defend the country’s dollar peg and prevent a run on the banks when they open their doors on Friday after two weeks of nationwide protests.”
“Lebanon’s Prime Minister Saad al-Hariri quit on Tuesday after two weeks of historic protests against leaders accused of pushing the country toward collapse.
““If the situation stays this way for another week, we will close,” said Khaled Sakr, whose company sells staples like cooking oil and rice to small grocers. “We can’t buy dollars and customers can’t pay us.””
“Kuwait’s central bank cut its benchmark interest rate on Wednesday, joining the Federal Reserve-led monetary easing cycle with its Gulf peers for the first time since July.
“Saudi Arabia, United Arab Emirates and Bahrain, whose currencies are pegged to the U.S. dollar, also cut rates.”
“HSBC on Thursday cut its best lending rate in Hong Kong for the first time since the global financial crisis, lowering it by 12.5 basis points to 5%, effective on Friday, November 1.
“George Leung, an advisor at the lender, told reporters on Thursday that the cut could help businesses and spur consumption in the city. Hong Kong is facing its first recession since 2009.”
“The world’s second-largest economy is facing heightened risks from slowing global demand and the Sino-U.S. trade war, adding pressure on policymakers to roll out more stimulus to avoid a sharper slowdown and bigger job losses.
“The Purchasing Managers’ Index (PMI) fell to 49.3 in October, China’s National Bureau of Statistics said on Thursday, versus 49.8 in September. The 50-point mark separates growth from contraction on a monthly basis.”
“China’s listed manufacturers are increasingly putting their money into financial assets such as stocks and bonds rather than investing in their own businesses, as the potential returns from capital expenditure wane.
“The fall in investment by industrial groups is weighing on China’s economy at a time when it is facing a severe slowdown…”
“Police in China arrested a woman after she spread a rumour via WeChat that “the local rural commercial bank is going bust”, leading to hundreds of customers rushing to withdraw cash from the lender in Henan province in the latest case to hit small regional banks during the economic slowdown…
“The incident came at a time of growing signs of stress within China’s small regional banks after the authorities were forced to take over or recapitalise at least three large regional lenders in the last six months.”
“…the time may be ripe for Japan to try something radical: like opening up to an American style immigration.
“But that will eventually change the fabric of the Japanese society, from a one-race/and culture society to a multi-racial, multi-cultural society. Is Japan ready for that?”
“…slowing demand for oil and gas around the world amid trade tensions between the United States and China, the world’s two largest energy consumers, could take a toll, Shell said.”
“The global manufacturing sector is in recession, which does not bode well for the outlook for metals, speakers at a London Metals Exchange seminar said.”
“Current difficulties facing the global economy are beyond the scope central banks, the former chair of the US Council of Economic Advisers has said.
““I think we’ve asked too much of the [Federal Reserve], of the European Central Bank and of the Bank of Japan,” Glenn Hubbard said to Dallas Fed president Robert Kaplan during a recent panel discussion. “We have asked them to solve problems that they really can’t solve.””