The Federal Reserve in the United States just rose interests for the third time this year, strengthening the U.S. dollar. The repo rate is currently at 2% and the interest on excess reserves is at 2.25%, the highest since the 2008 financial crisis.
In response to this stocks fell worldwide, most notably in the U.S., the U.K., Europe, Japan, and China. Due to the strengthened U.S. dollar, the move has also made imports (
The ongoing trade war between the U.S. and China was relentlessly cited by the mainstream media as the main reason, however, the market correction occurred because of rising interest rates and the overvaluation which affects markets in the U.S. as a whole. U.S. Stock market capitalization compared to the U.S. GDP has risen to a historical 151.7%, experts citing that 70%-80% would be ideal.
President Donald Trump mentioned multiple times that he doesn’t like this move from the FED and that the FED has ‘gone crazy’ and is ‘out of control’. Trump understands what this new increase in interest rates means because he was in the real estate sector all his life. Although he is looking at it from his perspective, that this move from the FED will be unhealthy for real estate companies trying to sell overpriced condos in places like the middle of Manhattan or Miami.
The new GOP tax bill which brought around a $2.3 Trillion tax break, with the pretext of creating an opportunity for companies to raise wages, however, factually speaking in just a few instances has resulted in this in wage increases (another article) (analysis of its effect by income groups), mainly for those who were earning less than $15 an hour. All the tax break did
Meanwhile, because of the inflation fueled by these
During the last 14 months big stock buybacks, mergers, and major acquisitions were taking place because of the availability of this cheap money. For instance, Microsoft has bought Github (for $7.5 billion), Sprint has acquired T-Mobile (for $26 billion), Flipkart was bought by Walmart (for $13 billion) and Marathon Petroleum has bought
These buybacks and acquisitions will definitely boost their respective stock prices creating a fake facade that the U.S. economy is booming. Instead of an economic boom, more and bigger bubbles were created in the U.S. economy, it pumped up not just the stock market, but also the auto loan bubble, the student debt bubble, the mortgage bubble, and the credit card bubble. Most notably the corporate debt bubble has gotten huge. It has increased by over $2.5 trillion (or 40%) since its 2008 high (source) and could very well be the first bubble to burst and unstabilize this fragile system. It is unclear however when it is going to burst
If the FED hadn’t kept interest rates this low, close to 0% and hadn’t introduced quantitative easing (it’s a trap), the U.S. economy would be much more stable and couldn’t develop these major bubbles. Clearly
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conqueredThomas Jefferson
….I believe that banking institutions are more dangerous to our liberties than standing armies ….The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Central banks have the capacity of creating artificial booms (bubbles) and economic crashes (bursts) by injecting cheap money and by refusing to lend money because they are essentially in control of the money supply and the monetary system. This was very nicely illustrated during the 1929 Great Depression and during the Japanese Lost Decade. In both of the instances, the respective central banks have stopped lending money and issued orders to other banks to request outstanding debts to be paid immediately.