With the news that China’s central bank is lowering interest rates, the bull market that began in 2009 is likely entering its final stage, which should carry it into at least the next year. Fears that the current global economic recovery is faltering led not just China’s central bank to cut rates, but the European Union to lower rates from 1 to 0.75 percent and the United Kingdom to increase its stimulus efforts. With a weak June jobs report, expectations of further monetary intervention by the United States also grew. But outside of China, monetary intervention is to a large degree pushing on a string. And even if China can give the world a temporary boost, the expansion of its economy will only provide a reprieve from the onset of the next downturn.
The balance sheets of the major central banks of the world are in a dangerous state. In the United States, the European Union and Japan they have basically printed money to buy debt, counting the debt securities purchased as an asset and the money paid for them in the liability column. Despite many mistakenly believing China’s central bank must be in good shape with all the U.S. government debt held in its asset column, this overlooks its liability column. Reviewing the magnitude of central bank liabilities, the implications on future policy and potential economic challenges, arguments can be made that central bankers are either wisely learning from history or the equivalent of fools playing with matches in pools of gasoline of their own pouring. Unfortunately their lackluster track record argues more for the latter than the former.
Last Friday’s government report on the economy, detailing Q3 GDP growth of only 2.0 percent, confirmed that the U.S. remains mired in a low growth, high unemployment paradigm. In a viewpoint I wrote for EE Times in February 2009 I predicted as much noting that the government’s economic stimulus package was more likely to make things worse than better and that strong sustainable economic growth requires a powerful technology innovation, like the internal combustion engine or microprocessor, being in its growth stage. I argued since 2000 there has been little real sustainable growth. I focused that short viewpoint on the impact of technology on the future growth potential of the economy. But with poor economic performance now confirmed it is worth spending some time on how government intervention can actually make things worse by among other things fostering economic zombies.