Chief economist update: Greater than the Great Recession of 2008

You know the world's in trouble when the Fed starts contemplating negative interest rates ... and then some.

"There are other types of policies that probably aren't getting as much analysis. But one is negative interest rate policies. Those are being used in Europe and in Japan. They haven't been as popular in the U.S., but that's something else that certainly could be looked at. There are probably a host of others that we could talk about, but those are probably the main ones."

These were the words St. Louis Fed president James Bullard podcast in his interview with Karen Mracek - media relations coordinator at Federal Reserve Bank of St. Louis - overnight (on August 14).

Perhaps I'm turning into a Dr. Doom but, if the current global economic dynamics persist, the Great Recession of 2008 would be "Happy Days" in comparison.

You don't believe me, Virginia? Just look at the 10-year bond yield offerings in most markets around the planet. They are now lower than the lows hit during the Great Recession.

To be sure, the much hoped for reflation that started in 2017 would have had their desired effects ... but for Trump - and his vow to "Make America Great Again" by beggaring its neighbours by imposing increased tariffs on US imports.

History shows that this is a lose-lose proposition. The Smoot-Hawley Tariff Act - enacted on 17 June 1930 (the time of the Great Depression) - increased the tariffs on US imports from 25.9% to 50%. What did this produce? Other countries imposed retaliatory tariffs on US imports (as China is doing now).

US imports decreased by 66% between 1929 and 1933 and its exports plunged 61%. Ouch! We all know what happened thereafter -- the depression deepened. The US unemployment rate jumped from 7.8% in 1930 to 25.1% three years later.

More worrying at this point in time is the fact that central bank policy rates have very little room to stimulate their respective economies by lowering interest rates ... just when another global recession is ominously looming.

Before Lehmann Bros collapsed on the 15 September 2008, policy rates among the world's major central banks were higher - 7.25% for the RBA (now 1%); 5.75% for the BOE (now 0.75%); 5.25% for the Fed (now 2.25%); 4.25% for the ECB (now 0%); and, 0.5% for the BOJ (now -0.1%).

How much lower can they go? How long is a piece of string? Recent history proves that zero and even negative interest rates weren't able to sustainably reflate individual domestic economies.

In addition, and as put by Nobel prize winner Paul Samuelson in 1948: "By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel."

"For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, "no nothing," simply a substitution on the bank's balance sheet of idle cash for old government bonds."

Given present uncertainties (with a capital S), central banks appear to be pushing on a string.

The hope is, given record low interest rates, fiscal policy would be employed before the Great Recession of 2008 turns into the 'Greater Recession of 2020'.

A simpler way, Trump reverses his war on trade, reflating the global economy (including the US of A) and lifting the tide that lfits all boats.

Trump's got to stop thinking that America will be top of the pops by putting others down.

Read more: TrumpGreaterMember BankBOEBOJChinaDr. DoomECBEuropeFederal Reserve Bank of St. LouisGreat DepressionJapanKaren MracekLehmann BrosMake America Great AgainMedia Relations CoordinatorMember BanksNobelOuchPaul SamuelsonReserve BanksSt. Louis Fed President James BullardU.S.US ofVirginia
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