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The Cult of Low-Interest Rates

Jeffrey Tucker

Posted September 19, 2022

Jeffrey Tucker

In a market where hope is hard to find, traders suddenly seized on a piece of “good” news. China has responded to its plummeting productivity by cutting back its benchmark rate, from 4.6% to 4.45%. It is a small cut and illustrates just how hungry traders are these days. Anything surprising that smacks of easy money causes a momentary frenzy. 

But is there anything really to stir excitement here? The cut could intensify inflation and capital outflows. It will weaken the currency. It will on the margin diminish prospects for growth over the long term. 

We know this from 30 years of history, starting with Japan in 1991. The country tried to cure its asset-bubble collapse through easy money rather than accepting the reality of recession. It led to a lost decade. Then decades. 

One might have thought this would have taught a lesson to the whole world! It did not. Instead, the U.S. copied the strategy, first gradually and then all at once, in 2008. The flirtation with a zero interest rate policy became a lasting love affair, blowing bubbles within bubbles. Now here we are in the midst of an inflation recession and no way out. The first real break in this ideology came only recently with Jerome Powell’s announcement that he will prioritize stopping inflation over preventing recession. 

China will go the same way. This change will do nothing to overcome the severe political issues that now afflict the country. The ruling regime is using Covid controls to burrow ever more deeply into the preposterous claims that its lockdown policies somehow made China the only country in the world totally safe from the virus. It’s ridiculous at many levels because being sick for a few days and gaining natural immunity is a far better choice than living in a prison state, unable to leave one’s home. 

China’s economy is crumbling, due not only to its lockdown policies but also to the destabilization of its international trade partners, especially the U.S. This began in 2018, with the tariff war and the destructive aspiration of decoupling the U.S. from China technologically. That mainly harmed the U.S., and, in China, promoted anti-American sentiment. At the time, we thought it was a small thing and would surely be resolved. Nope. The fury that it unleashed became worse. 

Biden has, from time to time, suggested there could be some kind of rapprochement but that is highly unlikely. Imports from China are still not back in dollar terms to their pre-2018 levels. Here is the trend line: 


And they won’t be because of the least-reported big change in the global economy yet. This is the gradual but decisive dividing of the world into three large trading blocs. 

Orwell’s World 

In the book 1984, there were three large superstates that mostly seemed interchangeable in their policies: Eurasia, Eastasia, and Oceania. Each state would toggle between the other two as allies and enemies. The history would be rewritten to reflect the new political strategy. 

It’s not widely known that Orwell chose the date 1984 as a number play on the year 1948. That was the year that Russia was suddenly declared to be the new enemy. It was the beginning of the Cold War. Russia was deemed to be a godless communist state, exporting revolution and instability all over the region and the world. 

But here’s what was weird. Only two years earlier, Russia was the valiant U.S. ally in battling the evil axis powers of Japan and Germany. Russia was deemed a liberator and in the postwar agreement, Eastern Europe was handed over to Russian control. This of course led to 40 more years of battling the country all over the world until the state collapsed in exhaustion. 

You only need to go back in time, twenty years before 1948, and see the absolute U.S. frenzy during the period called the Red Scare, when Russia was seen as an exporter of revolution. 

Orwell was so struck by this strange toggling going on, for the better part of half a century, that he used it as a model for his dystopian picture of international relations. This seems to be where we are headed. 

Looking back, the period between 1990 and 2018 was the salad days of falling tariffs, global economic relations, and world trade. Yes, there were wars, but they did not finally disturb the hope of a world economy that was united in the interests of consumers and producers. 

This is all coming to an end. China has its own trade routes established and they are mostly regional and very powerful. Russia too is focusing on its own trade deals and has managed very successfully to do so despite an incredible assault on all aspects of the Russian economy by the U.S. 

Meanwhile, there is talk of turning all the NATO partners into its own trading bloc, thus making a Cold War expedient into a lasting economic arrangement. This is why suddenly there are so many new states applying for membership in NATO. They are looking after their own self-interest as states, which is not the same as your interest. 

Cheap Money for the World 

The entire planet earth is so heavily addicted to forever-expanding fiat money that no state is willing to let it go and face the grim reality of recession. This is certainly true in China. But the same applies in such goofed-up states as New Zealand, where the government is battling high inflation plus recession by printing more money and handing it out like mad. They are repeating the same errors that the U.S. pursued in 2021. 

I remain unconvinced that Powell is serious about tightening enough to make any large difference in the U.S. inflation rate. I’m not seeing the evidence yet: real interest rates are deep in negative territory. What we need is a benchmark rate higher than the inflation rate to cause a serious tightening. Even so, more large banks have recently shifted to tell investors and the public of a new forecast: recession is coming. 

Fiat Money Is the Disease 

If all this weren’t enough, the CDC has already started to whip up a disease panic again, starting with our old friend Covid but now adding monkeypox (something entirely new) to the list of terrifying concerns. It’s hard not to notice that this is happening just as the World Health Organization is plotting a significant power grab to manage pandemic planning from now on for the entire planet. The idea is to say: we did it the right way last time and we’ll do it again for the next pandemic. And you have no say in the matter. 

How do you distract people from being furious with shocked anger over inflation? Find something else that distracts people. Disease seems always to fit the bill these days.

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