Now you know why the Federal Reserve should have raised interest rates a long time ago — or even as recently as earlier this🐬 month.
Greece, you might have heard, is in bad financial shape. We’ve been hearing about these problems for years, but it finally came to a head when Germany over the past few weeks said “Genug!” — “E♍nough!” — and demanded that Greece make cuts in its government pension system if it wanted another bailout.
Negotiations have been exhaustive and exhausting. And for weeks, officials in Greece and in other EU countries — off the rec🅘ord, of course — have been spilling the beans that a bailout deal was just around the corner, was being worked on, was near comple🌠tion or whatever other optimistic phrase that could have come out of the mouth of Pollyanna herself.
“Pssst, it’ll all work out,” were the whispers from the bean-spi🅠llers, all of whom had a vested interest in making the situation look better than it was.
Tౠhe trouble is, they were all full of beans. None of the happy talk was accurate. All the smart money got far away from Greece and from investments in any way connected with that country.
This week, Greek leaders declared a bank holiday. That sounds like so much fun — a “holiday” — but it ༺means that regular people can’t get at their savings and smaller companies that bank solely in Greece are not able to get the cash they need to operate.
Next week, Greek 🌄citizens will voteꦏ on whether to implement financial austerity measures that EU officials are demanding. I’m guessing they will say no.
And if I had to guess, if Greece votes no on the auster൲ity measures and the EU somehow bails it out anyway, then Italy, Spain, Portugal and other beggar nations will quickly line up for their handouts.
But that’s not the only thing going on right now. The rest of the world isn’t looking 𓃲so good either.
Puerto Rico — right here in our country — is having financial trouble. The governor of Puerto Rico said over the weekend that it can’t ꩵpay its $72 billion in debts. (Oh, don’t worry! Washington’s there to help even if our 💖leaders deny it.)
Who else is on the list of tro🐓ubled countries? Well, there’s China, the country that seemed to have a very healthy economy until just a few hours ago. Then the overpriced real estate ma𒅌rket collapsed.
And last Friday, the Chinese s💧🌟tock market had its sharpest selloff in years. The Shanghai index fell 7.4 percent on Friday alone.
China has a market bubble, much like our ow🙈n, which the government has been trying to deflate carefully. (Unlike our own government.)
And that’s exactly what’s supposed to happen when there is a crisis — cen🐷tral banks and elected officials are supposed to act.
Now let’s bring this column closer to🔯 home and discuss why the US is different fr🌺om China.
As I’ve been saying for a long time, the Feder﷽al Reserve needed to raise rates if it wanted to get any of its power back. But, at the same time, it couldn’t, because economic growth has been so weak.
On Monday, stock prices in the US fell✃ sharply in response to Greece, China and Puerto Rico. Is this a crisis yet𒁃? No, and hopefully it won’t become one.
But if stocks continue to decline, what are the opꦰtions left for Washington? The answer: There aren’t🥃 very many good ones.
The Obama administration and the Republican C🍃ongre🍸ss don’t dare spend any more to stimulate the economy. The US federal debt is already $18 trillion. And while the annual deficit has declined recently, it is still monstrous by historical standards.
If the financial markets think Washington is behaving irresponsibly, then interest rates will rise and what little economic activi🌃ty the US has will be hurt.
So can our Fed take a𓃲ction like the Bank of China just did? Well, no. Interest rates are virtually at zero percent in the US. So the Fed is essentially out of the picture, unless you count verbal intervention — which means upbeat chatter from Fed officials — as meaningful.
What about anotheไr round of quantitative easing, the tricky monetary policy enacted by the Fed in 2008 and abandoned last year? Under QE, the Fed printed trillions in extra money and used the dough to purchase securities issued by the US government.
And while QE probably helped provide liquidity during the financial crisis of 2008, it has done little to boost the US economy. The Fed’s actions have taken trillions out of 𝔉the pockets of savers and enriched a very small segment of US society — th꧙ose who invest in stocks.
So QE is basically off the table for the Fed.
Even as recently as Monday, Fed offic🌌ials were still t🅰alking about rate hikes. William Dudley, the influential head of the New York Fed, said a rate increase is very much in play for September if the US economy continues to show strength.
Fed chief Janet Yellen had𓃲 her chance to raiseꦉ rates during the brief spurt of good economic news. And she blew it.
Washington will probably make sure the stock market in the US doesn’t collapse. Stocks h💞ave been rigged before and desperate people will do it again.
But is that really what we want to count on?