The United States Federal Reserve recently raised interest rates due to a favorable recovery of the U.S. economy. The latest report, which appears positive, shows that the U.S. has added more than 200,000 jobs with the unemployment rate dropping from 5.3 percent to 5.0 percent. However, U.S. corporations saw negative growth in their revenues in November, and layoffs rose to the highest level since the subprime mortgage crisis. During the first three quarters of 2015, U.S. exports drastically decreased by 11 percent, domestic wholesale trade sales also dropped to the lowest level since the subprime mortgage crisis, with production, sales and real estate all following the downturn, and road, rail and air traffic volumes falling each month.
Official statistics indicate that employment in U.S. manufacturing has been declining for several years. New jobs are created mainly in the service industries such as food services and drinking places that are difficult to verify, which inevitably will involve an element of misrepresentation. Using McDonald’s, which recently announced the closing of 700 restaurants and massive layoffs, as an example, many industries in the U.S. are in a slump, and there is an apparent lack of industries that can massively absorb the newly added jobs. U.S. leading statistics expert John Williams, who successfully predicted the subprime mortgage crisis, publicly stated that, if the working age population who became discouraged by employment difficulties and left the labor market is taken into account, U.S. unemployment rate should, in reality, be at a staggering 23 percent. Therefore, the virtual bubble of the U.S. economic policy that stimulated the stock market could only have a weak impact on consumption and employment through the spillover effect, but does not solve the issues of unemployment and a weak recovery of the real economy.
Since the 2008 crisis, the U.S. has maintained a near-zero interest rate and has not dared to increase it, with the intention of making massive capital injections in private zombie banks riddled with bad debts from speculation.* Private banks on the verge of bankruptcy would not be able to endure even a slight increase in interest rates. This round of Federal Reserve rate hikes was not because of a thriving stock market and favorable operating performance from listed companies, but because of the virtual economy bubble that has been expanding for years, making it difficult to stimulate economic growth.
Although the U.S. stock market appeared to maintain a strong bullish momentum, the higher stock prices are, to a great extent, a result of large corporations using the Fed’s low interest loans to repurchase a large amount of their own shares. This was unrelated to investor behavior, but resulted purely from driving up prices internally. As a result, many companies are carrying huge debts and are forced to cut investments in research and development, and are making massive layoffs. The recent surge of the Dow Jones industrial average did not represent a favorable operating performance by the listed companies, but rather the expansion of the previously mentioned bubble stimulated by credits lacking any financial significance. Moreover, both the Dow Jones industrial average and the Dow Jones Transportation Average have begun to decline, while relying mainly on the 10 large, heavily weighted corporations to sustain gains. The Fed may raise interest rates several times this year and next year to proactively pop the bubble, delivering a double blow against the real economy of overproduction and popping of the virtual economy bubble, with a violent attack on countries with more vulnerable markets, resulting in a global economic recession.
In this context, if China cannot withstand the pressure from the U.S., thus opening wide its capital accounts, the panic of a post-financial crisis in the U.S. and Europe could spread rapidly to the Chinese market. There would be an exit of a large amount of international hot money,** causing China’s foreign exchange reserves to plummet, leaving no money to purchase energy and raw materials, and ultimately resulting in an expanding decline of international commerce multiple times larger. Countries would devaluate their currencies and begin a vicious competition, leading to a collapse of international commerce.
In this sense, the success stories of preventing an economic crisis from Franklin D. Roosevelt’s New Deal and during the period of social reformation in the West are worth learning from. Countries should adopt policies to support the real economy while curbing the virtual economy, taking financial control measures through strict capital account controls and interest rate and exchange rate controls to curb monetary speculation.
*Editor’s note: A zombie bank is a financial institution whose economic net worth is less than zero, but which is able to continue operating due to government credit support in repaying its debts.
**Editor’s note: Hot money is the flow of funds or capital between countries in order to earn a short-term profit on interest rate or anticipated exchange rate differences or changes.