By Robert A. Vella
Yesterday, the U.S. Federal Reserve took desperate measures to stave-off a worldwide recession by slashing interest rates to near zero. However, the move only intensified fears that the global economic system and national governments are incapable of coping with the consequences of the coronavirus pandemic. Stock and financial markets crashed again today in response to the news, and understandably so.
During the Great Recession of the late 2000s to early 2010s, regulators and legislators exhausted all their tools to get the economy up and running again. The strategy worked, but at a cost. It is analogous to a battlefield general who orders his defending soldiers to fire all their ammunition to repel the first wave of attacks by the enemy. If a second wave is launched, there’s nothing left to stop it. By drastically cutting interest rates as an incentive for capital investment which could reinvigorate business activity, the Federal Reserve left itself in a vulnerable position. This is why the Fed wanted to raise interest rates as the economy steadily improved, to restock its arsenal. But, when Donald Trump took office in 2017, the Fed’s plan was viciously attacked by the impetuous and incompetent new president who was obsessed with unrestrained economic growth which would boost his political status. Furthermore, the allure of cheap money encouraged corporations to load their debt obligations making them susceptible to bankruptcy if the economy went sour.
Fast-forward to 2020. Besides the interest rate constraint, the U.S. economy has become dangerously unbalanced after decades of neoliberal globalization which consolidated manufacturing production in low-wage, low-regulatory foreign countries (e.g. China) and which left the domestic economy much too reliant on consumer spending and technological innovation. When the latter too started moving overseas, only the American consumer remained – along with the financial sector (i.e. Wall Street) – to support the economy. This shaky situation, where stagnant wages were somewhat offset by inexpensive consumer products, could endure only if stability in the system was maintained. We are now witnessing what happens when that stability is destroyed.
There’s not much else the Federal Reserve can do now except to cut interest rates to zero. If interest rates go negative, the entire banking system could be imperiled as depositors withdrawal their savings, retirement accounts, and other investments. This would force Congress to pass another controversial and costly 2008-like bank bailout, and the advent of recession might force Congress to pass another 2009-like stimulus package which would further balloon the already overstressed federal budget deficit and national debt.
Considering all this, one doesn’t need to be Nostradamus to see where we are heading. As long as COVID-19 is running wild, consumer spending will be curtailed. Without robust consumer spending, the global economy will continue to deflate. As the economy fails, social anxiety and public pressure on government will rise. Yes, we are now in panic mode.
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Here’s today’s news:
Stocks fell sharply Monday even after the Federal Reserve embarked on a massive monetary stimulus campaign to curb slower economic growth amid the coronavirus outbreak.
The Dow was down 2,200 points, or 9.5%, while the S&P 500 and Nasdaq sank nearly 9%.
However, the weekend’s news about the coronavirus outbreak was not helping sentiment. U.S. cases have jumped to 3,774 and 69 deaths, according to Johns Hopkins University. The U.S. Centers for Disease Control and Prevention urged organizers to cancel or postpone events with at least 50 people.
“The main problem this time as to other market disruptions is the abrupt closure of economic activity,” said Dan Deming, a managing director at KKM Financial. “The speed of the impact to middle America, let alone the global community is relatively unprecedented.”
The Federal Reserve’s shock interest-rate cut and bond-buying program rippled through global markets on Monday, with S&P 500 Index futures falling by the most allowed and Treasury yields plunging at the start of what promises to be another volatile week.
Early reaction to the Fed moves on Wall Street was mixed. Some said the measures will help stabilize jittery financial markets, while others warned that the central bank’s emergency actions risked adding to investor panic.
Michael O’Rourke, chief market strategist at JonesTrading:
“They blew it. The Fed panicked and the market is spooked. The S&P 500 registered all time highs less than a month ago and the Fed has expended all its conventional and unconventional tools. The key takeaway will be that they have truly expended all of their ammunition and this is the action of a central bank that is scared.”
The odds of slipping into a recession are increasingly likely as the global coronavirus outbreak puts acute stress on the U.S. economy. That could be bad news for American workers, who may lose jobs by the millions in a downturn.
For those workers who don’t receive severance pay, the financial impact could be especially devastating.
Financial markets have cratered. American life has come to a screeching halt, as schools and cultural institutions have closed, sports leagues have suspended their seasons, major events have been canceled and state officials have moved to ban large gatherings. Officials from major cities like New York have ordered bars and restaurants to close to limit community spread.
Global deaths and infections from the coronavirus have surpassed those inside China for the first time since the beginning of the outbreak.
Worldwide infections have grown to more than 87,000, according to the Johns Hopkins university tracker, while cases inside China, stood at 80,860 as of Monday, according to the Chinese National Health Commission.
Deaths outside China have risen to more than 3,241, according to Johns Hopkins, while deaths inside China stand at 3,208 as of Monday (excluding four in Hong Kong and one in Taiwan).
Las Vegas is known as one of the biggest tourist hotspots in the United States, but many of the top hotels and casinos in the city are shutting down temporarily as a result of the coronavirus outbreak.
According to the Reno Gazette-Journal, officials from both MGM Resorts and Wynn Resorts announced Sunday they would temporarily close their properties in Las Vegas starting Tuesday until further notice.
WASHINGTON – The Supreme Court announced Monday it is postponing oral arguments scheduled for later this month due to the coronavirus, something it has not done in more than 100 years.
The court already had closed its doors to the public last Thursday until further notice “out of an abundance of caution.”
The justices had several major cases scheduled for oral argument in March. Tops on the list were several that will decide if President Donald Trump can shield his tax returns and financial records from congressional committees and New York prosecutors.
The Department of Justice’s Executive Office for Immigration Review announced late Sunday that it will suspend hearings for non-detained aliens scheduled from March 16 through April 10 amid the coronavirus outbreak.
The virus had previously suspended operations at several individual immigration courts, with one in Seattle temporarily closing its doors last week after a report of second-hand exposure to the virus, The Associated Press reported Friday. At the time, the Justice Department had said courts in Boston, Los Angeles, New York, San Francisco, Newark, N.J., and Sacramento, Calif., would remain open.
The delay will affect 68 immigration courts around the country and comes as the immigration courts already face a backlog of about 1 million cases.
The news also comes the week after the Trump administration reportedly ordered immigration courts not to post Centers for Disease Control and Prevention (CDC) flyers explaining procedures to prevent microbial contamination before reversing soon after.
German officials will hold crisis meetings on Monday to discuss a reported attempt by the United States government to secure the rights to any coronavirus vaccine developed by a German pharmaceutical company, The Washington Post reported.
The German newspaper Welt am Sonntag reported on Sunday that the Trump administration wanted to gain the rights to a potential vaccines and move research and development on it to the U.S., according to the Washington Post.
The German newspaper reported that the vaccine would be developed “only for the USA.”
German Interior Minister Horst Seehofer, asked by The Post to confirm the story, said he “heard from several other members of government today that is the case.”
JERUSALEM, March 15 (Reuters) – Israel’s president said on Sunday he will tap Prime Minister Benjamin Netanyahu’s rival Benny Gantz to try to form new government after a repeat election in March, according to an official statement.
Gantz, a former general, had earlier in the day won support from two key parties in his bid to oust right-wing Netanyahu, who is Israel’s longest-serving leader.