From 1927 to 1929 the Fed deliberately created then burst a stock
bubble using interest rates. Republican President Hoover signed the
Smoot-Hawley Tariff act in 1930 to defend American industry, resulting in a
trade war that was blamed along with Hoover for the Great Depression that was
brought on by an economy bloated with debt and easy money during the Roarin’
Twenties boom. Hoover was blamed and lost re-election to Democrat FDR with his
New Deal. Behind all were the
actions of the Federal Reserve, the real power. Soon it will be clear if 2020
will be a modern era repeat of the Hoover script, this time with a Democrat
whose “New Deal” will likely be green.
In
recent months US President Trump has pointed repeatedly to his role in making
the American economy the “best ever.” But behind the extreme highs of the stock
market and the official government unemployment data, the US economy is
primed for a 1929-style shock, a financial Tsunami that is more influenced
by independent Fed actions than by anything that the White House has done since
January 2017. At this point the parallels between one-time Republican President
Herbert Hoover who presided over the great stock crash and economic depression
that was created then by the Fed policies, and Trump in 2019 are looking
ominously similar. It underscores that the real power lies with those who
control our money, not elected politicians.
Despite
proclamations to the contrary, the true state of the US economy is getting more
precarious by the day. The Fed policies of Quantitative Easing and Zero
Interest Rate Policy (ZIRP) implemented after the 2008 crash, contrary to
claims, did little to directly rebuild the real US economy. Instead it funneled
trillions to the very banks responsible for the 2007-8 real estate bubble. That
“cheap money” in turn flowed to speculative high-return investment around the
world. It created speculative bubbles in emerging market debt in countries like
Turkey, Argentina, Brazil and even China. It created huge investment in
high-risk debt, so called junk bonds, in the US corporate sector in areas like
shale oil ventures or companies like Tesla. The Trump campaign promise of
rebuilding America’s decaying infrastructure has gone nowhere and a divided
Congress is not about to unite for the good of the nation at this point. The
real indicator of the health of the real economy where real people struggle to
make ends meet lies in the record levels of debt.
Seeds of Destruction: ...William
F. EngdahlBest Price: $9.73Buy New $18.70(as
of 11:40 EDT - Details)
Today,
fully a decade after the unprecedented actions of three presidents, the US
economy is deeper in debt than ever in its history. And debt is controlled by
interest rates, interest rates ultimately in the hands of the Fed. Let’s look
at some signs of serious trouble which could easily put the economy in a severe
recession by this time in 2020.
Ford
Motor, GE
On
September 25 the corporate bond debt of Ford Motor Co., which unlike GM refused
government nationalization in 2008, has just been downgraded to “junk” status
by Moody’s, who said Ford faces “considerable operating and market challenges…”
It affects $84 billion in company debt.
Junk
rating means than most insurance companies or pension funds are banned from
holding the risky debt and must sell. Before Moody’s rated Ford bonds at the
lowest just prior to junk, BBB. The problem is that over a decade of Fed low
interest rates, corporations have taken greater debt risks than ever, and the
share of BBB-rated or “at risk of junk” bonds today has risen to more than 50%
of all US corporate bonds outstanding. At the start of the crisis in 2008
BBB-rated bonds were only a third of the total. That amounts to more than $3
trillion of corporate debt at risk of downgrade to junk should the economy
worsen, up from only $800 billion a decade ago. Ten years of unprecedented
ultra-low fed interest rates are responsible. Moody’s estimates that at least
47 other multi-billion US corporations are vulnerable to junk downgrades in a
sharp economic downturn or with rising interest rates. The most mentioned are
the aerospace and electrical conglomerate GE which among other things makes jet
engines for troubled Boeing.
Corporate
debt in the USA today is a ticking time bomb, and the Fed controls the clock.
Today total corporate debt exceeds $9 trillion, an all-time high, a rise of 40%
or $2.5 trillion since 2008 according to the St. Louis Fed. With the ultra-low
Fed interest rates since 2008, companies have doubled the debt outstanding but
debt cost has risen only 40%. Now in recent months the Fed has been raising
interest rates directly and indirectly via Quantitative Tightening. The most
recent token .25% rate cut does little to change the grim outlook for the US
bond market, the heart of the financial system.
Ford
among other problems is being hit hard by the global downturn in the auto
sector. In the USA car dealers have become so desperate to sell cars as
consumers are choking on record levels of personal debt that they have recently
offered 8-year car loans. For the past two years the Fed has been slowly
ratcheting interest rates higher. The predictable result has been rising
default on household debts, especially car loans. As of April, 2019 a record 7
million Americans were 90-days or more behind in car loans, some 6.5% of all
auto loans. More than 107 million Americans have car loans today, up from 80
million in 2008 and an historic record. The rise in defaults parallels the Fed
monetary tightening graph.
Both
Ford and GM are announcing thousands of job layoffs as the economy slows and
consumer debt reaches dangerous levels. Ford is cutting at least 5,000 jobs and
GM 4,400 in US operations. Tens of thousands more layoffs are deemed likely in
coming months if the economy worsens.
Then
the private US Institute for Supply Management just reported that its index of
manufacturing industry contracted to the weakest since June 2009, the depth of
the economic crisis a decade ago. In the survey companies cited uncertainties
related to the China trade war of Trump as the major factor behind depressed
hiring and business activity. Trump then attacked the Fed for not moving fast
enough to lower rates.
One
indicator of the precarious state of the USA real manufacturing economy is the
deepening recession this year in the trucking industry, the sector that moves
goods through the country. In September 4,200 truck drivers lost their jobs as
freight rates plunged owing to lack of goods traffic. In the first six months
of 2019 around 640 trucking companies went bankrupt, three times the number a
year before when Fed rate impacts were still low and trade war consequences far
less clear. In June trucking loads were down more than 50% in June compared
with June 2018 in the trucking spot market. Rates also dipped by as much as
18.5% over that same period.
The
volume of freight shipped by all modes in the US has been sinking dramatically.
Freight shipments within the US by truck, rail, air, and barge fell 5.9% in
July 2019, compared to July 2018, the eighth month in a row of year-over-year
declines, according to the Cass Freight Index for Shipments, which excludes
bulk commodities such as grains. This decline, along with the 6.0% drop in May,
were the steepest year-over-year declines in freight shipments since the
Financial Crisis of 2008.
Dodgy
Home Loans?
Far
from realizing the lessons of the US sub-prime housing debt crisis leading to
the global crisis of 2007-2008, the banks have quietly moved back into making
dodgy loans. Moreover, the two quasi-government mortgage lending guarantee
agencies, Fannie Mae and Freddie Mac are in worse shape than during the 2007
sub-prime real estate crisis.
Nonetheless
in March, 2019 the President signed a Memorandum calling for steps to end the
ten-year Government conservatorship of the two agencies. However, as several
officials recently testified, “The U.S. housing finance system is…Worse off
today than it was on the cusp of the 2008 financial crisis.” That, despite $190
billion of taxpayer bailout to the two agencies. By a Congressional directive
Fannie Mae and Freddie Mac are allowed to hold a loss buffer capital reserve of
combined $6 billion. However they own or guarantee almost $5 trillion in
mortgage securities. Many of those mortgages are of dubious or dodgy credit
quality like before 2007, as banks look for higher interest rate yields. If the
overall economy worsens in the coming year in the run-up to November 2020
elections, home mortgage defaults could soar. It has been estimated that
“if just 0.12% of Fannie and
Freddie’s mortgages go bad (about one-tenth of 1%), it would wipe them out
completely. They’d have no capital left. And without a government bailout, they
might cease to exist altogether. That could quickly lead to a new mortgage
loan crisis.”
The key to the US economy is debt and debt
is at an all-time high for US Government, whose deficit is rising annually at
more than $1 trillion, for corporations with record debt and for private
households where home mortgage debt, student loan debt and car loan debt all
are at record high levels. Student loan debt reached $1.46 trillion by January
2019, with serious delinquency rates much higher than any other debt type.
Mortgage debt accounted for $9.12 trillion. Total private household debt was a
record $13.5 trillion. If we add to this precarious economic debt the situation
in American agriculture where farmers face the worst crisis since the early
1980’s, it is clear that the economic miracle of the Trump era is far from
stable.
To wit, one of the most noted features of
recent US economic growth, the US shale oil recovery of 2018 that made America
the world’s largest oil producer, has all but flattened out this year as world
oil prices fall sharply. The fall is threatening many US shale oil producers
many of whom borrowed by issuing blow investment of high interest yield junk
bonds in hopes of a recovery from the price collapse after 2014. Even an attack
on Saudi oil infrastructure and threats of war in Iran and Venezuela have not
stopped the price slide in oil in recent weeks. If oil prices continue to fall
below $55 a barrel a new wave of bankruptcies and closings in the US energy sector
will follow, most likely in 2020 just in time for the US elections.
From
1927 to 1929 the Fed deliberately created then burst a stock bubble using
interest rates. Republican President Hoover signed the Smoot-Hawley Tariff act
in 1930 to defend American industry, resulting in a trade war that was blamed
along with Hoover for the Great Depression that was brought on by an economy
bloated with debt and easy money during the Roarin’ Twenties boom. Hoover was
blamed and lost re-election to Democrat FDR with his New Deal. Behind all were
the actions of the Federal Reserve, the real power. Soon it will be clear if
2020 will be a modern era repeat of the Hoover script, this time with a
Democrat whose “New Deal” will likely be green.
Reprinted
with permission from GlobalResearch.ca.
F. William Engdahl is strategic risk consultant and lecturer, he
holds a degree in politics from Princeton University and is a best-selling
author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.
Copyright © 2019 GlobalResearch.ca, F. William Engdahl
