If US Fed raises interest rates this week, brace for global financial earthquake
Posted on September 17th, 2015
Citizens Electoral Council of Australia Media Release Thursday, 17 September 2015
A decision this Friday by the US Federal Reserve to raise interest rates could set off an earthquake in the global debt bubble, which is now much bigger than at the time of the 2008 crash.
The shock waves will slam economies which have lots of debt inflated by years of record low interest rates—including Australia.
The International Monetary Fund, World Bank and Bank for International Settlements have all issued warnings ahead of the US Fed’s decision, urging against a rate rise.
In a 14 September report, BIS chief economist Claudio Borio warned, Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve.” Of the recent market turmoil, Borio explained, We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines.”
These warnings prove that there has been no economic recovery since the 2008 crisis; instead, the so-called developed economies have propped up their financial systems with virtually zero interest rates and the central bank money-printing called quantitative easing. If governments had directed this money into productive investments, such as infrastructure and industries, it would have fuelled a real economic recovery, but they didn’t. It went instead into propping up the banks which caused the crisis, and those banks used it for speculation, in derivatives and mortgages, which just expanded the debt bubble. Business consultants McKinsey & Co. reported back in February that global debt as of 2014 was $57 trillion more than in 2007, a 17 per cent increase; total Australian debt in that time increased by 30 per cent.
The problem with the decision-makers, such as US Fed chairman Janet Yellen, is that they believe their economic theories, whether they be monetarist or Keynesian (two sides of the same coin), and the statistics that are based on those theories. Consequently, if she raises rates she might think she’s pushing the recovery” button, but instead push detonate”.
It’s urgent that we change the entire system, beginning with a full Glass-Steagall separation of everyday retail banking from speculative investment banking. This is the equivalent of sheltering behind a wall while setting off a controlled detonation of a mine-field. It was the repeal of Glass-Steagall in 1999 which exposed the real economy to this danger; only restoring Glass-Steagall, worldwide, will protect the real economy.
Secondly, governments must immediately move to invest in the infrastructure projects and productive industries that will employ their populations and meet their needs. This can be done through government-owned national banks that use the same quantitative easing mechanism the central banks used after 2008, but for productive public investment—the policy that newly-elected UK Labour leader Jeremy Corbyn calls People’s Quantitative Easing.
Thirdly, Australia and other developed nations must collaborate with the BRICS nations to establish a new model of international relations, based on co-operation on economic development projects that create prosperity and the basis for lasting peace.
Governments will only take these steps if the people force them to. That is starting to happen: in the support for Glass-Steagall advocates including Jeremy Corbyn in the UK, and Bernie Sanders and Martin O’Malley in the US, and in the anti-austerity movements in Greece, Spain and other European countries. The CEC is building a mass movement to force this policy shift in Australia—join the fight today!