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Sounds boring, but wait, read on. These terms are behind much that matters. First is ZIRP or Zero Interest Rate Policy. The developed world (Europe, Japan, USA) dropped interest rate to zero save the economy from the 2008 crash. Unfortunately, the economy stagnated while bank savings rates to dropped to almost nothing. It did, however, fuel the stock market beyond fair value (see post below). Next is QE or Quantitative Easing. The central banks bought bonds from the public and flooded the system with cash. The plan was to force the banks to lend out that idle cash and start up the economy? That did not work either.

With interest rates now near zero, there is NIRP or Negative Interest Rate Policy. The central banks will force interest rates down through to zero the point where the consumer will be charged to keep their money in the bank, forcing the depositor/consumer to spend it instead and revive the economy. Right? Well, maybe not. The smart choice may be to withdraw the cash and keep it under the mattress. But this would cause bank runs as depositors cash out the accounts. So first, cash must be outlawed. No $100, no $50, no bank runs, nowhere to go. This sounds ridiculous but read the news. Negative interest rates are raging in Europe and Japan, and a “cashless society” is being proposed everywhere.

Perhaps the next step is Direct Monetary Fiscal Policy. The way things currently work is when our government needs money beyond what it collects, they issue debt in the form of Treasury bonds. So far that comes to $19 Trillion in Federal Government debt, $9 trillion of which was just borrowed by the Obama administration. Fortunately, our Federal Reserve Central Bank has soaked up trillions of that through the above-mentioned QE program. So, to oversimplify, our government owes itself trillions. Again, ridiculous. So what may be coming are that laws will be changed so the Federal Reserve can create money to pay for massive government programs directly without the U.S. Treasury issuing any new debt. Traditionally, this would be highly inflationary, but we are not in traditional times.

Being an optimist, I hope it works.

This stock market sell off is being blamed on news that China’s economy is weakening, but it is important to note that China’s news is a mirror on what is going on in the rest of the world including the U.S.  China is an industrial powerhouse built on exports and the global economies are just not buying Chinese exports like they used to. Furthermore, raw material economies like Brazil and Australia depend on China to import huge quantities of their raw materials to manufacture finished goods which China then sells to the world. So when China doesn’t sell to the developed world, it doesn’t buy from the raw material economies.

Many attribute this to what changed in 2008. They call it ‘peak debt’. The pillar of aggregate demand (the middle class) maxed out on the money/credit they could or would borrow and spend. So demand for Chinese goods began to falter and the demand for raw materials began to taper off. This effect was delayed as the Chinese government injected stimulus to support their economy;  building even more capacity hoping demand for their exports would return. It didn’t.

Compounding this was the cure the developed world’s central banks undertook only made the problem worse. To reinvigorate economic activity or ‘aggregate demand’ they dropped interest rates to 0% (Quantitative Easing, or Zero Interest Rate Policy). Corporations worldwide used these low interest rates to expand even more capacity to meet the expanding aggregate demand they thought would soon appear.  But it didn’t happen. The American and European middle class was under pressure and not willing or able to continue  their  borrow-and-spend splurge. The expected resurgence in demand for Chinese exports never happened.

China’s economy is cooling because the world’s economies cannot increasingly import their exports. Without the world’s need for China’s exports, they have less need for the raw materials to manufacture those exports. Hence, a concurrent collapse in commodities prices, and not just oil, but iron ore, copper, zinc, etc. This lack of demand for exports from raw material economies then boomerangs back on less demand for Chinese exports, and so on.

It is not just China’s economy that is weakening, it is worldwide.