The world economy is looking very, very dicey right now.
Investors were enjoying a brief, sweet moment of relief from their perpetual distress in Donald Trump's trade war on Tuesday, when the White House announced it would delay some of the upcoming new tariffs on Chinese goods until mid-December, to avoid mucking with the holiday shopping season of America. But this morning, a whole raft of bad news reminded everyone that, oh yes, we are clearly in the midst of a global slowdown. As Bloomberg put it:
China has reported the weakest growth in industrial output since 2002. The German economy has been declining as exports have fallen, and euro area production has exploded for more than three years while overall expansion.
Prognosis: not great! There were other signs of danger as well. Britain's economy was booming over the past quarter, partly thanks to pre-Brexit fears, and seemed to be on the brink of a direct recession. Then there is the bond market, which is perhaps best described as a sweaty, red face on the face of an expensive suit that screams, "This sucker is about to explode!"
Aiming for safe places to put their cash in a moment of wheels, investors are stacking up on government debt around the world. As a result, bond prices are skyrocketing, and yields (which bond owners expect) are declining. Many bonds today offer a negative yield which means that a growing portion of the world's financial types are so mind-boggling about the economy that it is important to pay for the privilege of having someone in their money.
The bond market is flashing special signs of trouble in the United States. For months now, the Treasury yield curve has changed, meaning that the return on long-term bonds has fallen below those of short-term bonds. It is generally considered a signal that investors are thinking about growing and believe that future interest rates will remain low. It has also happened before every single setback in the last 50 years – without the development of a false alarm along that stretch.
In response to Wednesday's bad news buffet, the alarm went off quite a bit. Yields in the 10-year Treasury fell below those in the two-year Treasury, which basically means that the yield curve is now, officially, super super-duper uber-inverted.
It is possible, of course, that this time will be different – that the upside of the yield curve will not be followed by a fall. But there are other factors to worry about in the U.S. economy, besides the abstruse signals coming from Wall St. For example, the United States' growth in the last quarter as business investment dried up, likely thanks to the uncertainty created by the trade war. And even though Trump may delay some of his tariffs, once he imposes them, they will still pay new taxes on American consumers, which means another slight drag on GDP.
With everything in mind, it seems like … someone … should … think about taking some action to keep the economy from falling into a hole?
There are many people who can theoretically step that up. The Federal Reserve, for example, could lower interest rates again. It may be hesitant to do so — when the Fed lowered rates last month, Fed Chairman Jerome Powell said it could be a one-off event. But at this point, it's unclear what their downfall will be. Powell admitted that inflation was very low. These opportunities abruptly rise and the out-of-control spirals are effectively released. Sure, keeping up with borrowing costs can induce some bad lending or investment bubbles that can lead to problems down the line, but that concern is probably greater than the near and present risk of an actual that setback. Some people are also worried that if the Fed cuts now, it won't be able to cut back later that the recession should really come – but that concern also doesn't make much sense. We would rather try to prevent the economy from sinking into a ditch in the first place, rather than trying to push it back onto the road once we have crashed.
This, for what it's worth, is what Donald Trump wants to see. On Twitter today, he blamed the Fed for maintaining a very high rate and said of "CRAZY INVERTED YIELD CURVE." He is not wrong.
Of course, Congress could also consider jumping into action. Certainly, infrastructure week has become a running joke in America, but seriously, this would be a fantastic time for the United States to stimulate its economy by borrowing an entire cash boat and spending it on cash. Upgrading our rotating transportation networks. The Treasury's thirty-year bond is trading at about 2 percent today, and is threatening to decline – meaning the government could borrow almost three decades at a time. Maybe we should take advantage of that? Fix some subways? Fix some roads? Make good on one of Donald Trump's central campaign promises, even if it hurts Democrats' chances in 2020?
Finally, Trump himself can call the far-flung trade war that he is fighting without much strategy or direction. We know that the trade war is causing problems for American farmers, despite the bailout of the administration. As I mentioned above, it is also clear that domestic business investment is hurting. And as Neil Irwin writes in the New York Times, it is also driving global chaos. Our tariffs seem to put a dent in China's factory production and scare Chinese consumers into spending. Trump is almost certainly seeing it as a supplement, but as a result, Germany has exported fewer cars to the People's Republic, weighing in on its own growth, which is bad for all of Europe. And the weaker the world economy, the more likely it is that companies everywhere will be able to stop renting.
Things are looking a bit blurry right now. The good news is that there are many ways to lighten the picture. Cut interest rates. Borrow and spend money to make tools. Stop working tirelessly with our trading partners Someone just has to take some responsibility and do something.