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The Head of the Bank of England Warns Against the Global Economy

LONDON – The Bank of England’s Governor Mark Carney said the US-China deal on the sidelines of the G20 summit last weekend for the resumption of trade talks has helped to soften the dangers weighing on the global economy, WSWS reported Thursday.
In 2017, the world economy was experiencing its fastest growth rate since the global financial crisis of 2008. In addition, there were indications that central banks around the world were seeking to return to more “normal” monetary policy by reducing financial stimulus. This went through the board.
Carney noted that “in recent months, interest rates in the advanced economies have fallen sharply, especially in the United States, where two new rate hikes over the next three years have been reduced to four in the next year.” In the euro zone, markets had begun to forecast further rate cuts and new asset purchases by the European Central Bank.
Interest rate outlooks have a major impact on the bond markets, with long-term government bond yields falling sharply as their prices rise. Bond prices and returns are inversely related.
Carney pointed out that 10-year US Treasury yields hit their lowest level in two-and-a-half years. UK equivalent yields were at their lowest level since the Brexit referendum in 2016 and German 10-year yields were at all-time lows. In all, there is now 13 trillion in investment grade debt traded at negative returns – a record. A negative return means that a buyer of such a financial asset would suffer a loss if it held it until maturity.
At the same time, the low interest rates had “provided substantial support to the stock markets,” which had now reached unprecedented highs in the United States, “despite an increasingly weak and uncertain economic outlook.”
“These market developments reflect a radical change triggered by growing concerns over growing trade tensions and policy uncertainty omens are disturbing,” said Carney.
The rise in the price of financial assets – bonds and government stocks – is a kind of feverish chart of the growing problems of the underlying real economy.
Over the past year, Carney noted that the global economy has shifted from a solid, broad-based expansion to a general slowdown, with the proportion of the global economy rising from four-fifths to one-sixth above the global economy trend.
Initially motivated by concerns about bilateral trade imbalances, trade measures are being taken to address issues ranging from immigration to intellectual property protection, to the control of technologies underlying the fourth industrial Revolution. It has even become fashionable for some to talk about a new cold war. However, this “new cold war” is taking place in very different conditions from those of the twentieth century, with the escalation of the trade war becoming more and more acute with the increasingly integrated nature of the global economy.
At the height of the Cold War, Carney said, trade between the US and the USSR was worth $ 2 billion a year, while today “trade between China and the United States costs $ 2 billion dollars a day.
Although Carney did not elaborate on this, the growing role of intermediate goods means that current trade conflicts are much more explosive than those of the 1930s. During this period, tariffs were largely imposed. on finished products. Today, they are imposed on products that are part of a global production system in which the components of a product often cross borders before being in finite form.
Reflecting the more feverish atmosphere, a trade war has rocketed the most worrying risks for investors, and global policy uncertainty has hit record highs, he said.
Carney noted that across the G7 countries, the growth rate of business investment has almost halved since its peak in late 2017, leaving global expansion more dependent on consumer spending and reduces its resilience
However, while corporate profits are down, “for the moment”, the drop in expected interest rates set by central banks “has dampened the impact on stock prices”.
These comments highlight one of the essential characteristics of the world economy: the growing dependence of large companies on the price of their shares, resulting from the reduction in interest rates that continuously “tears” the markets.
This occurred yesterday when the Dow Jones index on Wall Street reached a record level, joining the other two major indices, the Nasdaq and the S & P 500, to reach record levels.
The market boom is entirely dependent on the expectation of interest rate cuts by the US Federal Reserve, perhaps at its next meeting at the end of the month, followed by further rate cuts before the end of the month.
In its report on the new record, The Wall Street Journal quoted comments from Jim Baird, Investment Director at Plante Moran Financial Advisors. He added that if the economic data indicated that the Fed had decided that it did not need to proceed in an “aggressive” way, investors would probably be disappointed and any indication that the Fed would not reduce rates would be a catalyst increased volatility.
In other words, any notion of independence of the Fed has disappeared. The US central bank has its head in the air to ensure that nothing stands in the way of wealth accumulation by speculation in the financial markets.
(Sahar News Monitoring Desk)

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