Interest Rates: A Remedy to National Debt? Pt. 1

Since taking office, President Trump has been pressuring the Federal Reserve to drastically cut interest rates. He believes it is a necessary component to fairly compete with economies such as the EU and China that allegedly exercise unequal business practices such as currency manipulation, although the US remains the world’s largest economy in terms of nominal GDP.

 

Recently, the president has changed his stance, presuming that negative interest rates or eliminating interest rates altogether would help the US fight the ever-growing national debt. The European Central Bank has been using negative interest rates to depreciate the Euro against the US Dollar as a means of spurring economic growth. This is to partially alleviate the burden of the current economic slow-down affecting the EU amidst the worries of an upcoming global recession. For example, Germany, the EU’s economic powerhouse, has seen its GDP growth rate fall from over 2% to just under 0.5% in a little over a year. This is partly due to the factory and manufacturing slow-down seen all the way from China to America. Similarly, the effects of the ongoing US-China trade war have been causing unrest in the stock markets and with investors. It is important to note that all inquiries into an upcoming recession have remained inconclusive. There are several differing opinions, with some forecasters saying a recession will not happen, while those that believe in an upcoming recession have no means of corroborating predicted time-frames with one another.

 

The president has long boasted about the “strength” of the US economy based on unemployment and GDP numbers. However, this call for the Federal Reserve to directly address the national debt could indirectly be a sign that the USA may also be witnessing symptoms of an economic slow-down and that a means for economic stimulus is needed, or that the national debt is indeed dangerously amassing out of control. The deficit currently stands at around $22 trillion.

 

This past July, the Federal Reserve slightly reduced the interest rate for the first time in 10 years. The chairman, Jerome Powell, who has been the target of most of the president’s attacks, argues that the economic worries are due to the random but constant tariff threats and the negative effects of the trade war with China. The last time the Federal Reserve temporarily decreased the interest rate to 0% was during the Great Depression.

 

There are legitimate concerns about the US economy: midwestern farmers (especially soybean farmers in Iowa) have been struggling to export their harvest as China was the primary consumer, the 2nd quarter of 2019 saw GDP growth drop from 3.1% to 2%, unemployment rose by 0.1% over the summer, and the Rust Belt coal and steel industries have been growing, but are nowhere near the scale of the early 2000’s. This is in large due to the US becoming the world’s largest producer of natural gas. Although US coal production increased by 6.4% in 2017, it has steadily been declining since 2014. US coal production is predicted to drop by 9.2% in 2019. Coal made up 27.4% of the US power generation in 2018, while that number will fall to 22.3% in 2020. To put this into context, US power generation by natural gas will rise from 35.1% in 2018 to 38% in 2020. Additionally, since the recession of 2008, federal spending has been constantly increasing with no regard for the national debt.

 

Nonetheless, the US economy remains considerably strong with the lowest unemployment numbers in almost 50 years and the wage growth rate increasing from under 2.5% to over 5% under the Trump presidency, while economic growth remains steady. Small businesses are experiencing a 6% increase in profit margins during this past year, while the United States Nfib Business Optimism Index shows an increase from under 95 index points to around 105 index points from 2016-2019. This is largely in part due to savings spurred by the 2017 tax cuts along with additional taxation benefits aimed at small businesses. Likewise, major banks have been making it easier to take out loans with an increased credit limit. These factors make it difficult to determine whether the interest rate is hindering economic growth, as opposed to the uncertainty caused by the president’s use of tariffs and the prolonged trade war with China.

Post-editing by Tom Handels

Charles van BurikComment