JAMES Bullard, the head of the St Louis Fed, told a recent City Week Forum in London that investors are far too complacent and could be in for a very nasty shock in the coming months as the US interest rate rises.
‘I think reconciliation between what markets think and what the Federal Open Market Committee (FOMC) thinks will have to happen at some point. That’s a potentially violent reconciliation and I am concerned about that,’ he said.
Rakesh Mohan, the executive director of the International Monetary Fund, commented that it is far from clear that the Federal Reserve Bank will in fact be able to raise rates safely without setting off chaos and a massive crash.
He told the City Week Forum, ‘We are entering uncharted waters. Once you are caught in a zero interest rate policy, how can you get out of it without causing a crash?’
Ray Dalio, the founder of Bridgewater Associates, warned that the Federal Reserve Bank risked repeating ‘the errors of 1937’ when it began to raise rates before the recovery was fully entrenched, precipitating a relapse back into depression.
‘We don’t know – nor does the Fed – exactly how much tightening will knock over the apple cart,’ he said.
The dominant opinion is that the Fed will soon pull the rate rise trigger – unless forced to back away by a fresh global shock – potentially an emerging market storm as the soaring dollar tightens the noose on $9 trillion of dollar-denominated debt borrowed outside the US, ruining entire nation states.
The dollar index (DXY) has risen almost 25 per cent since mid-2014 – climbing to a 12-year high of 100.3 last week – an even sharper rise than the dollar rally of the late 1990s that set off the East Asia share crash and collapsed the Russian banks.
Christine Lagarde, the head of the International Monetary Fund, recently raised concerns in India about the ripple effect of the Federal Reserve tightening on countries that have borrowed heavily in dollars and whose still-recovering economies remain desperately vulnerable to a rate rise.
It is being pointed out that in 1937 the equity markets were supreme; today they are dominated by the debt markets, which are, in turn, dominated by the derivatives markets.
The total price of all global equities was around $70 trillion in June last year, according to the World Federation of Exchanges; meanwhile, the notional price of all outstanding derivatives contracts was more than $690 trillion. Around four-fifths of all existing derivatives contracts are based on interest rates.
Ian Stannard from Morgan Stanley has commented: ‘Our bear scenario is that the euro will fall to $0.90 by the end of the year if we see capital controls or anything like that in Greece.’
Meanwhile, the European Central Bank is tightening the noose on Greece a day after the president of the Bank denied the institution was ‘blackmailing’ Athens into agreeing to extreme bail-out conditions.
The ECB is preparing to move to officially ban Greek banks from increasing their holdings of the country’s short-term sovereign debt.
Such a restriction will ensure that the Greek government runs out of money to pay wages and pensions by the end of the month.
Speaking to the European Parliament on Monday, Mario Draghi denied the ECB was acting unfairly: ‘We haven’t created any rule for Greece, rules were in place and they’ve been applied,’ said Draghi.
Athens responded by accusing the ECB of ‘asphyxiating’ Greece.
The ECB’s fresh curb comes as depositors have rushed to withdraw their money from Greek banks. Capital flight amounted to an estimated 1.5bn euros (£1.1bn) in the last week alone.
The truth of the matter is that it is Greece today, and many other countries, including the UK, tomorrow as the capitalist crisis inexorably deepens.
In fact, what we are experiencing is the death agony of the capitalist system whose productive forces, including the working class of the world, are being destroyed by the deepening of the world crisis. There is only one way out of this crisis and this is by building sections of the Fourth International in every country to lead the world socialist revolution that this crisis is driving forward to its victory.