US Economy: Recovery, Stagnation, and Interest Rates.

On CNBC, we read:

The U.S. economy contracted at a much steeper pace than previously estimated in the first quarter, but there are indications that growth has since rebounded strongly.

The Commerce Department said on Wednesday gross domestic product fell at a 2.9 percent annual rate, the economy’s worst performance in five years, instead of the 1.0 percent pace it had reported last month.

While the economy’s woes have been largely blamed on an unusually cold winter, the magnitude of the revisions suggest other factors at play beyond the weather. Growth has now been revised down by a total of 3.0 percentage points since the government’s first estimate was published in April, which had the economy expanding at a 0.1 percent rate.

The cold winter had nothing to do with it. The USA has had plenty of colder-than-normal winters without inducing economic stagnation. There is the no way that an unseasonably cold winter had an effect of this magnitude on the nationwide economy. Blaming the weather is cover for the fact that the Federal Reserve and government economists are unable to sweep away the legacy of the 2008/2009 recession, and they’re running out of excuses for why that is.

The presence of free-market capitalism in America is indeed allowing recession-battered markets to recover, but much more slowly than they would without government intervention into the economy, which retards economic recovery.

I direct our attention to a tried and true method of measuring worldwide economic health: the Baltic Dry Index.



As we read on the current Wikipedia entry:

The Baltic Dry Index (BDI) is a number (in USD) issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides “an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food; the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity. . . .

A falling index represents falling demand.

Over the past 5 years, the trend is clear: downward. The economic recovery has been weak. The index has been mostly stagnant over the past 3 years. This corresponds with the stagnant economy.

Here’s what is interesting about this situation: in today’s economy, capital is basically free. Short-term interest rates have fallen to basically zero. The below chart shows that this has been the case for the past 5 years. Short-term T-bills haven’t risen above roughly 0.25% since 2009.


The situation is similar in short-term commercial paper:


According to Keynesian economic theory, we should be seeing enormous economic growth. Low interest rates encourage borrowing money. This money ostensibly fuels spending and demand, which kickstarts the economy (according to Keynesians, anyway). This is not happening. Rates have been near zero since 2009, but the recovery since 2009 has been stagnant.

Rates basically at zero. For the large banks and corporations issuing securities, their obligations are almost nil. They can borrow money from investors practically for free. What are they doing with this money? I have a guess: leveraging. They are borrowing short and lending long. The money costs basically nothing to borrow, at near-0% interest, and can be thrown into long-term investments with a better rate. They beef up on borrowed cash to buy long-term assets.

At least, they do this with part of the money. The rest of the cash is held at the Federal Reserve as “excess reserves”:


So one large portion of their assets are spent on longer-term carry trades, while the rest of the money is being socked away in the vaults at the Federal Reserve. Why is this the case? Because commercial banks are afraid to lend into the general economy. As to why exactly that is, I cannot say. But I can guess that commercial bankers are pessimistic about the state of the economy. They do not trust the current economy. They would rather have their money tied up in long-term carry trades or sitting in Federal vaults doing nothing rather than lend out into the general economy. This says to me that the banking sector is not as optimistic about an ongoing recovery.




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