The Central Bankers’ Dilemma; Was Pax Americana Good for America?*

The Central Bankers’ Dilemma

On March 30th, the Federal Reserve announced that it does not intend to increase interest rates in 2019. It has put its Quantitative Tightening (QT) program on indefinite hold. Recall that it was only in November that Fed-watchers were forecasting a continuation of QT with 3-4 interest rate hikes in 2019. No more. The Fed also announced that it would stop shrinking its balance sheet by September when it’s expected to reach $3.5 trillion, a further loosening of monetary policy. Some have inferred that these steps presage a new round of Quantitative Easing (QE) that likely will begin later this year.

The Fed is worried … and yet the economy is motoring along.

The S&P 500 has risen 11{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} so far this year.

Corporate profits, and expectations of higher profits, are up.

The Economic Optimism Index is high – almost 56{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}.

Fears of a trade war have receded.

Why the worry?

Top of the list for the Fed is a pervasive fear that the economy could tip over into deflation, a fear that has plagued the Fed since the Great Recession. With inflation now in an almost 40 year bear market, nothing worries the Fed more than an out-of-control deflationary spiral. That worry has increased with the Fed’s inability, using every economic lever at its disposal over the past decade, to raise the inflation rate. It remains below 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} despite the lowest unemployment rate since the 1960s and increasing wages.

Second is concern that the Fed’s carefully constructed economic models aren’t working … and haven’t been working. The Fed has been consistently overly-optimistic in its economic predictions. With a cloudy Fed crystal ball and a weakening global economy, a wait-and-see approach is prudent, especially when the President has stridently opposed additional interest rate increases.

Third, the Fed understands that at this late stage of the economic cycle with global trade tensions at a multi-decade high, the stock market more easily can succumb to jitters – its plunge in December was a further reminder of the Fed’s power over stock prices. Moreover, the housing and auto markets are weak, manufacturing output is in a downtrend, there are likely to be knock-on effects from the partial 35-day government shutdown in January, and the March employment numbers were shockingly weak.

So what happens next?

The crystal-ball-fog-descent is not limited to the Fed. Most economists’ crystal balls have also clouded over. Those followers of the Austrian School of Economics see bad times ahead, but then they’ve seen bad times ahead since 2009. They see a recession in 2019, a 20{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} or greater stock market correction, rising bond prices, and the Fed returning to QE in 2019. Keynsians are more sanguine. They see a somewhat higher stock market with weak 2019 GDP growth of 1-2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. The consensus among economists (for whatever that’s worth) is for no recession until at least 2020 or 2021, although the track record of economists’ forecasts for even any two-month period is poor, let alone for two years.

Whatever might be said about the Fed’s poor record in accurately predicting GDP growth, its post-Great Recession economic policies have been amazing successful. The U.S. has seen one of the longest – and smoothest – periods of economic growth in its history. It therefore would be foolhardy to bet against the Fed’s ability to continue to control the economic cycle. Tailwinds help, however, and in 2018 the Fed had a tailwind from tax law changes that injected enormous amounts of free cash into the U.S. economy. The consequences from that leverage, the debt from tax reform, will not come due until the mid-2020s. A fresh tailwind in 2019 seems likely to come from infrastructure and increased defense spending now under consideration in Congress. If so, and with a Presidential election little more than 19 months away, it would be bucking history to bet against the U.S. economy. Incumbents win when the economy is right and lose when it isn’t … and this President is especially attuned to winning reelection. That seems the most likely outcome … that is, unless this time is different.

Was Pax Americana Good for America?


The United States established Pax Americana in 1945 after the end of WWII, imposing decades of global growth, spreading prosperity, stability, political and economic integration, and a hard-fought peace that lasted ~70 years. This followed hard on the heels of a global Great Depression, two World Wars and multiple purges and genocides that took tens of millions of lives.

America’s Pax Americana derives from the Roman Pax Romana which lasted ~200 years (from 27 BC to 180 AD) and the British Pax Britannica that lasted 100 years (from 1815-1914).

Just as Rome and England imposed their political and economic systems on their worlds, America built – and rebuilt – the modern world in an image it believed would best serve its interests. It used its power militarily, economically, politically and philosophically to unite a fractured world and build a multilateral, multicultural, globalized economy driven by a commonality of shared political and economic interests. A host of commentators have explained why Pax Americana was good for the world, which they evidence by unprecedented reductions in poverty, disease, malnutrition, and violence and increases in freedom, quality of life, and opportunity. I won’t repeat the statistics. They’re readily available.

But what did Pax Americana do for America and Americans? Did the money America gave Europe in the Marshall Plan help Americans? Were the trade agreements America imposed on the world through the World Trade Organization and otherwise beneficial to Americans and American businesses? How did the outsourcing of manufacturing and service businesses, together with their many jobs, first to Europe and then to Asia, benefit America and American workers?

These are not simple questions and the answers are dizzyingly complex. However, a simple answer can be found in the difference between America today and America in 1945 and 1965 and 1985 and 2005. Those differences cut both ways, but in the final analysis are positive on multiple bases.

America and Americans are better off today than they were at any time in the past. Have many Americans been left behind? Yes. Is that the fault of Pax America or poor execution? No one can doubt that mistakes have been made. Policies could have been improved, as could the execution of those policies. Our government could have been more in tune to a changing world. The records of our past several Presidents certainly could have been better. We fought unnecessary and/or unsuccessful wars. We entered into treaties that were not in our best interest. We pursued a number of economic policies that were damaging to our country and its citizens.

With that as background, students of history know what followed Pax Romana … and everyone knows what happened in the 30 years after the end of Pax Brittanica. History doesn’t always repeat, but sometimes it does but it almost always rhymes but it often rhymes.

Finally (from a good friend)

Psychiatrist vs Bartender:

Ever since I was a child, I’d always had a fear of someone under my bed at night. So I went to a shrink and told him: “I’ve got problems. Every time I go to bed, I think there’s somebody under it. I’m scared. I think I’m going crazy.”

“Just put yourself in my hands for one year,” said the shrink. “Come talk to me three times a week and we should be able to get rid of those fears.”

“How much do you charge?”

“One hundred fifty dollars per visit,” replied the doctor.

“I’ll sleep on it,” I said.

Six months later the doctor met me on the street. “Why didn’t you come to see me about those fears you were having?” he asked.

“Well, $150 a visit, three times a week for a year is $23,400.00. A bartender cured me for $10.00. I was so happy to have saved all that money that I went and bought myself a new pickup truck.”

“Is that so?”with a bit of an attitude he said. “And how, may I ask, did a bartender cure you?”

“He told me to cut the legs off the bed. Ain’t nobody under there now.”

It’s always better to get a second opinion.

┬® Copyright 2019 by William Natbony. All rights reserved.

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