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Decline that Never Quite Becomes a Fall

Walter Russell Mead

One big reason the Federal Reserve decided against raising rates had nothing to do with the state of the domestic economy, The Financial Times reports:

The Federal Reserve held interest rates at historic lows as concerns about an increasingly brittle global economy overshadowed evidence of a resilient US recovery.

The US central bank maintained its 0 to 0.25 per cent target range for the federal funds rate, ending weeks of feverish speculation over whether it would raise rates for the first time since before the financial crisis.

For years, we’ve been hearing about the ongoing American decline. We’ve been told that emerging markets and particularly the BRICS are transforming the world and that the old rules no longer apply. We created the G-20 because of the widespread belief that the U.S., even with the other G-7 countries, was no longer strong enough economically to set the agenda.

Yet here we have the G-1 holding the switch on which that the global economy depends. The vaunted BRICS have to be protected from the economic disaster that a Fed rate rise would be for them. The Federal Reserve System of the United States is the world’s de facto central bank.

That doesn’t mean that the world economy is in a good place; clearly when interest rates can’t be raised from their present derisory level something is seriously wrong. One suspects that several factors are at work: the over-saving of Asian and oil economies accumulating huge reserves; rapid falls in prices not fully captured by economic statistics so that real interest rates (interest rates minus the rate of inflation or plus the rate of deflation) may be higher than the numbers we are looking at; the gradual deflation of a vast global bubble in excess manufacturing capacity and the consequences of government efforts to enable a soft landing; under-reporting of the shadow economy of, for example, oligarchs in Russia and princelings in China. To say nothing of vast off-the-books liabilities for pensions and other entitlement type spending in the advanced world. Central bankers have their work cut out for them these days.

The United States, especially to those of us looking from up close, often seems to be a stumblebum lurching from one folly to the next. And that’s often true. But what we forget is that, erratic as our national performance might be, the other big economic and political groupings—Europe, China, Japan, India, Brazil and so on—have problems of their own. Even with all its flaws, the U.S. still looks like the fastest runner in a slow field.

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