Guest Post by Simon Black
On October 19, 1987, the US stock market suffered the worst crash in its more than 200 year history, dropping more than 23% in a matter of hours.
It wasn’t just in the United States, either. More than 20 major stock markets around the world, from London to Hong Kong to Australia, fell by similar amounts.
And economists estimate that stocks worldwide lost roughly $1.7 trillion of value (approximately 10% of global GDP at the time) during the October 1987 crash.
The next morning on October 20th, the Federal Reserve announced that they would do whatever it takes to support the economy.
And ten days later they cut interest rates by 0.5%.
Yesterday the Federal Reserve did the same thing. Stock markets worldwide have been jittery lately due to Corona Virus fears, so the Federal Reserve stepped in and cut interest rates by 0.5%.
Honestly there are so many things that are remarkable about this—
First, the Fed already has a regularly scheduled meeting coming up in two weeks on March 17th. But apparently they thought the situation was so severe that they held an emergency meeting yesterday and hastily voted to cut interest rates by 0.5%.
Just think about what that means: 30+ years ago, the Fed cut rates by half a percent after, literally, the worst day in the history of the stock market.
Today’s stock market turmoil is nowhere near as bad as it was in 1987. Sure, the market is down around 10% over the past two weeks. But where is the law that says the stock market isn’t allowed to fall? Capitalism is all about risk and reward. There are supposed to be periods of decline.
But to the Fed, a 10% correction is catastrophic… SOOOOO catastrophic, in fact, that they couldn’t even wait two more weeks for their regularly scheduled meeting. They had to take immediate action to prop up the stock market.
Ironically, this interest rate cut caused investors to panic even more. After the Fed made its announcement, the Dow Jones Industrial Average plummeted another 800 points.
It’s as if the entire market collectively thought, “Holy cow, if the Fed is taking EMERGENCY action, things must be even worse than we thought.” So the rate cut had the opposite effect as intended.
The Fed also managed to confuse the hell out of everyone… which is something they’ve been doing a lot of lately.
Last year, for example, even when they insisted that the US economy was booming and the unemployment rate was at a record low, they still cut rates by 0.75%… which is typically something they would only do when there’s economic weakness.
And then, yesterday at 10am, the Fed announced that “the fundamentals of the US economy remain strong. . .” But just an hour later they changed their tune and said, “risks to the US outlook have changed materially.”
Go figure, the market tanked even more.
Perhaps most comical is that the entire episode was forgotten by this morning… and the only story that seems to be driving the market is the resurrection of Joe Biden.
So the Fed basically blew a 0.50% rate cut and has absolutely nothing to show for it.
Here’s why that matters—
In the crash of 1987 when the Fed cut interest rates, its benchmark rate was 7.25%. So a half-percent cut was not especially significant.
In 2000 when the US economy entered recession (and the stock market started to fall from its peak), the Fed’s benchmark rate was 6.5%. So they had plenty of room to cut rates.
In 2007 when the US economy entered recession yet again (and the stock market started to fall from its peak), the Fed’s benchmark rate was 5.25%– still plenty of room to cut rates.
But as of yesterday morning, the Fed’s benchmark interest was just 1.75%. So a 0.5% cut is pretty huge. Do the math– they cut interest rates by nearly a third, down to 1.25%.
This gives them VERY little room to cut rates further when the US economy enters recession, virtually guaranteeing that interest rates in the Land of the Free will go negative.
Remember that, in a typical recession, the Fed cuts interest rates by an average of 5%.
Rates right now are only 1.25%… so we could easily see rates at MINUS 3 to 4%.
Just imagine paying money to deposit your savings at the bank (Wells Fargo will have so much fun), or being paid to borrow money…
That is now a very likely possibility in the most advanced economy in the world.
I probably don’t have to tell you this, but negative interest rates will almost certainly be very positive for gold prices, and gold-related investments.
More on that soon… because this emotional roller coaster is far from over.
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If that happens we’re all going to the mattresses with cash.
Assuming there will still be cash in existence for much longer. The corona virus is probably a good excuse for the masters of the universe to get rid of all that dirty old cash. You know, gotta do it for the public good or whatever.
So before we go negative will there be a bank “holiday” and suddenly any money in the banks are frozen?
When you deposit money into the bank it is no longer yours. It becomes their money and they can do what they want with it after promising to give it back to you.
Keep your backs to the wall and don’t, don’t drop your soap.
“ Rates right now are only 1.25%… so we could easily see rates at MINUS 3 to 4%.”
If they cannot force inflation then they must have negative rates which in turn is forced inflation. Your dollar today will buy 4% less to,orrow. It forces people to spend and buy hard assets or things that hold value. Perishables will not be in demand.
The supply shortage due to virus will also cause inflation due to demand with falling supplies. They need inflation due to all the money printing and QE they give the banks. The banks are borrowing from the feds overnite window to avoid bankruptcy, the corporations stock buyback for the last decade was fueled by pension funds loaning them money. When not if this fallout occurs banks, pensions and many flagship corps will be gone. Along with pensions….
Seems gold and silver is where to be right now before the masses realize it. However, if they make cash illegal to transfer due to viruses it poses a serious kinerty movement problem for preppers and barter….
Another inside the park home run in less than 20 minutes…
Armstrong claimed recently even if the fed tries to go negative, the bond market won’t go for it. Interest rates will go up no matter what they try to do. I know Armstrong is a little weird, but I believe he’s been right more than he’s been wrong.
The Fed is in full panic mode. Deflation is coming and they are powerless to do anything to stop it.. That deflation will cause a mass repricing of assets, and the majority of those assets have been purchased with borrowed money. When the value of assets fall below the debt that has been incurred on those assets, the result is usually default on the debt. That is what scares the Fed and their member banks to death. They would much prefer to lower interest rates and allow smaller payments that to have the debt and the money that debt represents disappear all together.
70% of US GDP is now service sector, much of it small business, and that is where the impact from this virus will hit the hardest. Small business simply does not have the staying power to withstand 3 or 4 months of no income with inflated overhead costs. Faced with the choice between incurring crippling debt that will last for years or decades, or hiding assets and declaring bankruptcy, most small business people will do what is in their best interests in the long run. The thing banks and the Fed fear worse than anything is the default on debt, and yet they have created an environment where the default on mass quantities of debt is the only realistic solution.