America, the real power vortex

IF EVER we needed a reminder of where financial and economic power lies in the world, we got one last week, and may get another this month. Power lies in America, and the reminder last week came from the chair of the US Federal Reserve, Jerome Powell. He said that the Fed would be ‘patient’ about increasing interest rates.

Markets around the world took this to mean that US interest rates were unlikely to rise this year, contrary to previous expectations.

The US accounts for a quarter of the world economy and the dollar is the dominant reserve currency.

Now we know that interest rates around the world are no longer likely to be pulled up by what happens there.

That has a direct impact here in the UK. It means there will be no external pressure to push up interest rates once the whole Brexit business is settled.

If we were to find ourselves in a rip-roaring boom with surging inflation, sure, we would get higher interest rates. But there is not much prospect of that.

Instead, I think we have to assume that interest rates throughout the developed world will remain low, in some countries near zero, for the foreseeable future.

That will have consequences, good and bad.

Good include the probability that global business will be supported by cheap money, and the prospect of some sort of worldwide recession has faded for a while. Of course, there will someday be a recession, because there is an economic cycle that no one fully understands. But unless there is an escalation of US/China trade tensions (see below), not yet.

Bad consequences include the distortions we have become used to in the past few years. Cheap money favours the sophisticated and the rich.

So savers who simply keep their money in a bank will continue to be cheated, for the interest they get will be less than the rate of inflation. Pensioners will suffer because of low annuity rates. Asset prices, be they houses or shares, will be underpinned by cheap money.

There is, of course, no assurance of investment success, but the basic point is that the more adept you are financially (or the better your advisers) the more you are likely to gain from low interest rates.

That is not good for social mobility. It is fine for families that are already wealthy; but it is tough on people who have to save for a downpayment on a mortgage without family help. And it encourages the debt culture: that it is OK to borrow for more or less anything. Even low-interest debts have to be repaid.

If the US Fed reminded us about America’s financial power, expect the US President soon to remind us about America’s economic power.

Donald Trump’s trade challenge to China (let’s not call it a trade war) could be resolved one way or another this month.

In ten days’ time, two top US officials, the Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer will visit China for the next stage of the trade talks. The deadline, before tariffs are sharply increased, is March 1.

In showbiz terms, Donald Trump needs a success, and he has said the talks have made ‘tremendous progress’.

China has already promised to buy a lot more from the US, and you can see the outline of a deal.

If the US and China can do that deal, the world economy will continue to thrive. If not, we are all in trouble. GOOD banking means saving businesses, not shutting them down.

Of course, companies should never get themselves into the position where they cannot pay their debts.

But when they do, banks have learnt from long experience that they are more likely to recover their money if they can find a way to keep the business going.

So it is truly shocking that Royal Bank of Scotland should put fast recovery of debts ahead of sound banking practice.

We knew it was a catastrophically bad bank; now we know that even after we taxpayers had rescued it, it remained one.

US interest rates are unlikely to rise – there’s less pressure to push them up here