Major economies rely on dangerous myths

China’s economy is tanking.  Refugees flood Europe.  Possible interest rate hike threatens U.S.

These three major stories are based on major myths.

China’s economy is in trouble.  Though under a Communist government, the country seems to allow its brand of free enterprise, including foreign investment.  It even has a stock market.

The government has tried to give the impression the benefits of capitalism can be achieved or even surpassed thanks to its ability to intervene and ensure efficient operation.  The stock and other markets boomed, and the economy boasted of remarkable growth.

But the government achieved these results artificially.  While China had something that looked like a free market, the results were actually the result of government manipulation.  Meanwhile, corruption and inflated markets grew.

The new leadership promised to reduce corruption without fully understanding how deep it went.  As it eliminated key people from leadership, China has become nervous about the future.

China’s market growth could not be sustained as prices rose too high.  The government reduced the value of the currency, creating a sense of near panic.  Instead of stabilizing the economy, its attempts to reduce imports, increase exports and support markets came too little and too late.

The result would be that, the market bubbles gone, China would have fewer resources to support its play for world power.  And the reduced Chinese need for imports would pose new threats for the economies of developed countries, though relatively little to the United States.

The myth of the state-run but partly free Chinese economy is fading.

After World War II, some European leaders decided that joining the countries of the Old World together as closely as possible would make it impossible for them to wage against each other once again.  They openly promoted a “United States of Europe.”

Their idea brought about remarkable progress.  National economies became increasingly integrated.  Some countries dropped their currencies in favor of the euro, a multi-nation currency.  The prospect of war in Europe virtually disappeared, not only because of unification efforts, but because the European economy became part of an interdependent world economy.

But some European countries chafed under centrally made rules.  By the time of the 2014 election of the latest president of the European Commission, the European Union’s independent managing body, the winning candidate said he opposed a “United States of Europe.”

The EU has no common refugee policy.  As they have streamed in recent months from the Middle East to Europe, refugees have found some countries, acting on their own, tried to shut the door on their entry.  Refugee access opened only after international attention became embarrassing.

And the common currency was not backed by a common tax policy that could raise the funds to support it in a crisis or by a method of forcing participants to avoid excessive debt.  The Greek crisis eased only when some countries increased bailout funding for their weakened partner.

The euro as a mature, world currency and Europe as a unified region were revealed as myths, though Europe could make them real.

In the U.S., after Congress blocked efforts to stimulate the economy by increased federal spending, the Federal Reserve was left to deal with high unemployment and the effects of the recession.  It lowered interest rates almost to zero to make loans supporting job creation as inexpensive as possible.

Investors, including the pensions funds on which many retirees depend, turned away from buying low-interest bonds in favor of stocks, which have a better chance of producing income.  But each time there has been any hint that the Fed would raise interest rates, stocks have lost value based on the belief that investors would soon return to bonds.

Interest rates have remained low, while, at the same time, stocks have fallen in value.  Not only does that send an inaccurate message about the state of the economy, where unemployment has dropped, but it undercuts retirement incomes.

The market reaction may discourage the Fed from increasing rates even after employment has recovered.  But the market reaction is based on myths.

The truth is the Fed is almost certainly only going to nudge up the rate and will not send it to such higher levels that bonds –lending money – will suddenly look better than stocks – investing money.   

And there is ample history that higher interest rates can co-exist with good stock prices.

In short, like China and Europe, the U.S. has its myths.    Having confidence in myths can be dangerous to economic health anywhere, so now may be the moment to abandon harmful and mistaken beliefs.