Ron, i would agree that the US economy is structurally more sound than most other industrialized nations. i have said this already in my earlier reply to you.
that was however not the point of Noland's article. the point of the article as i understood it was that credit growth in the US is egregious, and the numbers seem to bear this assertion out. another important point being made is how the asset backed securitization markets are used to transform the credit ratings of the assets in question from junk to investment grade, a variation on the borrow short/lend long theme, only infinitely more dangerous in a systemic sense.
to attribute the enormous growth in the US money supply to demand emanating from fringe economies that use the USD as a default currency is imo too simplistic a view. i tend to think that the aforementioned growth in credit/debt has more to do with it. in the Austrian sense the US is in the midst of a crack-up boom that is largely credit induced. the big question is imo not whether the Fed overshoots in terms of its rate hikes - they are largely rendered ineffectual anyway due to constant massive reserve additions. the question is rather when will the natural limit of this credit growth be reached.
the current state of affairs is that private sector debt is at an all time high, in every which way(i.e. both relative to assets/GDP/disposable income as well as in absolute numbers). this is precisely what has led to the Japanese liquidity trap which you mention.
as debt grows, it is natural that the quality of this debt declines. you may recall that when the Japanese debt and asset bubble topped out, nary a soul predicted a 10-year long bear market/liquidity trap/depression. the naysayers had approximately the same credibility problem as Mr. Tice enjoys now. imo the fact that he has warned of the growing imbalances for quite some time doesn't make his analysis less pertinent - after all, the imbalances have grown larger in the meantime instead of moderating.
neither households nor corporations have balance sheets equipped to deal with a downturn, which in turn can probably only be averted as long as credit growth continues to outstrip economic growth as it has done in recent years. it is clear that at some point the servicing of this debt pile becomes an impossibility - the aforementioned natural limit. of course it is hard to predict when the limit will be reached - the bubble's durability so far is quite amazing.
my guess is that the current account deficit which is growing by leaps and bounds will eventually become the trigger for an economic downturn. since the US savings rate has plummeted to heretofore unseen depths (see charts relevant to this discussion: a) savings rate: csf.colorado.edu
b) total consumer credit: csf.colorado.edu c) savings as percentage of disposable income: csf.colorado.edu d)household debt as % of disposable income: csf.colorado.edu e) personal income/credit market debt trends : csf.colorado.edu f)current account deficit: bearmarketcentral.com )
it is necessary to pull in well over $1 billion daily from overseas savings to keep it financed. this is however becoming more difficult as overseas economies revive. that's the reason why we have seen an interest rate bidding war of sorts commence, a situation which i expect to persist.
imo ultimately the current account deficit problem will be resolved by means of a recession - which will likely be more severe than the last one, as the mountain of private sector debt will weigh in. we know the vicious circle from Japan: first, increasing defaults lead to credit markets seizing up, and banks pulling in their horns. then consumers and corporations engage in a scramble to pay off debt and increase savings, thus choking off consumption expenditures and capital investment, further reducing the ability of the weaker borrowers to repay debt, which in turn leads to more non-performing loans on the banks balance sheets and so on.
in addition the asset bubble will by that time likely deflate rather quickly, impairing the value of collateral, and damaging consumers psychology, further contributing to the recessionary unwinding of the accumulated credit excesses (here is consumer sentiment,exuberant and typical for a late stage boom : csf.colorado.edu.
imo a crucial mistake has been made with regards to the Fed's often stated main policy goal, which is to keep the aging expansion going as long as possible. contrary to received wisdom, shorter economic cycles are actually better for the economy's long term health, as excesses like the ones documented in the above charts are cleared out more frequently, instead of being allowed to accumulate. as things stand, the seemingly endless boom will eventually lead to a mirror image bust, perhaps not as severe as in structurally challenged Japan, but certainly more severe as it would have been had the Fed applied the brakes more frequently and with more gusto.
it is a question of short term pain vs. long term gain and vice versa. as recently as '94 the Fed was worried about a developing stock market bubble as the minutes from early '94 FOMC meetings show. however, now that the bubble is thrice as large, the good chairman professes his inability to spot it, except in hindsight. which amounts to an admission of failure as far as i am concerned - the Fed has allowed the bubble to form, and now is trying to avoid taking responsibility for it.
a few words regarding Japan: i do agree with your comments on the Japanese quandary. i feel that the BoJ should actually proceed to raise rates. obviously, no other strategy has worked so far. raising rates would give Japanese savers a bigger return, which might induce them to spend more, and it would send a strong psychological signal to the markets that the BoJ believes in the durability of the latest economic upswing and an increase in inflationary pressures. this is what might be needed to turn things around. the BoJ could continue to monetize government debt at the same time in order to further inflationary expectations.
the Fed on the other hand, instead of letting its chairman wax about productivity, the measurement of which has begun to raise serious questions, should concentrate on combating the objectively measurable imbalances in the economy. if it takes a recession and a bear market to achieve this, so be it. it will save the US and global economy from having to endure more pain later.
regards,
hb |
