By Dr. Irwin Kellner, CBS.MarketWatch.com
Last Update: 9:05 AM ET Jan 30, 2001
NEW YORK (CBS.MW) -- As they look forward to the Federal Reserve's next cut in interest rates and the ones likely to follow, the financial markets see only positive outcomes. Lower rates are usually good for stocks, and what's good for the market is good for the economy as well.
However, lower interest rates do not come risk-free. The most obvious risk, of course, is a return to irrational
exuberance as investors come to believe that the Fed has created a moral hazard. By being so quick to inject monetary stimulus, the Fed might be perceived as bailing people and businesses out of bad decisions.
But that isn't what the FED is doing, at least not yet. He's making the mistake that interest rates are inverse to the creation of money. he must have been trained at a demand management school(Hofstra)
This, of course, is nothing new. The Fed has been a counter-cyclical force since its inception-but since it has not had a perfect track record in managing both the stock market and the economy, easier money alone is not necessarily a big risk.
How is this relevant?
A newer risk emanates from the huge trade deficits that the United States has run in recent years, resulting in foreigners now owning large amounts of dollars. These dollars have been recycled back into the U.S. in the form of investments in stocks and bonds, besides purchases of U.S. companies.
Looking around desperately for something to blame, they finally get around to the trade deficit because the budget deficit is no longer available. In contrast to his claim he apparently forgets the perilous situation in Japan which is likely to oppose any such tendency. He has to be specifically thinking of Europe, but Europe's days are numbered. If we are rapidly slowing, what will occur in socialism? Budget deficits.
For instance, foreign holdings of U.S. financial assets now equal 70 percent of our gross domestic product, up from 50 percent at the end of 1996-and only 20 percent in 1985.
Foreigners now own 9 percent of all U.S. equities-a 50 percent greater share than they did as recently as 1992.
Meanwhile, their holdings of corporate bonds and government securities have almost tripled over the past decade, and now account for more than one dollar out of every five worth of public and private debt.
As you might figure, U.S. banks are not immune from this trend. Foreign holdings of currency, checkable and time deposits in the nation's banks now total close to $400 billion-7.3 percent of the total. Eleven years ago, their share was only half as big.
What all these numbers mean, of course, is that the U.S. has become increasingly dependent on foreigners recycling their dollars back into our economy. While the country was booming and the financial markets were rising, this was a no-brainer for astute foreign investors.
Now that the bloom is off the boom and the stock market is in its second year of treading water, foreigners might well be looking for an excuse to repatriate some of their dollars and invest them elsewhere.
Like where?
If the Fed gets too aggressive, it might well trigger an outflow of funds seeking higher returns elsewhere. That would clearly weaken both stocks and bonds, thwarting the Fed's efforts to boost the economy.
Huh? What higher returns elsewhere and in what risk class? Certainly not in Europe, the only possible factoring destination where rates are half of what they are in the US.
That's why monetary policy needs help from fiscal policy. Cutting taxes would boost the economy while keeping foreign funds from fleeing.
Huh? Tax cuts prevent disintermediation? Monetary policy needs fiscal policy help? This guy is lucky he isn't in my class. He'd never pass with these uneducated views. That's what happens when you become "Weller" Professor. |
