>>ACF, surely the Fed will start raising interest rates soon. They don't want another round of irrational exuberance after the carnage of the last shambles.<<
Uncle Al is on the record stating that asset bubbles are not the primary concern of the Fed. It is clear from his past statements that the current Federal Reserve Board sets monetary policy based largely on the traditional measures of inflation - CPI & PPI - and to a lesser extent on employment. The last piece of the puzzle is that Uncle Al takes great care for monetary policy not to get too far out of step with the bond market. It could be argued actually that the Fed does not control interest rates so much as ensure that the cost of money from the Federal Reserve Banking System is largely in line with the cost of money established in the private sector. This is just one more reason why our wonderful Uncle Al is unfairly pilloried - the fact that J6P can get a 5% 30 year mortgage is not his doing - it's the rational work of the private sector. Also, while the media focus on interest rates, I think Uncle Al focuses more on appropriately controlling the money supply to maintain a fixed value for the dollar while incidentally feeding the US Treasury with vast amounts of seignorage.
So.....the great surprise of the next couple of years and in fact of the next 20 or so years is that we have entered a sustained period of extraordinarily low interest rates. The tidal wave of low cost labor that has entered the global labor market together with new era productivity, in which I am a true believer, as is Uncle Al, will ensure that inflationary pressures remain absent for the rest of this decade.
We are now at a turning point, the beginning of an awesome, unprecedented, never-before-seen period of coordinated global economic growth. Recognition is dawning that China is not so much a competitor as a partner, not just a supplier of low cost basic material inputs to myriad industries but also a buyer of high value added manufactured products and services. That the US economy is about to embark on another wave of technology and productivity-driven growth that will drive explosive increases in profits, sending US equities to the stratosphere.
Of course, this will all end very, very badly. As the data increasingly support the scenario I have described above, it becomes clearer to me that the massive breakdown in final demand that will strike much of the West at the end of this decade will find us totally unprepared and extended. After 2010, we will likely see Japan-style negative real interest rates as we enter a 15 year period of collapsing asset prices and debt liquidation. Jay's fondest wish will come true and we will have his Great Bust of 2001 (in 2010). |
