It seems we are in general agreement on 6 out of 8.
That is pretty good!
Seems we disagree on these...
======================================================
1 Mish... - "Raising of interest rates is not going to help US citizens live within their means. It will make them harder to do so ... we need less ... spending ..."
Glen....
But how is the U.S. going to spend less if it doesn't make the cost of borrowing and consuming more expensive? I really don't see the American public voluntarily cutting back on their spending habits unless things cost more to consume, and/or the cost of borrowing increases. How are you going to "reign in credit and liquidity" without making money more difficult to borrow - i.e. increase interest rates?
Unless, perhaps, the U.S. government scaled back her ambitions for global empire. This seems to me perhaps the least costly way for America to balance her books. However, it brings its costs, which to this point have not been politically palatable.
2 - Mish...."the entire world wants to devalue against the $ to keep the US consumer buying. That has to stop and that is the heart of the trade issue and that has little to do with interest rates IMO."
Glen.....
I don't quite agree with your initial statement, that the world wants to devalue against the $ to keep the US consumer buying. Rather, countries want to prevent their currencies from appreciating against the US$ because of fear that their export economies would become less competitive against devalued US exports. The trade issue is about keeping national economies above water, in an environment of global excess capacity that cheap money has spawned.
I do agree that this is not a problem that rising interest rates solves. The problem, to my mind, is to clean up the aggregate debt and work through global excess capacity, and rebalance global currencies and trade flows to better correspond with the "wealth of nations", and their underlying economic health and productive capacity. However, among the weaker economies in this scenario, there will likely I feel be a combination of "relatively" higher interest rates and a lower currency. Correspondingly, in the emerging economic dynamos of the 21st century, look for "relatively" lower interest rates, and appreciating currencies. Does this make sense?
===================================================
Issue #1 Glen....
But how is the U.S. going to spend less if it doesn't make the cost of borrowing and consuming more expensive?
Mish reply
Just because interest rates are low does not mean it is available or anyone wants it. Look no further than Japan. They have the opposite problem, no one wants to borrow. Can we achieve the same thing? Why not? If we lose enough jobs eventually the consumer will be tapped out whether or not anyone wants it. Are job losses going to stop? Also ask yourself this: How much of that consumer spending was a result of cash-out refis? This consumer spending just might be petering out on its own accord and the FED might actually know it (assuming they understand anything which is another debate for later).
So you see interest rate hikes as a means to stop rampant spending might be a case of overkill now. Yes we should never have lowered them as far as we did in the first place, we should have been raising them about 3 years before we did and started lowering them slower and less than we did but that is water under the bridge IMO. Acting aggressively to prevent a "japan scenario" Greenspan may have instead guaranteed one.
I believed the FED hoped to keep consumer spending going long enough so that business spending would be picking up as consumer spending started to slow. It was not without "theoritical" merit, but I do not think the FED fully understood the overcapacity issue, the outsourcing issue, the China factor, and other global deflationary issues. Instead they kept fighting these forces with more and more and more credit and loose money that created a "re-financing bubble 100% for sure" and most likely a housing bubble as well but people can debate that or not.
Now what? Now they are F*'d because there are signs (M2, poor sales at wallmart, etc) are slowing BEFORE business spending has picked up. Unfortunately (From the FED's perspective), raising interest rates now will prick the consumer bubble AND the corpoarte bubble as well. How many corporations are still dependent on short term financing? How many more have debt they desperately need to roll over. Until jobs pick up, and until corporations get all the debt rolled over long term, raising interest rates would take the wind out of both consumer spending and any chances of business spending as well. The problem the FED never realized was that Business spending simply was NOT going to return, no matter ho low interest rates got because of a) Overcapacity and b) The China Factor.
Ok Now what?
Raise interest rates in the face of a possible or even probable slowdown in consumer spending atht might already be underway, knowing what that might do to housing, and corporate profits? Is that logical?
========================================================
Now for issue #2
Glen....
I don't quite agree with your initial statement, that the world wants to devalue against the $ to keep the US consumer buying. Rather, countries want to prevent their currencies from appreciating against the US$ because of fear that their export economies would become less competitive against devalued US exports.
Mish reply.....
IMO devaluation of the US$ and no appreciation of foreign currencies agaisnt the US $, are just two forms of the same thing, with devaluation being more immediate and more severe. The reason I am correct can be judged by the actions of Japan (on a routine basis) and the Swiss (more interemittantly) to step in and support the US$ trying to force it to rise. That action is EXACTLY an attempt to depreciate (devalue) their currency agsinst the US$, when one of the problem is an overvalued US$. Quite literally it is a hopeless task, and IMO macro trends can not be stopped until they run full course. What needs to happen is for the US$ to be devalued, when most countries are attempting to force the reverse. China I might add is VERY CLEVERLY sitting this mess out with an official peg to the US$.
M |
