Interest rates are low because there are no jobs and credit burdon would become unmanageable at higher rates.
This doesn't make a great deal of sense to me mishedlo..
It makes perfect sense actually.
If the FED hiked there would be mammoth bankruptcies, housing would collapse, housing jobs would fall of the cliff, the stock market would collapse, amd trillions of dollars in credit derrivatives would blow up in smoke. We would have near instant depression. This economy simply can not take a rate hike. Period.
Low rates and easy credit are not the same thing. If bankruptcies pick up, I expect lending requirements to tighten. The FED will not hike, but banks will not want to lend to risky credit customers. People will not want to borrow. Those that can afford to borrow will not have anything useful to buy, and those that can not afford to borrow cause they are already up to their eyeballs in debt will be refused further credit. I expect bankruptcies to be picking up, and a rate hike into that environment would be like throwing gas on a fire. Not gonna happen.
One thing many folks forget is that while certain events (joblessness, out-sourcing to China.. etc) might be issues of concern here in the US, they are magnified in Europe where economic stagnation and unemployment are far greater burdens on that continent.
Does Europe have lower debt levels than we have? Does Europe have longer unemployment benefits? If yes, then Europe is in better shape.
Furthermore, with the trade deficit maintaining, or even growing, over the near term, Europe and Asia have a vested interest in maintaining weakness in their own currencies and strength in the US dollar.
Exactly!!!!
What we have is competitive currency devaluations.
Look for Europe to cut rates. The brunt of the US$ fall has been on Europe as Japan intervention has kept the YEN down.
Everyone wants a weak currency vs the US$. Well the US wants a weak currency too! A rate hike here would support the US$. That is the last thing the US wants!
Finally, Greenspan warned the world about China's fragile financial system, where some theorize that some 50% of outstanding loans are non-performing (shades of Japan).
I really doubt if anyone outside of China fully understands what is going on there. Greenspan is rambling. What he is correct on, however, is that China should not float the RMB. Bush and Snow have no idea what they are asking for IMO.
All of this suggests that focusing on the problems in the US may merely be masking the even greater challenges around the world for international pools of capital.
A US centric world economy has reached the stall point. That is something Russ and others do not understand. No jobs=no real growth and the tailwinds of multiple rounds of refinancings are nearly finished. If the US goes into a recession (and I am 80% sure it will next year), the entire world will go into one. Once again, there is no way the FED will hike into that.
Greenspan has totally fucked up and mismanaged everything from LTCM, Y2K, the recession, the aftermath, and the current reflation. Unfortunately it is far far too late to do anything about it. He is trapped by lack of jobs growth and lack of pricing power. The PPI has skyrocketed but walmart SKUs are barely up (if up at all). The only way to sell cars is with 0% financing and massive rebates.
Higher oil prices are deflationary. The BBB just can not get this simple fact into their heads. Every cent US customers spend on gas and oil prices is less money they have to spend elsewhere. Rising home prices means rising property taxes and less money to spend elsewhere. Wages are not keeping up and consumers keep piling on debt. All of this is deflationary.
This snip posted earlier by JW summs up much of the deflation debate in a single paragraph:
when the loss of jobs leaves people with less income but the same mortgages and debts, upward mobility collapses. Income distribution becomes more polarized, the tax base is lost, and the ability to maintain infrastructure, entitlements, and public commitments is reduced. Nor is this adjustment just short-run. The huge excess supplies of labor in India and China mean that American wages will fall a lot faster than Asian wages will rise for a long time.
Mish |
