Hussman - A good read
hussmanfunds.com
my favorite snip:
The Fed's Problem
At present, we don't really see many of the output constraints that would normally lead the Fed to tighten monetary policy. Normally, the point of a tightening is not to slow economic growth per se, but to slow down the rate of demand growth when the economy has little capacity to expand supply.
So from a capacity standpoint, the Fed is exactly right to target a “dampened trajectory” for coming rate hikes, since those hikes are intended to normalize short-term interest rates to be consistent with current rates of inflation and economic growth, not to slow demand growth.
Unfortunately, there are at least three problems. First, as I've noted before, Fed hikes have a very strong tendency to increase “monetary velocity,” which means that the short-term result of Fed tightenings has historically been higher, not lower inflation. Combined with recent energy price hikes, the risk is that inflation rates will rise enough to make the Fed seem “behind the curve.” Indeed, the latest string of Fed pronouncements seems to recognize that the Fed may be forced into a more aggressive stance if inflation rates continue to surprise on the upside.
Second, fiscal policy is undisciplined here. If fiscal policy was balanced, and bank lending still had any tie at all to reserve requirements (which it does not – see Why the Federal Reserve is Irrelevant), then monetary tightening might have a chance to reduce inflation. At present, monetary tightening will surely have the effect of normalizing short-term interest rates (perhaps too quickly if the Fed comes to believe it's behind the curve), but those policies are unlikely to have much favorable effect on inflation rates in the near term.
Finally, looking out somewhat longer term, the U.S. continues to carry weak balance sheets at the national, corporate and personal levels. Yes, economic expansion has been reasonably good in recent quarters, which was largely expected from helicopter-money fiscal policy and a peak in the refinancing boom. But in order to determine whether a given level of spending is sustainable, you don't look at the recent pile of store receipts – you look at the balance sheet. Given the overhang of debt that was never worked off in the past recession, and the unfortunate fact that much of this debt is now tied to short-term floating interest rates (see Freight Trains and Steep Curves), higher interest rates and inflation in the near term could very well contribute to defaults and credit instability over the longer term. |
