The deflation debate rages on and few see it yet
Fillmore
You missed my point.
Rates will go down when the bubble bursts, but rates are still far too low to burst the bubble IMHO. Japanese rates did not collapse until AFTER their bubble imploded..
Mish
You miss the similarities.
Japan had interest rates at 6% or whatever
The bubble burst (stock market and real estate)
Japan cut rates to respond.
Shortly thereafter, Japan then raised rates thinking the worst was over.
Japan was cutting rates for the next 12 years or whatever, until zero was hit and there was no more room to cut.
The US had rates of 6% or whatever in 2000.
We only had a stock market bubble at the time, not a housing bubble (or at least a far smaller one).
Greenspan cut rates and then again.
Fearing the Japan trap he cut more still.
Now Greenspan thinks all is clear (just like Japan) and has raised rates 150% so far.
Yes it was from a lower level but you are forgetting the burst of the stock market at 6% or so. You also forget that a 150% hike and siz hikes in a row are historically a lot of tightening.
In the US money poured into real estate on the Stock market burst. Now Greenspan thinks he can slowly deflate that bubble.
I disagree, when it pops it is all over. All Greenspan did with that panic cut to 1% is to guarantee that the deflationay bust will be far bigger than if he just let the market handle it.
If you look closer you will see the parallels between what Japan did and what is happening in the US are strikingly similar. One difference I see is the creation of an echo bubble in housing that Japan already had in place. The second difference is that our debt levels are now far higher than what happened in Japan. Ultimately we are likely to have a bigger deflationary crash because of it.
This debt simply can NOT be inflated away unless wages rise dramatically. Unless and until you can show me a way that Americans can pay off the debt on their credit cards and houses in the face of declining wages and job growth, any answer that involves "inflating the debt away" seems obviously flawed to me. Show me big wage increases and job growth, then I can accept inflation. Instead, the burden of debt goes higher and higher and higher. A credit crunch, WHEN (not if it comes) will be mammothly deflationary. As I said, the parallels to what happened in Japan are striking. That we are not a nation of savers, only means there is far more debt to be destroyed. Forget about US debt owed to the world and tell me exactly how consumer debt gets wiped out in a world of rising debt, job exportation, and slumping (or even stalling) of home prices.
That is the achilles heal of inflationists that still has not been answered to my satisfaction.
As I have stated in the past, you assume it will take higher interest rates than I do to burst that bubble. The 30-yr long bond and 10-year treasuries beg to differ, as do I. We are roughly 40 bps from the 5yr and 10-yr inverting. Anyone attempting to play the carry trade by buying 3 month treasuries and shorting 10 yr-treasuries has had it 100% ass backwards. This yield curve tightening is affecting all sorts of carry trade plays including gold. This next recession will NOT be a mild one as you have suggested. With these levels of debt and an economy 80% dependant on housing and related activity, once it reverses it will be mammoth and just like the naz-crash lower interest rates by Greenspan will not help one iota.
I am actually glad that no one here sees or believes that. It makes it all the more likely IMO.
Mish |
