<<If the FED fights this all the way>>
We're saying the same thing. Real Rates will rise when bad debts are liquidated.
The only thing the Fed can do and knows how to do is encourage credit creation.
If the Fed cannot encourage it, we are screwed.
If the economy is slowing at a 2% real-rate and 4% nominal rate, what does it tell you?
By the time the authorities attempt to intervene in the deleveraging process, it will be too late, NOMINAL rates would have to be at negative to encourage the type of credit catalyst that spawned the most recent, anemic expansion (assuming a 0% CPI in the next recession). Once deleveraging starts, it won't stop until fair value is reached.
The appropriate policy response in 2001 would have been to not cut rates as much, let the recession dig deeper and for CPI to hit near 0%, cut rates substantially, and then hike rates relatively sooner.
Had they done that, we probably would have bought ourself some more time, but now we're in a box.
Instead, now we will probably get sharp recession in late 2006, muddle for a couple of years past '08 election, and then a modern-day depression around 2010 until debt liquidation is complete (which would be a catalyst for real rates to rise).
Classic pushing on a string scenario coming to a theatre near you. |
