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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (50381)1/20/2006 10:49:09 AM
From: J_Locke  Read Replies (2) of 110194
 
Russ, the issue is not liquidity provided by the Fed through open market operations, but rather systemic liquidity feeding through a dysfunctional fractional reserve banking system. The central banks are not doing an irresponsible amount of monetizing, but because they all set bank reserve requirements so low in the late 80's, early 90's they have become enablers of what Doug Noland calls the "leveraged speculating community."

They have allowed the money center banks to run wild, both in their own trading and in the lending they provide to hedge funds. On this score, the European Central Bank, which generally operates on a sensible, empirical basis (as opposed to the Fed, which is ideology and ego based) is just as bad as the Fed and BoJ.

I regard it as a truism that if you set reserve rates at essentially zero (as is now the case) real returns on all asset classes will be driven to zero. Buy a 10-year bond today and you will get a zero real return over the next 10 years. Buy an S&P index and you will get the same. Buy real estate and your real return will be negative over the next 10 years.

This is exactly what should be expected when there is no functional limit to speculator borrowing. Attractive returns are quickly arbitraged away because low reserve requirements mean there is never a need for asset class rebalancing. If foreign stocks are more attractively priced than U.S. stocks, you don't sell your U.S. stocks to buy foreign stocks, you borrow more from Lehman Bros., or Deutchebank or Nomura, who borrow it from the central banks.
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