Hi mishedlo. Thanks for the discussion.
*** Sorry for the long post ... wanted to reply "in detail" to your previous post ***
A few comments to your comments:
1 - "Raising of interest rates is not going to help US citizens live within their means. It will make them harder to do so ... we need less ... spending ..."
But how is the U.S. going to spend less if it doesn't make the cost of borrowing and consuming more expensive? I really don't see the American public voluntarily cutting back on their spending habits unless things cost more to consume, and/or the cost of borrowing increases. How are you going to "reign in credit and liquidity" without making money more difficult to borrow - i.e. increase interest rates?
Unless, perhaps, the U.S. government scaled back her ambitions for global empire. This seems to me perhaps the least costly way for America to balance her books. However, it brings its costs, which to this point have not been politically palatable.
2 - "the entire world wants to devalue against the $ to keep the US consumer buying. That has to stop and that is the heart of the trade issue and that has little to do with interest rates IMO."
I don't quite agree with your initial statement, that the world wants to devalue against the $ to keep the US consumer buying. Rather, countries want to prevent their currencies from appreciating against the US$ because of fear that their export economies would become less competitive against devalued US exports. The trade issue is about keeping national economies above water, in an environment of global excess capacity that cheap money has spawned.
I do agree that this is not a problem that rising interest rates solves. The problem, to my mind, is to clean up the aggregate debt and work through global excess capacity, and rebalance global currencies and trade flows to better correspond with the "wealth of nations", and their underlying economic health and productive capacity. However, among the weaker economies in this scenario, there will likely I feel be a combination of "relatively" higher interest rates and a lower currency. Correspondingly, in the emerging economic dynamos of the 21st century, look for "relatively" lower interest rates, and appreciating currencies. Does this make sense?
3 - "Foreigners are willing to buy US treasuries to keep the US consumer spending ... At some point that will stop and that WILL affect the treasury rate and at some point might force an interest rate hike."
Yes. I am in total agreement with you on this one.
4 - "Raising interest rates will stop consumer spending and kill housing but I doubt it does much for US exporters who have to compete against China."
I agree here too. Raising interest rates will damper U.S. aggregate demand for global goods and services. And a lower currency will help make US exporters more competitive. But it will only "help" - it will take a considerable period of time for US and European manufacture to be competitive with Chinese manufacture. Of course, US and European manufacture could theoretically be made to be competitive with China in an instant ... just alter the currency exchange rates to balance the equation. Of course, the political and social costs of doing so are prohibitive. But in time, things will balance out.
5 - "they will keep on inflating this bubble until something triggers it to burst and I do not know what that will be. It will NOT be inflation that forces a rate hike as the inflation we are experiencing has more to do with China sucking up natural resources than it does with much of anything else."
Hmmm. I see two factors are work on the inflation front. Firstly, general price inflation pressures from the out-of-control debt-based global expansion of credit. I believe this may well be a policy coordinated with the U.S. "war on terror", much like the inflation of the 1970's was a result of financing the war in Vietnam. Secondly, there is commodity-price inflation from the rise of China, India, etc. and their collective demand for raw materials.
However, there are even more powerful deflationary forces at work, namely a massively debt-leveraged global financial system, significant global excess manufacturing capacity, and global surplus labor from China, India etc, resulting in deflationary global wage arbitrage.
So there are conflicting inflationary and deflationary forces at work here. But no matter how you slice it, the U.S. will have to consume much less that it presently does, and save much more. How might market mechanisms force this issue? In any of the following manners:
(i) goods and services become more expensive for Americans to consume in real terms (i.e. inflation/currency devaluation), and/or
(ii) interest rates rise so that (a) it becomes more costly to borrow to finance present-day consumption, and (b) there is a greater incentive for Americans to save, and/or
(iii) American increase their earnings capacity by being globally competitive in the manufacture and distribution of goods and services so that they make more money so that they don't have to borrow it from other peoples savings. Unfortunately, this is an area where the U.S. economy is at an enormous structural and strategic disadvantage, due to its twin deficits, and its cost structure, and/or
(iv) Policy decision are made that dramatically change financing and spending patterns in the U.S. Most significantly, this would involve going the the process Great Britain did in the early/mid 20th century by scaling back visions of empire.
Am I missing any other possibilities here?
6 - "No matter which way you turn there is no easy way out. Higher interest rates will cause a worldwide recession IMO and guess what the attempted cure will be? You got it ... Lower interest rates."
Yep, there is no easy way out. I do believe that deflationary forces are more structurally powerful that inflationary forces. However, I can see moderately increasing interest rates also chipping in to curb global excess demand. Of course, the system is so unstable that there may be no way to engineer a soft landing ... and global high interest rates are not likely to be sustained IMO. But, they may be one way to force the issue. I personally wouldn't bet against it (and am not! (smile)).
7 - "There is NO other cure than a lower standard of living for the US, and a higher standard of living for China and emerging markets"
Totally agree with this point. Well, global fascism would be another alternative ... but not one I would really warm up to. ;)
8 - "Tell me how higher interest rates solves these problems."
Simply by forcing an issue that is going to be forced one way or another - i.e. that there really is such a thing as "cost of capital", and that one can't live forever beyond one's means. Effectively, it would be a way to "begin" to bring the financial system back to reality. In a way, it's like the beginning stages of therapy ... it doesn't "solve" your problems, but at least you finally start to recognize and admit that you have problems. And that is painful. It really hurts. That's the role that moderately rising interest rates might bring. Beneficial pain that should have been encountered decades ago.
JM2C on the matter.
Regards,
Glenn |
