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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (2383)	11/19/2003 6:37:50 AM
From: russwinter	Read Replies (6) \| Respond to of 110194

Let me throw a wild card into this interest rate mix nobody is really thinking of. Personally I believe this one is getting more and more obvious. This USD collapse is getting very serious, as is the overheated Asian situation, possible trade wars (what happens with steel with Europe, the stupid textile thing with China?). And everybody assumes the Fed is the one that will set rates (low), and get back to the deflation fight as the economy reweakens. But, I think we are at the point where the US is going to need an IMF style bailout (a la Argentina, not Japan, the later was much healthier, so wrong analogy). This is only months away (not years), maybe even weeks if there is some other shock (like $40 oil, $8 NG, which I see as a good possibility). Obviously, the Asians hold the chips used for the stabilization of the American situation, but they're finally going to insist on a real, not the current phoney "all on the backs of Asians" defense of the US currency, even if they agree to some resettings. Let's just call it the new "well, fuck you too" (WFYT), Asian/IMF package for the US. The Chinese in particular need to cool off their economy and they are not going to care if American consumers retreat, they need that now anyway. The WFYT style bailout is done the old fashion way, by pricing all this US debt more appropriately to the risk foreigner creditors take in lending to a bankrupt economy (even if it's the US) and GSEs that engage in criminal behavior. I have no idea what level would start to defend the USD, but I don't think 2% fed funds and a 5% ten year is it. You might be surprised in fact at how high it could be. I think Easy Al goes, and this (the WFYT deal)would provide cover to allow his Volker-like replacement to conduct the necessary deeds, without having to take all the heat for it. Whatever the ultimate rate level is (and there is precedent to look at: Mexico, the Asian and Russian crisis), placing bets that short rates won't increase a lot(deflation or not)will be a very dangerous proposition. () WFYT style economic policy for the US: -cool off your credit and debt expansion, 10-15% growth here is excessive. Credit growth should be limited to 5% tops, maybe even less. -cool off your runaway consumer, it destablizes the whole world, tighten, not loosen lending standards, -get your fiscal ship in order, cut deficit down in stages, first back to 3% of GDP, then 2%, -get your trade imbalances in order, cut deficits down to 3% of GDP, then 2%. -reregulate your absolutely crazy (and often criminal) financial sector, especially the GSEs. -encourage more real savings, less speculation, focus economic activity on productive, not consumptive activity (including housing): may be necessary to eliminate some of the over incentive for homeownership. Reorient your whole economy: energy a priority.