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

To: GST who wrote (51001)	1/23/2006 4:30:11 PM
From: GraceZ	Read Replies (3) \| Respond to of 110194

We got there incrementally. This is why the Fed's habit of incrementally raising rates, while it seems rational is very dangerous. If you watch the way free markets operate they almost always move to an extreme on the other side of neutral before they come back, they don't operate on a smooth incremental approach. Without the pain caused by the extreme, excesses aren't rung out. What happened that got us to 19.10% was that every time the Fed raised the economy adjusted to the new regime. We got there one small step after another. Of course they followed up rate increases with plenty of coupon passes back then because Congress wanted them to do their job without the pain of any Americans losing their jobs. The thing that is different now is that, with a global work force, it would be impossible to protect American jobs with monetary policy measures. The trade situation now is far more integrated. We are net debtors, something you continuously point out. But what you fail to point out is that we are net creditors in FDI and foreign equities. A 5% drop in the dollar results in a 10% capital gain in the assets we own that are denominated in foreign currency. The US owns 5.4 trillion in assets (as of the end of 2004) that are denominated in foreign currency. Here's an interesting paper which covers this: newyorkfed.org This is not to say that a drop in the dollar wouldn't be inflationary, it would be primarily because it would allow less efficient US companies to raise prices of goods sold here. OTOH the dollar retreat from 2001 to 2004 was largely eaten by our trading partners in Asia. Right now the only thing forcing US companies not to raise prices is foreign competition, the same thing is keeping wages in check. Inflation can't accelerate if there is a lid on prices.