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

To: Keith Feral who wrote (90872)	1/27/2008 3:04:32 PM
From: glenn_a	Read Replies (2) \| Respond to of 110194

Keith. (([Doug Noland] would love to see more suffering from high interest rates.)) I don't think that's true. I believe Doug is arguing that you can't draw blood from stone. You can't keep extending credit from an undercapitalized financial base, and not avoid serious inflationary reprecussions, which ultimately threaten the stability of the entire financial system. And, the longer you have negative real interest rates against a backdrop of an undercapitalized global financial system, the worse the day of reckoning will be. Furthermore, I think Doug would relish a bit of karmic retribution for unconscionable monetary policy and speculation. I think Doug would advocate positive real interest rates and sound monetary policy. But I don't think anyone wishes suffering "on the little guy". OK, maybe George Bush and Dick Cheney might. But beyond that ... ;) ((The point is that the high interest rates caused the correction the shorts have made money.)) And that's where I think you differ from Doug Noland and myself as well. I believe Doug Noland would argue that the "fundamental" cause of the current correction is built on twenty-plus years of absolutely reckless monetary policy. And that the "proximate" cause is that the global credit markets are seizing up. Furthermore, the "fundamental" problem is not a liquidity problem, it is a solvency problem. And while lowering interest rates can perhaps fix a liquidity problem, they are relatively powerless to fix a solvency problem. Put another way, Interest Rates can only go so far to solve the problem here. Interest rates set the cost of borrowing money (and if that money actually has value, it represents capital or actual purchasing power). But, you can't lend something you don't have. If the banking system is undercapitalized, it doesn't actually have the capital (not money, which is just pieces of paper or electronic bits which represent claims against capital) to lend. Lowering the cost of borrowing "capital" is a bit of a slight-of-hand here. If you're going to create claims against capital out of thin air, then you're going to dilute the claims against the nation's existing capital stock - in other words, you're inflating. ((I don't want the perma bears establishing any monetary policy in our country.)) Well I don't think I'd want a perma-anything running monetary policy in our country. But I personally don't feel Doug Noland is a "perma bear" so much as he is an advocate of sound monetary policy. In the current environment, yeah for sure that makes him a "prudent bear" on the global credit system and probably the global economy. Would you prefer a perma-inflationist - that is, someone who creates additional claims against capital against an already undercapitalized financial system? Because asking for negative real interest rates in an insolvent financial system is asking for exactly that IMO. Anyway, we'll probably have to agree to disagree on this one I figure. Regards, glenn