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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (257855)	6/30/2010 10:22:39 PM
From: neolib	Read Replies (3) \| Respond to of 306849

You understand that interest rates steadily declining to zero, while the ratio of debt to income increases, is merely the narrative of massive credit bubble being formed. The main thing that comes to mind when reading such a statement is that those claims are not meaningful unless one can place time & magnitude components on them which somehow justify the claim. Unlike most people who post here, I'm quite certain Keynes was correct in his theory. You might well take interest rates to zero, as well as take on debt, as a means to smooth out economic dips. But such controls should be of limited duration. So it comes down to trying to define what the time bounds are on such manipulation. A 1 year recession with such manipulation would likely not be confused with your "steadily declining to zero...", but what about manipulation for a 5-year recession? From an engineers perspective, I look at things from a frequency POV. Keynesian manipulation works in a certain frequency range, but it does not work down to 0 frequency. What is the range of frequencies where it is effective? I think people try to apply it at too low of frequency, where it has no ability to perform. So in a really long recession, it will not be effective. But neither zero rates, nor debt alarm me, sans some understanding of the time spans involved, because I'm certain they can be used positively. The fundamental problem is thinking the time spans can approach long durations, i.e. the frequency -> 0. Thats a problem. If we describe only consumer prices as inflation, leaving out asset prices, we can marvel over our conundrum. 100% agreement there. I've long been annoyed that inflation numbers don't reflect asset inflation. What about population growth? Doesn't that affect the debt to income ratio? I don't know, does it? I was pointing out that debt needs to be normalized. Japans normalized debt will climb even if the total debt stays constant. How about our balance of trade? Certainly that somehow naturally created the massive credit bubble America has experienced since 1980? No, in fact our trade deficit is the natural child of the credit bubble. I think our trade deficit is the natural child of free trade laws (or lopsided free trade laws as the case may be) and cheaper foreign labor. Our central bank monetary policy didn't make cheap foreign labor. The monetary policies of the countries with cheap foreign labor then helped fuel our credit bubble by lending us back our money so we could buy more from them. When an economy collectively spends more than it earns it either pushes up domestic prices, or it imports goods from abroad. Americans mortgaged their homes to import goods like oil and trinkets. Yes, but only to the extent that foreign producers take our money at face value. That's a "manipulation" they do as well. Might bite them in the ass of course.