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One Little Word
Tuesday, December 12, 2006
As expected, the Fed left rates unchanged today, but the minor changes to the policy statement are full of intrigue - one little word paints a big picture in this case.
Despite what Alan Greenspan might say, according to the current Fed chief, the cooling of the housing market is no longer just your run-of-the-mill, normal sort of cooling.
Now it is substantial cooling.
Who knows why they bothered with that second change. Maybe Ben Bernanke got approval from Hank Paulson to add the word substantial, and then Paulson said, "But that's it!".
Ben agreed but then made the second change anyway, just to prove that he's not the boss of me.
And maybe not.
9 comments:
Boy in only 1 1/2 months it went south. The "one word" is significant but they also note the economy is no longer humming "recent indicators are mixed" speaks volumes to me. I think that a minority albeit large wanted to raise rates for fear of the dollar freefall that is just beginning. If the dollar goes down inputs that are imported for a variety of thing will go up thus pushing inflation up. (or will they cook the books on that too?)
Oh, I forgot to add, maybe Colbert will add that to his "Word" segment.
An interesting commentary in today's Journal about Ben and Paul's excellent adventure in China:
"This week's trip to Beijing by Treasury Secretary Hank Paulson is being hyped as the biggest economic expedition since Marco Polo's. We suspect that's a tad oversold, but in the meantime it's too bad Mr. Paulson cajoled Federal Reserve Chairman Ben Bernanke into risking his credibility by joining him.
Mr. Paulson's trip is transparently political, with the goal most leaked to the press being to persuade China to let the yuan appreciate further against the dollar...
As Fed Chairman, he is or ought to be politically independent, and the perception of that independence is crucial to his credibility...
Mr. Bernanke is well aware of the dicey symbolism of being in Mr. Paulson's entourage. So while the Treasury Secretary is taking a gaggle of Cabinet secretaries on a government plane, Mr. Bernanke is traveling separately to Beijing via United. He's also giving a speech apart from the Treasury group. He is, however, also joining the Treasury at a joint U.S.-China Strategic Economic Dialogue for most of Thursday, and the Chinese can be forgiven if they infer that the Fed chief is part of the lobbying effort."
The bearish contingent simply doesnt get it. As long as everyone is more concerned about a housing bust rather than a Dollar bust the monetary system can survive and prosper.
A housing bust is very solvable. Print money. A dollar bust isn't.
There were hints in today's USA Today about also pursuing a strategy of getting China to buy US assets. This would be closer to a win-win: surplus Chinese dollars spent on buying overpriced US assets, hence keeping the financial bubble going longer and continuing to bolster the dollar, and less of the surplus going into government debt. The big problem here is protectionism -- people might start to get a little annoyed at the Chinese buying up a good chunk of the country.
anonymous:
Explain how printing money is going to undo the malinvestment.
I explore the possibilities here, and the issue isn't pretty no matter how you slice it. I come away thinking there is a steep cost that will simply have to be paid; inflation just allows shifting the burden from some parties to others.
Exactly right. A dollar bust throws the planet into depression. They will try to keep this house of cards going as long as possible.
- save the consumer
- print more
- manage the indicators
They need an exit plan though, which I don't think exists. They can't hold it together forever.
"A housing bust is very solvable. Print money."
I always hear this line of reasoning in the various financial blogs and it never makes any sense to me. The key component of a housing bust has always been rapid credit destruction. Cascading cross-defaults will trump printing presses every time. Throw in a little $370TR derivatives meltdown into the mix (which a housing bust is almost sure to trigger) and any increase in money supply would be overwhelmed by credit and money destruction in short order.
Another way of looking at it: If Heli-Ben was to go through with his plan of dropping cash on everyone, the dollar would tank and import prices would skyrocket and the housing and derivatives bust would continue anyway. Any new found money would be immediately offset by higher consumer prices, thus negating any positive effect this new money might have on asset prices.
To demonstrate the point, have you noticed lately what the stock market does when the dollar has a real bad day? It goes down.
As the race to the bottom progresses, the 1st big economy to embrace a metallic standard will come out in the lead. Who is that going to be?
Anonymous: "A dollar bust throws the planet into depression."
Then the last thing one would want to do is print more dollars, no?
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