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Four years! It didn't have to be this way

Thursday, March 26, 2009

While sifting through the latest offering from Treasury Secretary Tim Geithner on the subject of regulatory reform (does this man ever sleep?), a short pause is in order to reflect on today's four year anniversary of this blog.

Reproduced in its entirety below is the very first post from back on March 26th, 2005.

Obviously, we now know what happens to an asset-dependent economy when the Federal Reserve raises interest rates and that very last comment of mine was kind of prophetic, given that the Time Magazine housing cover wouldn't appear for another three months.

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An appropriate first post - Stephen Roach hits another home run with his latest missive The Test. The last paragraph serves as an excellent premise for this blog:
"It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy."
Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes.
"Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? "
All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits.
"I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. "
This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.

2 comments:

marku said...

Even more to the point I think, is that to escape this trap we have made, we need to completely redefine the relationship between capital and work. The reason so many people took on so much debt was
A: Lenders were handing it out on terms you'd be a moron to refuse

B: the standard of living of the normal person couldn't be kept up anymore, even with two earners.

(check a graph of median wage VS worker productivity--productivity up for 30 years, wages flat)

Plus the wall street casino coupled with ultra low interest rates made working and saving for chumps.

Workers got downsized, right-sized, outsourced or temped, always to a lower wage job You had to be invested in the ground floor of one bubble or another to get ahead.

The only way this economy recovers if if we can create some real middle class wage jobs, and prevent the parasite executive class from outsourcing them all.

I'm not holding my breath...

dearieme said...

"...if we can create some real middle class wage jobs": but come what may, you compete for your livelihood with hundreds of millions of workers in China, India and so forth. Unless you have some magic ingredient that makes you more productive than them, your incomes are going to converge.

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