Wikinvest Wire

It Didn't Have To Be This Way

Saturday, March 26, 2005

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.


Ben Jones said...

Excellent post and site Tim, thanks for the Roach link..Ben

Dan said...


I read a lot of articles with similar views. They all say that things will end up badly. But how exactly?


Tim said...


Well, if anyone tells you exactly how this is going to end, don't believe them - and don't buy anything from them. All you can do is read, listen, and learn, then place your bets. I've heard so many people predict so many things and if you ever go back and check up on their predictions, they are almost always wrong.

I am sure that this global fiat currency system will not survive much longer in its current form, but who knows when or how. Look at the last hundred years of history, and every 30 years or so, there is a major shakeup - we've been operating under the current "US Dollar Standard" since Nixon closed the gold window in 1971, and wars usually precipitate big changes to monetary systems, so I think we are due.


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