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Re: Why the Fed can’t lower rates
EJ that was a great piece, But I don't understand the last sentence. Can I have an brief explanation in plain language? Something simple for econ illiterate people if possible.Originally posted by EJ View PostComment
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Re: Why the Fed can’t lower rates
Plain English: If the Fed cuts rates again - and it did - that signals that either the liquidity crunch is over or that the Fed is panicking.
Thus the Fed won't cut until there is absolutely no choice.
I personally have never seen the 2% as necessarily the arbitrary line in the sand, but that line exists and is one or two cuts over 0%.
The recent 0.5% cut in coordination with other CBs was clearly an example of trying to show greater impact by circling the wagons, and equally clearly failed miserably.Comment
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Re: Why the Fed can’t lower rates
C1ue - Here's the paradox for the USD at the zero bound. With a world ex-USA as it's looking this week (death warmed over), who frankly believes that capital flight from the USD is an automatic eventuality when rates hit zero? If it's a cat 1 hurricane within the US markets, but death itself in ex-USA markets, then the USD could remain "paradoxically strong" for a good long while - as long in fact as the maelstrom and resultant global depression persisted outside the USA.
I'd like to be wrong. iTulip tells me I'm wrong, you tell me I'm wrong, dozens of others do. What am I missing in that simple logic?Comment
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Re: Why the Fed can’t lower rates
Possible that what is needed is not lower, but higher interest rates? The Fed has generally held them below natural market rates for years. Maybe the market is starved for relief?Finster
...Comment
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Re: Why the Fed can’t lower rates
Finster - might that not be compared to prescribing a radical Austrian program of vigorous diet and exercise to a patient who has just been wheeled into the ER with Cardiac Infarction?
Originally posted by Finster View PostComment
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Insert - via your own imagination - a snide comment from me about newsletter sellers.Originally posted by Lukester
*whew*
Now having gotten past that:
The problem (or perhaps my problem) with the paradigm of interest rates driving capital flight is that this behavior is not true in all situations.
One of the most common conclusions from Japan's experience (not cutting rates fast enough, but still cutting them to zero, resulting in a situation where your domestic interest rates are lower than anyone else's, but your economy is still in the dumps) is that somehow the problems from the zero bound are due solely to this relative interest rate differential.
My conclusion is slightly different: Japan chose to not screw its citizens and also was unfortunately in a situation where there was a 'higher power' currency to go to: the US dollar.
The Japanese economy may not be growing, but between their trade surplus and the massive savings, Japan is not experiencing anything like the pain of the Great Depression.
The US has again a totally different situation: besides being in massive debt, it also has the tools to wreak its own destruction.
Certainly as the world de-leverages, there are (and have been) victims.
But again, those nations which create: manufacture, invent, mine, grow, drill, pump are going to eventually pull out of the dollar deleveraging whirlpool.
The currencies of these nations will recover as the ongoing production of the nation continues, if for no other reason that there is something new to sell to each other to buy things which individual nations cannot produce or less efficiently produce for themselves.
In other words, the rest of the world will be hit with recessions/depressions, but those nations which produce will pull out of it once the negative drag of de-leveraging ends.
The US also creates production, but consumes far far more than it produces. Besides the relative balance of consumption/production being heavily skewed toward consumption, the US also has massive debts which also drag down the balance - on the side of consumption.
So, while there can and will be 'flight to safety' as the US dollar has been the de-facto safety currency/regime for many year, nonetheless the US itself has put itself in a position where the progenitor of the reserve currency will destroy the currency.
The only way I see this as not happening is if the rest of the world decides to just give up their present and future production for nothing.
Again, why would they do that?
Put it another way: how does flight into safety gain you income for the future? At some point people still want some gain for their saved money.
Is there more opportunity in the US - as massive debts are being dealt with via dollar depreciation, even without the prospect of rising interest rates? Or back home?
The iTulip thesis of a 2 to 6 month span for the 'flight to safety' pop for the dollar is much more likely to me than some 2, 3, or 4 year period where all the net producers in the world somehow drop further than the net consumers of which the US is the largest.
Note that Iceland is (was) a net consumer.
Iceland's example will be instructive - note their position in the following list I've compiled using Wiki Currency Account and World population figures.
As for Europe's problems, note the position of the PIGS, Ireland, and the UK.
Then there's Australia...
Then there's the US. Not the worst, but the largest in aggregate by far.
Code:Country Current account balance Population CAD/CAS per population Iceland -3,384 320,169 -$10,569.42 Anguilla -42.87 13,000 -$3,297.69 Greece -36,400 11,215,000 -$3,245.65 Ireland -12,600 4,422,100 -$2,849.32 Spain -126,300 46,063,500 -$2,741.87 Latvia -5,839 2,268,000 -$2,574.51 United States -731,214 305,386,000 -$2,394.39 Australia -50,960 21,446,187 -$2,376.18 New Zealand -9,973 4,281,200 -$2,329.49 Estonia -3,092 1,340,600 -$2,306.43 United Kingdom -111,000 61,186,000 -$1,814.14 Portugal -18,530 10,617,600 -$1,745.22 Seychelles -141 87,000 -$1,620.69 Lithuania -5,320 3,361,100 -$1,582.82 Cyprus -1,236 794,600 -$1,555.50 Malta -411 410,600 -$1,000.97 Antigua and Barbuda -83.4 85,000 -$981.18 Romania -20,950 21,528,600 -$973.12 Italy -57,940 59,619,290 -$971.83 Bulgaria -7,189 7,640,238 -$940.94 Croatia -3,836 4,435,400 -$864.86 Lebanon -3,337 4,099,000 -$814.10 Slovenia -1,429 2,029,000 -$704.29 Hungary -6,681 10,035,000 -$665.77 Jamaica -1,573 2,714,000 -$579.59 Slovakia -3,119 5,402,273 -$577.35 Fiji -465.8 827,900 -$562.63 France -35,940 64,473,140 -$557.44 Czech Republic -5,701 10,424,926 -$546.86 Turkey -36,270 70,586,256 -$513.84 Bosnia and Herzegovina -2,021 3,935,000 -$513.60 Poland -18,130 38,115,967 -$475.65 Mauritius -552 1,262,000 -$437.40 Cape Verde -218 530,000 -$411.32 São Tomé and Príncipe -58 158,000 -$367.09 Georgia -1,582 4,382,100 -$361.01 South Africa -16,280 47,850,700 -$340.22 Belarus -3,056 9,690,000 -$315.38 Guyana -229.7 738,000 -$311.25 Federated States of Micronesia -34.3 111,000 -$309.01 Kazakhstan -4,643 15,422,000 -$301.06 Albania -918 3,170,000 -$289.59 Jordan -1,690 5,924,000 -$285.28 Costa Rica -1,259 4,468,000 -$281.78 Panama -861 3,343,000 -$257.55 Serbia -2,451 9,527,100 -$257.27 Kiribati -19.87 95,000 -$209.16 Dominican Republic -1,993 9,760,000 -$204.20 Belize -54 288,000 -$187.50 Moldova -569 3,572,700 -$159.26 El Salvador -929 6,857,000 -$135.48 Nicaragua -754 5,603,000 -$134.57 Guatemala -1,772 13,354,000 -$132.69 Kyrgyzstan -677.3 5,317,000 -$127.38 Vanuatu -28.35 226,000 -$125.44 Sudan -4,465 38,560,000 -$115.79 Colombia -5,132 44,585,200 -$115.11 Syria -2,160 19,929,000 -$108.38 Tunisia -935 10,327,000 -$90.54 Armenia -275.1 3,230,100 -$85.17 Ukraine -3,890 46,030,720 -$84.51 Senegal -1,034 12,379,000 -$83.53 Eritrea -343.1 4,851,000 -$70.73 Cuba -750 11,268,000 -$66.56 Honduras -446 7,106,000 -$62.76 Ghana -1,470 23,478,000 -$62.61 Laos -355 5,859,000 -$60.59 Madagascar -1,145 19,683,000 -$58.17 Sri Lanka -1,118 19,299,000 -$57.93 Mexico -5,414 106,682,500 -$50.75 Burkina Faso -710 14,784,000 -$48.02 Ecuador -600 13,341,000 -$44.97 Tonga -4.321 100,000 -$43.21 Pakistan -6,477 164,548,000 -$39.36 Tanzania -1,422 40,454,000 -$35.15 Mozambique -726 21,397,000 -$33.93 Benin -278.8 9,033,000 -$30.86 Zimbabwe -409 13,349,000 -$30.64 Uruguay -100 3,340,000 -$29.94 Cambodia -410 14,444,000 -$28.39 Cameroon -501 18,549,000 -$27.01 Kenya -980 37,538,000 -$26.11 Togo -165.5 6,585,000 -$25.13 Comoros -17 682,000 -$24.93 Swaziland -26.71 1,141,000 -$23.41 Ethiopia -1,851 79,221,000 -$23.37 Haiti -184.8 9,598,000 -$19.25 Guinea -175 9,370,000 -$18.68 Gambia -31.69 1,709,000 -$18.54 Rwanda -172.8 9,725,000 -$17.77 India -18,530 1,139,070,000 -$16.27 Burundi -137.3 8,508,000 -$16.14 Tajikistan -102 6,736,000 -$15.14 Lesotho -28 2,008,000 -$13.94 Vietnam -1,199 87,375,000 -$13.72 Chad -144.5 10,781,000 -$13.40 Paraguay -82 6,127,000 -$13.38 Malawi -180 13,925,000 -$12.93 Samoa -2.428 188,540 -$12.88 Uganda -241 30,884,000 -$7.80 Republic of Macedonia 5 2,045,200 $2.44 Bangladesh 683 158,665,000 $4.30 Yemen 178 22,389,000 $7.95 Zambia 150 11,922,000 $12.58 Morocco 433.9 31,224,000 $13.90 Burma 1,676 48,798,000 $34.35 Egypt 3,115 75,404,000 $41.31 Indonesia 10,210 228,412,000 $44.70 Papua New Guinea 314 6,331,000 $49.60 Brazil 10,200 187,850,600 $54.30 Côte d'Ivoire 1,056 19,262,000 $54.82 Peru 2,045 28,750,770 $71.13 South Korea 3,700 48,224,000 $76.73 Nigeria 14,610 148,093,000 $98.65 Philippines 9,040 90,457,200 $99.94 Uzbekistan 3,045 27,372,000 $111.25 Thailand 8,619 63,038,247 $136.73 Turkmenistan 689.3 4,965,000 $138.83 Bolivia 1,325 9,525,000 $139.11 Tuvalu 2.323 11,000 $211.18 Iraq 7,802 28,993,000 $269.10 Iran 19,000 70,495,782 $269.52 Argentina 11,154 40,301,927 $276.76 People's Republic of China 372,000 1,326,570,000 $280.42 Chile 8,184 16,763,470 $488.20 Equatorial Guinea 250 507,000 $493.10 Namibia 1,065 2,074,000 $513.50 Venezuela 17,020 28,018,018 $607.47 Russia 93,035 141,900,000 $655.64 Palau 15.09 20,000 $754.50 Angola 13,640 17,024,000 $801.22 Israel 5,941 7,337,000 $809.73 Canada 28,460 33,396,800 $852.18 Denmark 4,699 5,489,022 $856.07 Azerbaijan 7,535 8,629,900 $873.13 Algeria 31,500 33,858,000 $930.36 Malaysia 25,930 27,730,000 $935.09 Republic of China 23,800 23,007,007 $1,034.47 Belgium 11,040 10,666,866 $1,034.98 Botswana 2,231 1,882,000 $1,185.44 Gabon 1,626 1,331,000 $1,221.64 Cook Islands 26.67 20,200 $1,320.30 Oman 3,785 2,595,000 $1,458.57 Austria 12,610 8,340,924 $1,511.82 Japan 201,300 127,690,000 $1,576.47 Libya 11,710 6,160,000 $1,900.97 Germany 185,100 82,169,000 $2,252.67 Bahrain 2,009 760,168 $2,642.84 Hong Kong 19,870 6,985,260 $2,844.56 Finland 17,120 5,322,200 $3,216.71 Trinidad and Tobago 4,288 1,333,000 $3,216.80 Sweden 30,190 9,234,209 $3,269.37 Saudi Arabia 88,890 24,735,000 $3,593.69 Netherlands 59,280 16,456,600 $3,602.20 British Virgin Islands 134.3 23,000 $5,839.13 United Arab Emirates 36,110 4,380,000 $8,244.29 Switzerland 67,890 7,647,600 $8,877.29 Singapore 41,390 4,588,600 $9,020.18 Qatar 7,733 841,000 $9,195.01 Norway 55,820 4,786,800 $11,661.24 Kuwait 51,490 2,851,000 $18,060.33 Luxembourg 11,300 483,800 $23,356.76 Comment
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Re: Why the Fed can’t lower rates
Never underestimate the FED. Indeed, this is their aim and the odds remain quite good that they will have their way.
Originally posted by c1ue View PostComment
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Re: Why the Fed can’t lower rates
Exactement!!!!! The market is starved of capital.....savings. One would wish out of all this it would dawn on someone that it is just not possible to create wealth by running printing presses and opening expensive coffee shops. Alas i fear nothing has been learned. We still believe the Govt has some sort of unlimited funds to "inject' to "fix" everything..........more like fux everything!Originally posted by Finster View PostComment
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Re: Why the Fed can’t lower rates
Unfortunately finster as you observed elsewhere the solution to the current crisis "lies somewhere back in time"Comment
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Re: Why the Fed can’t lower rates
Sorry Finster, but I believe you make a fundamental error or your formulation is unintentionally misleading.Originally posted by Finster View Post
There are two completely different (unrelated/independent/unconnected) things:
a) what Fed action is needed and would make sense for the health and stability of the financial system;
b) what the Fed really wants to do and that it is willing to do in order to achieve it's goal.
I was trying to point to the major fallacy in made by EJ in the last sentence of his comment:
It's true the Fed knows a lot of information and knows all the implications of their move (I don"t think they are incompetent). I'm sure they knew very well about the deflation trend started in July that was revealed by the FDI beyond any reasonable doubt (in my opinion).The Fed knows this. It is doing everything it can to keep inflation above zero and maintain dry powder, and that means keeping the Fed Funds rate target over 2%.
But that says nothing, and there it can't be construed as a valid argument for EJ's prediction that the Fed will take the necessary and logical decision.
So my conclusions are:
- EJ's prediction with respect to what the Fed is trying to do, was flat wrong;
- EJ's failure to predict the next move of the Fed was due to a false assumption (that the Fed has as the main objective the well being and stability of the US financial system).
From iTulip Select Subscription Description:
I don't think my feedback is expert by any standards, but in relation to this thread it is definitely critical.The secret to iTulip's success is not so secret: 1) rigorous and entertaining analysis of events in the context of a framework that describes the complex interaction of political, social, and psychological influences on markets and economies over time, and 2) continuous improvement and refinement of analysis based on feedback from the critical, expert, and thoughtful iTulip community.Comment
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Re: Why the Fed can’t lower rates
The Fed has literally ALL the data in the world: they know EXACTLY what's happening and what's going to happen. To assume they are surprised about anything is asenine.Originally posted by $#* View Post
There are dirty, dirty politics at work, not incompetent technocrats. Assuming anything is dangerous.Comment
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Re: Why the Fed can’t lower rates
Outback. Carrying forward the analogy suggested to Finster, to your comment: "The market is starved of capital - it is just not possible to create wealth by (printing)".
Well when the patient is wheeled into the ER in cardiac arrest, nobody is talking about "creating wealth", (i.e. giving him a stiff electric jolt and dumping him out at the local football field to resume his Saturday calisthenics). They are instead having a somewhat urgent and abbreviated conversation about how to keep his heart ticking until the next day. While you are conjecturing about what they must do to get this near-corpse straight back out onto the football field doing stretches and pushups, they would consider securing a 24 hour survival to be an outstanding accomplishment. Your "creation of wealth" would be considered a topic for the third week of recovery.
What part of this do you guys not wish to recognise as plausible? Your recommendation instead might be compared to "bleeding the patient so that his diminished blood supply may become richer". An audacious strategy when the poor stiff is turning blue already.
Originally posted by The Outback Oracle View PostLast edited by Contemptuous; October 10, 2008, 07:32 PM.Comment
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Re: Why the Fed can’t lower rates
You yourself are assuming they know exactly what's going to happen. May be a little risky right there. They may think they know what's going to happen, but does that mean that they actually do? Common sense would suggest it far more probable in a force ten gale, no-one ultimately knows "exactly what's going to happen". But common sense can sometimes go begging.
Originally posted by phirang View PostLast edited by Contemptuous; October 10, 2008, 07:34 PM.Comment
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Re: Why the Fed can’t lower rates
I am going to disagree with both Lukester and Phirang.
As I see it, the problem has always been time. Everyone in the present system wants answers fast. When faced with the thought that their salvation will come from long term investment that brings in all the inventive and industrious who will, inevitably, take something like a decade to really start to get up to speed, they baulked.
They are a bunch of lazy investors wanting their cash up front and to hell with the rest, as long as they win a pot of money by the end of the week. The result is that, they are completely locked into the idea of quick answers and that is what is going to crash the whole system. The FED might have all the information anyone could ask for. But they do not have the wit, nor the inclination to change their ways.
This is turning into a classic Disaster where the old way of thinking is going to be swept aside by "Events". They do cling on for the time being simply because to try and replace them right now would make for even more instability. But rest assured, they will be faced with the short plank sometime not long after the storm abates.
The only way out of this is long term equity capital investment of savings into new industry created by the innovators and inventors that have been forced to sit still throughout the last several years while the bubble reached its peak. But to be able to make the new start, the old way of doing things, short term, no time to sit and wait for investment to mature - must be shown to be unworkable.Comment
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