>   (email exchange)
>   On Sun, Apr 11, 2010 at 10:58 AM, wrote:
>   What is your call?

It’s certainly possible, but my suspicion is that we may be going the way of Japan, with interest rates low for very long. With core CPI going negative and the output gap/unemployment remaining very high, especially people who can’t find full time work hitting a new high of 16.9%, the Fed is far from meeting its dual mandate of full employment and price stability (along with low long term rates). And the recent dollar strength, stubbornly high jobless claims numbers, weak loan demand numbers, and not much sign of life in housing has to be a concern about the recovery being more L shaped than V shaped as well.

Seems the Fed would have to have some pretty strong forecasts for CPI and much higher levels of employment to move any time soon apart from perhaps going to what they consider a more ‘normal’ real rate of 1% or so.

And when I look at the euro dollar rates out past 5 years they’re higher than libor got in the last cycle, and this one doesn’t feel like it’s stronger than the last, at least so far. So to discount rates that high (well over 5%) as midpoints of expectations for fed funds looks high to me.

Consumers in U.S. Face the End of an Era of Cheap Credit

By Nelson D. Schwartz

April 10 (NYT) — Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

14 Responses

  1. Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

    Oxymoron or just moron? Where’s the demand supposed to come from?

  2. “the Fed is far from meeting its dual mandate of full employment and price stability”

    Tell me, what has the Fed done to reduce unemployment lately? Anything?

    1. Min, Bernanke would likely say that they have reduced interest rates and increased liquidity to spur lending in order to increase both investment and consumption.

      The MMT answer, “How well is that working for you?

      I don’t see that problem is that the Fed is doing either nothing or the wrong thing. Rather, there is nothing that it can do through monetary policy that will be effective in relieving unemployment.

      Bernanke should instead by taking the MMT line and telling politicians and voters that monetary means are not appropriate to the situation and that fiscal loosening is required. He is not only not doing that but also is saying that the US needs to exert “fiscal discipline.”

      1. Thanks, Tom. I suppose that in normal times the Fed could aid employment by stimulating aggregate demand. But times ain’t normal.

        However, I think that Bernanke’s speech hinders efforts to reduce unemployment by calling for “fiscal discipline”. Despite what he may say, such rhetoric raises questions about additional stimulus and more direct job creation.

  3. Min, It seems to me that in “normal time” the Fed is more concerned about restraining “inflationary expectations” while fostering investment than in stimulating AG.

    The Fed chairman using his bully pulpit to push “fiscal discipline” when monetary policy is doing nothing and U3 is ~10% with capacity utilization in the tank is just crazy.

    1. Tom,
      The only connection I can make between Bernanke and “the Dark Side” (ie Peterson et al) is geographic. Bernanke was at Princeton, Blackrock/Blackstone/Schwarzman-Peterson has operations at Princeton as their equity strategist Doll does his CNBC reports from Princeton. This is a clip from a Concord related website:

      Panel guests include: Pete Peterson, Founder and Chairman of Peter G. Peterson Foundation, Co-Founder and Chairman Emeritus of The Blackstone Group and former U.S. Commerce Secretary; David Walker, President and CEO, Peter G. Peterson Foundation and former U.S. Comptroller General; Bill Bradley, former U.S. Senator and Managing Director, Allen & Company LLC…

      Bill Bradley is from Princeton. Alot of this “fiscal sustainability” seems to revolve around Princeton for right now.

      1. Matt, I agree that everyone espousing “sound finance” is not coming from the Dark Side. As Bill Mitchell observes about in Question 2 of this week, Abba Lerner attributed this concept to conservative moralizing rather than economics. Bernanke is definitely conservative, but I don’t know that he is in bed with the Peterson folks. So I’m OK with just calling him out for moralizing without imputing any disingenuous intent. Whatever the reason, it should have disqualified him for reappointment.

    2. Bernanke is more Oxford than Princeton, 14th Century Oxford. He’s like a Medieval physician who treats his patients with blood letting– the weaker they get, clearly,,the more blood they need purged… After all, it’d be irresponsible not to balance those humours.

      1. Beowulf,

        You know, that (balance the humours) is a VERY appropriate analogy. (I have to admit I had to look it up!) Ignorance again at work within the mainstream. Then in medicine, today in economics.

      2. Thank Matt. Its the mindset that if the theory doesn’t match how the world works, its the world that must be adjusted, not the theory (collateral damage be damned). During the Middle Ages, plague had a mortality rate as high as 90%. It killed a third of Europe, and to imagine there was much that men could do to reverse what was clearly the wrath of God was as blasphemous in their age as someone in our age denying “there’s no such thing as a free lunch”. Today, doctors can treat plague with tetracycline ($4 at a Walmart pharmacy– so lunch isn’t totally free) and other antibiotics.

        In one of Ken Follett’s novels (can’t remember if it was Pillars of the Earth or its sequel), the English doctors, Oxford men all, treat plague victims by bloodletting. Meanwhile, when a nurse who used herbal remedies was clearly getting better clinical outcomes, the doctors responded as one would expect– accuse her of witchcraft and demand she be burned at the stake. Some people have no sense of humour! :o)

  4. MMT is bullshit.

    As I said on Dec 27: Contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length. However the lag for nominal gdp (the FED’s target??), varies widely.

    Assuming no quick countervailing stimulus:

    jan….. 0.54…. 0.25 top
    feb….. 0.50…. 0.10
    mar….. 0.54…. 0.09
    apr….. 0.46…. 0.10 top
    may….. 0.41…. 0.01 stocks fall

    Should see shortly. Stock market makes a double top in Jan & Apr. Then the real-output of final goods & services falls/inverts from (10) to (1) from Apr to May. Recent history indicates that this will be a marked, short, one month drop, in rate-of-change for real-output (-9). So stocks follow the economy down (with yields moving sympathetically?)

    1. Still haven’t seen an actual critique of MMT that showed you in fact had a clue about what you are criticizing. You are critiquing something, but it is defeinitely not MMT.

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