Friday, May 21, 2004

Monetary Policy: Interest Rates Dynamics

Proving that the sun can shine even on a dog's behind once in a while, Samuelson of Newsweek actually writes a decent article that while isn't terribly insightful is at least helpful to a lay-person.

What's tricky is that, except for the overnight federal funds rate, the Fed doesn't control any interest rate. Banks, pension funds and others actually set market interest rates (on mortgages, business loans, bonds) based on their views of inflation and risk. When the Fed cuts the funds rate, it simply buys U.S. Treasury securities from banks and others. The cash used to pay for those securities gives banks more lending funds, which—other things equal—could reduce other rates. The Fed succeeded because inflationary expectations were subsiding and because the Fed itself reduced the perception of risk.

It influenced long-term rates by encouraging the "carry trade'': Investors borrow short-term money at low rates (say 2 percent) and lend it at higher long-term rates (say, 5 or 6 percent). A lot of that happened. From 2000 to 2003, bank lending rose about $1 trillion. Banks used cheap deposits to buy mortgages and bonds. As more money moved into these investments, their interest rates fell. But the carry trade is risky: if short-term interest rates rise, it can become unprofitable. So, last year the Fed reassured investors. The Fed funds rate would stay low for "a considerable period," it said. The Fed shaped "expectations of long-term bond investors in a very creative way," notes Mark Zandi of Economy.com.

Unfortunately, cheap credit cannot last indefinitely, because, once the economy improves, it will rekindle inflation: too much money chasing too few goods. Worsening inflationary psychology will push up market interest rates. With better job growth, Greenspan and the Fed have reached this juncture. The Fed has withdrawn its "considerable period" pledge and indicated that the Fed funds rate will soon rise from 1 percent. Market interest rates have already increased, because views of inflation and risk have deteriorated. In mid-March, the rate on a 30-year fixed mortgage was 5.4 percent; now it's above 6 percent.


Stirling Newberry of BOP-news writes a much more powerful tour de force of monetary policy that is correspondingly much less accessible to the average person.

The basic dishonesty, of reflexive market worship, creates a warped lense. It is why World Bank programs fail over and over again, and why "shock therapy" fails over and over again. Left to itself the market in an transitional economy will strip the country bare of assets in return for short term consumption, and place the wealth in the hands of a corrupt few. See Russia for an example. See Mexico for another. Essentially, people get their hands on money, and they spend it on imports. The economy booms for a short time, and then the bill comes due, and investors flee.

Instead, the successful transitional economies have government intervention to impose discipline: to erect barriers to luxury imports, and encourage exports, it is a formula that England, the United States and Germany all used. While the particulars differ - government concentration of the control of money, and a preferential tactic of putting that accumulated money into industrial development targetted to export is the core of the process.

Governments which allow the free market to buy up assets at pennies on the dollar end up slumping: there is no reason for absentee investors to do more than pillage current value and move on, and there is no reason why the local population should work hard for the benefit of foreign owners.

While neo-mercantilism gets a bad reputation in every economics textbook, the hard fact is that it works. Malaysia - that paragon of state interference in the economy - chugged through the financial crisis of the late 1990's, precisely because it put a strangle hold on "hot money", as did China. Nations which did not saw their stock markets punished for years, not for months.

Stirling then goes on to describe what he calls Peronism:

The danger, and it is a perpetual danger, can be called "Peronism", after the Argentine dictator who rose to power promising immediate prosperity. Peronism crops up in developing nation after developing nation and consists of allowing excessive consumption growth during the transition. It is an easy trap to fall into, as pent up demand finally has a seeming outlet, credit is available, and people buy with it, at the expense of importing Intellectual Capital and key materials, and at the expense of growing industries for export. Peronism rapidly makes a basket case out of any nation that practise it, and leads to a bail out, which, since the export infrastructure is underdeveloped, leads a cycle of government austerity, lowered standard of living and more bail outs.

But these clear facts are conveniently ignored by writers such as Bradsher, in their neoconservative worship of Thatcherization. The reason that Bradsher's dishonest screed is so laughable is that the United States has been pursuing a policy of massive government intervention, which has awoken inflationary pressures again, and created a speculative environment in key input commodities. Without the war in Iraq and the Bush Tax Breaks, the price of oil would be considerably lower, and the US would be growing extremely quickly - not with sluggish job growth and rising inflation...

Transitional governments are faced with three roads: mercantilism, peronism and thatcherization. The first leads to prosperity, but also corruption and a disciplined economy. The second two lead to different flavors of ruin. Peronism because money flees from the country for consumption and the industrial system hardens into a rigid pose that cannot compete, and the second to a few extremely wealthy robber barrons and millions at a lower standard of living. Peronists point their finger at thatcherizers, and thatcherizers point their finger at peronists - each calling the other all sorts of unseemly names.

The problem is that the American government with the collusion of the Federal Reserve is acting in a Peronist fashion. It is laying a large amount of debt, pursuing unsustainable social spending entitlement policies, and allowing a structural current accounts deficit to occur that is effectively a permanent and ongoing drain and export of capital flight from domestic assets to foreign assets. That's the real danger of outsourcing. It's not a question of some trivial synergy of comparative advantage, it's a simple dog-eat-dog competitive allocation of capital and asset growth. Right now it's going overseas, which is why the only solution the Federal Reserve has come up with in collusion with Treasury is to break the dollar and staunch the flow by getting outsourcing from Europe.

Only Europe isn't very happy with that idea of beggaring them in order to keep American trade balances from getting corrected by the market.

It's also only a short term solution. Peronism has become the unofficial defacto economic policy of the United States of America. God help us! Put that in context then for the perspective of pursuing Samuelson's closing graphs...

For Greenspan, this may be his last hurrah; by law, his Fed appointment ends in early 2006. The Fed needs to raise rates fast enough to prevent market rates from taking off—and slowly enough not to choke the recovery. It's a delicate maneuver. By pulling it off, Greenspan would ensure his reputation.

Superficially this is correct. The short term task for the Federal Reserve is to balance GDP growth versus inflation. Because it's an election year and Greenspan has a legacy to worry about, he's chosen to encourage the Open Market Comittee in order to protect GDP growth. However the intrinsic difficulty is that Greenspan knows that the United States economy is on borrowed time - and borrowed money. What's happening is that there is a collapse in living standards that hasn't made itself fully apparent to people because it's obscured by inflated government statistics and consumptionist policies. The underlying wealth of the nation is being second-mortgaged off in an equity asset stripping operation that is exchanging it for a line of credit that is being used to expand consumption. Because of the temporary consumption increase, the country seems to feel everything is well.

The real story is that the United States is like that apocraphyl foolhardy family we all seem to know who took out a home-equity loan or a second-mortgage or borrowed against their IRA/401k portfolios in order to take a vacation in Barbados or Tuscany. When I was growing up there was always some family whose children in my high-school got to go away to thise kinds of places over Christmas break - and invariably at least one of them was living "beyond their means" on lines of credit. Well that's what the United States of America has become like. We're living beyond on our means on borrowed money, precisely because our creditors have agreed to take our assets in return for such consideration.

Isn't it scary when you look at it like that?




29 Comments:

At October 4, 2005 at 11:48 PM, Blogger David said...

For All Your Home Loan Needs Visit Our New home equity loan Site

 
At October 7, 2005 at 8:08 AM, Blogger heropoo said...

Help! I am lost. I was searching for debt consolidation loan and somehow ended up here. How that happened I don't know, however I do like your Blog a lot. Would you mind if I add your Blog to my favorites page so others can visit?

 
At October 7, 2005 at 4:43 PM, Blogger hexadecimals resources said...

I found a good guaranteed auto loan site. I am looking into it myself.

 
At October 8, 2005 at 7:35 AM, Blogger Online Incomes said...

Nice blog, keep up the good work!
I have a blog/site toosan diego home equity loan
It's a free information site on on home equity loans and refinancing. It can help you save money if you are in the market for a loan.
You should check it out if you have the time :-)

 
At October 9, 2005 at 6:56 PM, Anonymous Anonymous said...

So this is where all the mortgage quote uk information is, I thought I did a good job on my site, but I am humbled. Maybe someone can take a look at my site at mortgage quote uk and tell me where I can improve.
Very nice site!!

 
At October 14, 2005 at 2:47 PM, Anonymous Anonymous said...

Came here searching for best best best loan loan loan loan loan uk uk uk uk uk.net cause i need a best best best loan loan loan loan loan uk uk uk uk uk.net

Best ive found so far is

best best best loan loan loan loan loan uk uk uk uk uk.net

Nice blog on loans in the UK good for best best best loan loan loan loan loan uk uk uk uk uk.net

 
At October 14, 2005 at 8:39 PM, Anonymous Anonymous said...

Came here searching for bank loan uk cause i need a bank loan uk

Best ive found so far is

bank loan uk

Nice blog on loans in the UK good for bank loan uk

 
At October 15, 2005 at 9:26 AM, Blogger Adult Personals said...

hey i got here searching for bad credit easy personnel loan

You have such a high ranking for that
Top 3 for bad credit easy personnel loan

bad credit easy personnel loan

 
At November 2, 2005 at 12:09 PM, Anonymous let to buy said...

Hey Oldman, I've been hunting around the net trying to find more up to date information on poor credit mortgages and chanced upon your site. Actually, Monetary Policy: Interest Rates Dynamics is not exactly what I was looking for but I enjoyed reading your post and wanted to add my own comments. Keep up the good work my friend.

 
At November 4, 2005 at 2:04 PM, Anonymous uk mortgage said...

Hi Oldman, Don't you just luuuuurve the internet!! I was looking around for up to date information on cheap mortgages and found your site. Monetary Policy: Interest Rates Dynamics isn't exactly what I was searching for but I enjoyed reading your post and thought it only right to drop in a comment to say hello! Take care, keep up the good work.

 
At November 5, 2005 at 3:15 AM, Anonymous buy to let said...

Great post Oldman!, I have been looking to get the latest info on uk mortgage and found your site when I did a search on Google. Admittedly, Monetary Policy: Interest Rates Dynamics wasn't exactly what I was looking for but it got my attention and I figured I'd drop a comment. I can see why I found your page when I was looking for uk mortgage related information and I'm glad I stopped by to say "Hi" even though this isn't a perfect match. Once again, Great post Oldman I'll bookmark your site for the future. Have a great day.

 
At November 12, 2005 at 10:57 AM, Anonymous council right to buy said...

I've been trying to find out more about commercial mortgages and came up on your site. Monetary Policy: Interest Rates Dynamics isn't really what I was looking for directly but I liked your post and figured I'd drop a quick 'Hello'! Keep up the good work and I will continue my quest for knowledge.. Ahhhh don't you just luuuuuurve the internet!! :o)

 
At November 15, 2005 at 3:22 PM, Anonymous buy to let said...

Hi Oldman, Don't you just luuuuurve the internet!! I was looking around for up to date information on commercial mortgages and found your site. Monetary Policy: Interest Rates Dynamics isn't exactly what I was searching for but I enjoyed reading your post and thought it only right to drop in a comment to say hello! Take care, keep up the good work.

 
At November 20, 2005 at 10:52 AM, Anonymous commercial mortgages said...

Great post Oldman!, I have been looking to get the latest info on adverse credit mortgages and found your site when I did a search on Google. Admittedly, Monetary Policy: Interest Rates Dynamics wasn't exactly what I was looking for but it got my attention and I figured I'd drop a comment. I can see why I found your page when I was looking for adverse credit mortgages related information and I'm glad I stopped by to say "Hi" even though this isn't a perfect match. Once again, Great post Oldman I'll bookmark your site for the future. Have a great day.

 
At November 21, 2005 at 1:20 PM, Anonymous council right to buy said...

Hi Oldman, Don't you just luuuuurve the internet!! I was looking around for up to date information on let to buy and found your site. Monetary Policy: Interest Rates Dynamics isn't exactly what I was searching for but I enjoyed reading your post and thought it only right to drop in a comment to say hello! Take care, keep up the good work.

 
At November 26, 2005 at 8:20 AM, Anonymous commercial mortgages said...

I've been trying to find out more about commercial mortgages and came up on your site. Monetary Policy: Interest Rates Dynamics isn't really what I was looking for directly but I liked your post and figured I'd drop a quick 'Hello'! Keep up the good work and I will continue my quest for knowledge.. Ahhhh don't you just luuuuuurve the internet!! :o)

 
At June 26, 2006 at 12:25 PM, Blogger Credit Score Improvement said...

Your blog is great, You may be interested in living better Investment property refinance . http:\\thehomemortgageguide.com

 
At February 4, 2009 at 9:38 PM, Blogger gfutfy said...

Joy in warcraft leveling living comes wow lvl from having wow lvl fine emotions,wow power level trusting them,power leveling giving them power leveling the freedom of wrath of the lich king power leveling a bird in the open.wlk power leveling Joy in living can age of conan gold never be assumed as a pose,or put on from guildwars gold the outside as a mask. People who have this joy don not need maple story mesos to talk about it; they radiate it. wow gold They just live out their joy and let wow power leveling it splash its sunlight and glow into other lives as naturally as bird sings.

 
At November 13, 2009 at 11:20 PM, Anonymous Anonymous said...

Online Pharmacy for Cialis, Levitra, Tamiflu, Viagra. Get Cheap Medication online. Buy Pills Central.
[url=http://buypillscentral.com/about_en-us.htm]Order Top Quality Viagra, Cialis, Levitra, Tamiflu[/url]. Indian generic drugs. Discount medications pharmacy

 
At November 18, 2009 at 4:20 PM, Anonymous Anonymous said...

At our purchase you can descry various medication and of definitely such lay buy Cialis Online a man – At Generic Cialis pharmacy.

 
At December 13, 2009 at 9:51 AM, Anonymous Anonymous said...

nice site platform

 
At January 9, 2010 at 8:59 AM, Anonymous Anonymous said...

Bookmarked this. Show one's gratitude you after sharing. Definitely benefit my time.

 
At January 17, 2010 at 4:39 PM, Anonymous Anonymous said...

This is a titanic article as they all are. I tease been wondering less this an eye to some culture now. Its great to receive this info. You are fair and balanced.

 
At January 20, 2010 at 5:55 AM, Anonymous Anonymous said...

[url=http://kfarbair.com][img]http://www.kfarbair.com/_images/_photos/photo_big7.jpg[/img][/url]

בית מלון [url=http://www.kfarbair.com]כפר בעיר[/url] - שירות חדרים אנחנו מספקים שירותי אירוח מיוחדים כמו כן ישנו במקום שירות חדרים המכיל [url=http://www.kfarbair.com/eng/index.html]סעודות רומנטיות[/url] במחירים מיוחדים אשר מוגשות ישירות לחדרכם.

לפרטים נוספים נא גשו לאתרנו - [url=http://kfarbair.com]כפר בעיר[/url] [url=http://www.kfarbair.com/contact.html][img]http://www.kfarbair.com/_images/apixel.gif[/img][/url]

 
At February 10, 2010 at 7:13 PM, Anonymous Anonymous said...

frequent confer elegant shown gypsies frankly receivables exercising security perper compiled
lolikneri havaqatsu

 
At February 14, 2010 at 12:03 PM, Anonymous Anonymous said...

Thanks after sharing. Like always, on the in money and strategic on quarry!

 
At February 24, 2010 at 11:28 PM, Anonymous Anonymous said...

http://markonzo.edu i'm fine good work ashley furniture price [url=http://jguru.com/guru/viewbio.jsp?EID=1536072]ashley furniture price[/url], fpymudc, allegiant air verdict [url=http://jguru.com/guru/viewbio.jsp?EID=1536075]allegiant air verdict[/url], 91086, pressure washers info [url=http://jguru.com/guru/viewbio.jsp?EID=1536078]pressure washers info[/url], frfpg, dishnetwork blog [url=http://jguru.com/guru/viewbio.jsp?EID=1536080]dishnetwork blog[/url], diinw, adt security preview [url=http://jguru.com/guru/viewbio.jsp?EID=1536076]adt security preview[/url], xihjk,

 
At March 17, 2010 at 9:31 PM, Anonymous Anonymous said...

In my opinion you are mistaken. Let's discuss. Write to me in PM.

 
At July 17, 2010 at 11:57 AM, Anonymous Anonymous said...

[b]Supreme Search Engine[/b]

[i]A powerful new search engine on the Net! Find information and websites on the Internet. [/i]

[url=http://www.supremesearch.net]Supreme Search Engine[/url]

[url=http://www.supremesearch.net][img]http://www.supremesearch3000.bravehost.com/Mini.jpg[/img][/url]

 

Post a Comment

<< Home