Btw, I don't think MP can have it both ways. If the fed keeps raising short term interest rates an inverted yield curve is almost a sure thing unless long term rates go up, right? Or am I not understanding something here?
MP probably thinks that the FED will pause or even reverse its rate hikes at around 4%.
But isn't the fed trying to prevent a deflationary scenario like what has occured in Japan? It seems to me that the fed would be likely to push rates up at least until the end of the year. And isn't it really unlikely that the fed would reverse the trend unless the economy all of a sudden slipped into a recession? And since the economy doesn't seem to do anything suddenly that would be very unlikely wouldn't it?
the Fed was trying to prevent deflation, back in early 2004 and 2003 that’s part of the reason why they dropped the Fed Funds rate to 1%. Now they are trying to prevent inflation, oh so quickly
Greenspan was supremely WRONG when he announced to the world that deflation was upon us. The surprising thing is #1) he never admitted his mistake, 2) people aren’t criticizing him for that statement.
Greenspan now is in a ‘conundrum’ b/c the 10-yr yield isn’t cooperating with his goal to drive rates higher.
Now, would you trust ONE MAN to decide your financial future, or the MARKET? Greenspan is losing it. Too many people think he’s god, and that’s scary.
Will wonders never cease? I actually agree with you that too many people put WAY too much faith in Alan Greenspan (aka, 'Mr. Bubbles') and that he was dead wrong about deflation. I have long been critical of his easy money policy as a primary cause of the RE bubble (read back in the archives for proof).
Personally, though, I don't think his decision to lower rates to 1% (negative in real terms) had anything to do with this phantom "deflation threat" that never existed to begin with. While I think AG is dishonest, I don't think he's stupid. He was clearly under orders from the politicians who reappoint/confirm him to lower rates in order to help shorten the recession and mitigate the effects of the tech bubble's collapse.
The fact that he waited so long before raising them is the main reason why things are now so out of hand credit-wise. You said, "Now they are trying to prevent inflation, oh so quickly". More like "oh so SLOWLY"! A half-point hike or two would put the fear of God into the bond markets and end this credit party real fast, IMHO.
You still haven't answered SactoQt's point about Fed rate hikes & the yield curve:
Btw, I don’t think MP can have it both ways. If the fed keeps raising short term interest rates an inverted yield curve is almost a sure thing unless long term rates go up, right? Or am I not understanding something here?
...It seems to me that the fed would be likely to push rates up at least until the end of the year. And isn’t it really unlikely that the fed would reverse the trend unless the economy all of a sudden slipped into a recession? And since the economy doesn’t seem to do anything suddenly that would be very unlikely wouldn’t it?
If you think that: (a) the Fed is not likely to pause in short-term rate-hikes anytime soon, and (b) long-term bond rates aren't going any higher (which I think you DO), then an inverted yield curve is a certainty, no?
Deflation is extremely unlikely and the federal gov’t can just print more money to prevent it.
That was probably what Greenspan was thinking. He did "print money" to prevent deflation, didn't he? ;)
IMHO, economy-wide inflation is just as unlikely as economy-wide deflation. While fiat currencies give central bankers more flecibility in fighting deflation, increasing "global arbitrage of commodity prices" aka globalization will counter inflation.
I don’t follow. My thinking goes, if the US borrow enough money at a fixed rate and can’t afford to pay, then we’ll print more money to pay the bonds, therefore creating inflation. There’s nothing foreigners can do if we do decide to take what will seem the easiest course of printing more money.
Yes -bingo! Lowering interest rates to negative (in real terms) is basically the same thing as printing more money. It massively increases credit/liquidity, although as Peter says, it's very hard for the Fed to control exactly where all that credit goes.
I don’t think US politicans today can think past their next fund raiser, nevermind past the next election cycle.
"In a social democracy with a fiat currency, all roads lead to inflation."
--Bill Fleckenstein, MSN Money
I know you don't agree with this view, Peter, but I really do believe that the Fed is/has been/will continue trying to deflate the National Debt (and federal entitlement obligations) via inflation, and that deflation was never a real threat to begin with.
Call me a conspiracist if you like (let me go get my tin-foil pyramid hat), but I firmly believe a key component in this strategy is to keep much of the real inflation "off the books" via accounting gimmicks and statistical gymnastics (ignoring energy, food & healthcare, creative weighting, hedonics, substitution, etc.). As long as the bond markets don't catch on and demand higher yields, this works really well. If you also peg most federal entitlement programs to a phony CPI and let inflation work, then those obligations just melt away over time as well.
I just don't see how any rational person at this point can actually believe the official CPI actually reflects reality.
“In a social democracy with a fiat currency, all roads lead to inflation.”
I may actually agree. The question is "inflation" in where?
I just don’t see how any rational person at this point can actually believe the official CPI actually reflects reality.
No index can completely reflect the reality. However, IMHO, CPI is not too far off. It is fair that they use rent in the calculation because it measures the cost of housing as a consumable rather than an asset.
Alright, let me play devil's advocate here. Suppose I agree that this fictional person who doesn't need food, gas, electricity or healthcare actually exists, and that when GM adds a side air-bag to my new SUV (which doesn't need gas, btw) that this constitutes a "quality improvement" which lowers the cost of my SUV, as far as the CPI is concerned (but not the price I actually paid for it).
Ok, so now I believe in a 3% overall inflation rate. Now I see AG ratcheting up rates above the official inflation rate, and I see the yield curve flattening (which is already happening: .35 spread between the 1-year & 10-year note: tinyurl.com/exy8r). If he keeps raising the Fed rate, it should eventually invert, which usually means a recession's soon to follow. Deliberately inverting and triggering a recession in a time of such supposedly low inflation might even cause deflation. Why would he risk that, when deflation is supposed to be his mortal enemy? After all, deflation means dollars and anything denominated in dollars (National Debt, federal entitlement obligations, etc.) will RISE in value.
Like I said, I think AG's dishonest, not crazy/stupid.