Jun 30 2005
Bubbles not Just Real Estate…
We couldn’t have said it better ourselves:
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“By electing to condone the greatest equity bubble since the late 1920s, the Fed has been snared in a low real interest rate trap — in effect, locking itself in to a serial bubble-blowing strategy. To counter post-equity bubble aftershocks, the Fed slashed its policy rate by 550 basis points to 1% — vowing that it had learned the tough lessons of Japan (see the now-seminal research report by the Fed’s research staff, “Preventing Deflation: Lessons From Japan’s Experience in the 1990s” by Alan Ahearne; Joseph Gagnon; Jane Haltmaier; Steve Kamin, et. al., June 2002). And then in the face of a full-blown deflation scare — a classic and predictable symptom of a post-bubble shakeout — the Fed maintained an uber-accomodative policy stance that is still in place today. It pushed the real federal funds rate into negative territory for three years (2002-04) before finally taking it up to the zero threshold, where it remains today.”
That’s Stephen Roach of Morgan Stanley in his July 24, 2005 dispatch… There are other real doozies, like this one, too:
- “Dangers cumulate as one bubble follows another. That’s because debt invariably enters the equation. And that has certainly been the case in recent years. Not only does the outstanding volume of household sector indebtedness now stand at a record of nearly 90% of GDP, but this ratio has soared by 20 percentage points over the past five years (2000-04) — equal to the rise that took place over the preceding 15 years (1985-99). Moreover, household sector debt-service burdens are at historic highs when scaled by disposable personal income — truly astonishing in a climate of rock-bottom interest rates. That means it wouldn’t take much of a back-up in rates to put a real squeeze on the over-extended American consumer.”
Really, Roach places the blame squarely where it belongs. As we’ve been saying, it seems the prescription for the sickness may actually be making the patient worse off. Read it.
