I'll simplify: Geithner is concerned about low long term rates, the trade deficit and asset prices in the US (Mostly housing). He is concerned that they are all related and it might unwind in an ugly way that the FED cannot control.
The rising trade deficit gives foreign Central Banks excess dollars that they have been investing in US treasuries - driving down rates. This has led to rising asset prices in the US. US homeowners have borrowed from these assets (their homes) and spent the money on consumption (a large portion imported).
This has increased the trade deficit, further lowering US rates and increasing US asset prices. A virtuous cycle.
I've suggested that as asset prices stabilize or fall, homeowners will withdraw less from their homes, spend less on consumption, leading to slower import growth and less foreign CB intervention - this will lead to higher rates and lower asset prices. A vicious cycle.
Geithner is concerned that the FED will be powerless if this unwinds in a vicous cycle.
The second warning from Geithner in as many weeks about systemic imbalances that can unwind in ways the Fed can not control. Is he managing expectations by outlining worst case scenarios or doing a little CYA?
dd, I'm not sure of the purpose for these warnings or the intended audience. I doubt it is CYA.
Perhaps Geithner is trying to influence Bernanke. Or perhaps his intended audience is fiscal policy makers more than monetary policy makers - especially when he points out the possibilities of problems beyond the FED's control. If that is the case, I'm confident the warnings are falling on deaf ears.
Hopefully the adjustments will be gradual and manageable.
Talk about being delusional - anyone who tried to buy a house with prudence, could see that they were competing with crazies with free money/no-doc loans. Anyone who tried to live within their means could see rampant inflation, instead of the cooked up CPI. Liquidity was flowing like booze at a frat party. And he did not know it till now.
All those Fed research, but cant see what's really happening on the street. Ivory tower indeed. NOT. It was a con game.
It was the greatest pyramid scheme.
And the young, and the poor, who got last into the game are going to be sacrificed.
this means the FED wants to overshoot. The congress should be enacting new regulations banning all the innovations in the financial sector : new loans, derivatives.
Instead we have a market policy that comes much too late anyway (yeah i know better late than never) and that will create major damage.
Remember, either in the USA or in Japan this is apparent euphoria : employment creation, growth is back, even oil seems down.
The Feds' short term rate increases can do nothing to address the larger fiscal issues. Congress can't even do anything about the trade deficit or its own spending - it all seems to be beyond anyone's control.
It's all interconnected like a giant game of Jenga.
It's all interconnected like a giant game of Jenga.
Actually I think there are things congress could do but it would result in driving down overall demand here as well as 'import demand'... Plus putting in place a tax strategy that favored 'creative processes' here rather than consumption and you turn it around over time.
It could all be done but it would be quite painful at least initially... especially step one which would be tax increases & budget cuts to trim the federal deficit and quickly remove at least one sector of the economy where we aren't saving.
The others wouldn't much less painful... do stuff like impose a VAT and offset it with reductions in payroll tax & more generous depreciation schedules... Possibly move the cap on interest deduction for personal RE way down. Fun stuff like that giving more incentive to 'produce' than 'consume'.
Never happen - it would be political suicide and neither party is thirsty for that brand of poisoned kool aid.
One of the implications of this speech should be clear: the old econometric models which the Fed and others use to measure inflation, etc. may not work any more. The landscape is changing, and the rate of change is accelerating...
I'm sorry to be so ignorant, but isn't this more Greenspan-speak? Could you translate this into English?
mtnrunner2, great name!
I'll simplify: Geithner is concerned about low long term rates, the trade deficit and asset prices in the US (Mostly housing). He is concerned that they are all related and it might unwind in an ugly way that the FED cannot control.
I've written about this before:
The rising trade deficit gives foreign Central Banks excess dollars that they have been investing in US treasuries - driving down rates. This has led to rising asset prices in the US. US homeowners have borrowed from these assets (their homes) and spent the money on consumption (a large portion imported).
This has increased the trade deficit, further lowering US rates and increasing US asset prices. A virtuous cycle.
I've suggested that as asset prices stabilize or fall, homeowners will withdraw less from their homes, spend less on consumption, leading to slower import growth and less foreign CB intervention - this will lead to higher rates and lower asset prices. A vicious cycle.
Geithner is concerned that the FED will be powerless if this unwinds in a vicous cycle.
Best Wishes.
The second warning from Geithner in as many weeks about systemic imbalances that can unwind in ways the Fed can not control. Is he managing expectations by outlining worst case scenarios or doing a little CYA?
dd, I'm not sure of the purpose for these warnings or the intended audience. I doubt it is CYA.
Perhaps Geithner is trying to influence Bernanke. Or perhaps his intended audience is fiscal policy makers more than monetary policy makers - especially when he points out the possibilities of problems beyond the FED's control. If that is the case, I'm confident the warnings are falling on deaf ears.
Hopefully the adjustments will be gradual and manageable.
Best Wishes.
And he didn't know this till now?
Talk about being delusional - anyone who tried to buy a house with prudence, could see that they were competing with crazies with free money/no-doc loans. Anyone who tried to live within their means could see rampant inflation, instead of the cooked up CPI. Liquidity was flowing like booze at a frat party. And he did not know it till now.
All those Fed research, but cant see what's really happening on the street. Ivory tower indeed. NOT. It was a con game.
It was the greatest pyramid scheme.
And the young, and the poor, who got last into the game are going to be sacrificed.
this means the FED wants to overshoot. The congress should be enacting new regulations banning all the innovations in the financial sector : new loans, derivatives.
Instead we have a market policy that comes much too late anyway (yeah i know better late than never) and that will create major damage.
Remember, either in the USA or in Japan this is apparent euphoria : employment creation, growth is back, even oil seems down.
All we need is a flap of wings from a butterfly
The Feds' short term rate increases can do nothing to address the larger fiscal issues. Congress can't even do anything about the trade deficit or its own spending - it all seems to be beyond anyone's control.
It's all interconnected like a giant game of Jenga.
It's all interconnected like a giant game of Jenga.
Actually I think there are things congress could do but it would result in driving down overall demand here as well as 'import demand'... Plus putting in place a tax strategy that favored 'creative processes' here rather than consumption and you turn it around over time.
It could all be done but it would be quite painful at least initially... especially step one which would be tax increases & budget cuts to trim the federal deficit and quickly remove at least one sector of the economy where we aren't saving.
The others wouldn't much less painful... do stuff like impose a VAT and offset it with reductions in payroll tax & more generous depreciation schedules... Possibly move the cap on interest deduction for personal RE way down. Fun stuff like that giving more incentive to 'produce' than 'consume'.
Never happen - it would be political suicide and neither party is thirsty for that brand of poisoned kool aid.
One of the implications of this speech should be clear: the old econometric models which the Fed and others use to measure inflation, etc. may not work any more. The landscape is changing, and the rate of change is accelerating...