Saturday, November 20, 2004
Greespan and the Economy, Again!
Greenspan said major, and to some, shocking things:
"rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now is obviously desirous of losing money."He also said:
"Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point …But when, through what channels, and from what level of the dollar? Regrettably, no answer to those questions is convincing."
Here's The Prudent Bear's Doug Noland writing about the week ending November 19
The dollar has been declining now for over two years, yet the inevitable adjustment period has not even begun. Importantly, the Fed’s misguided war against deflation has tremendously distorted our financial and economic systems. And it is now impossible for us or the rest of the world to “grow our way out” of the problem. If foreign central banks further push the accelerator to stimulate U.S. exports, get ready for $75 crude, $600 gold, and only more problematic global Monetary Disorder. Here at home, our central bank has nurtured a dysfunctional U.S. financial Credit system that is today only capable of sustaining mortgage lending excess. The nature of inflationary manifestations ensures over-consumption, minimal economic investment, massive trade deficits and global liquidity excess. These liquidity excesses and the attendant weak dollar have fueled a major inflation in non-dollar asset-classes, which has incited increasingly self-reinforcing speculative flows out of the dollar. As with all great inflations, the consequences become increasingly uncontrollable, while there is always a need for additional inflation to keep the game going.The Fed is saying interest rates are going to go up a lot, and the dollar is going to go down a lot.
The Fed is in a quagmire. It will not risk piercing the Credit or Mortgage Finance Bubbles, so the spigot of Credit and liquidity excess runs wide open. Asian central bankers are left to purchase massive dollar securities, in what should be an increasingly conspicuous self-defeating proposition. This only supports over-heated U.S. debt markets - and unrelenting Credit, speculation and liquidity excesses. The Fed is now facing its comeuppance. Greenspan should never have nurtured the Bubbles of leveraged speculation and asset-based lending. And only time will tell as to what accident is waiting to erupt in the currency derivatives markets. Simultaneously rising rates and a sinking dollar could spell trouble for our foreign creditors and derivative players. There have been similar Credit system Bubbles and dysfunctional dynamics in play over the past decade, and they have invariably ended in crisis.