On July 26 I wrote the following:
I think stocks are being sold, bonds are being bought and yields are dropping precipitously in anticipation of something we “average” people don’t see yet; some economic news which eliminates any possibility of the Fed raising interest rates (not that there is such a possibility right now anyway), and in fact points to the possibility of lowered rates. That would only happen as a way to increase liquidity in the face of some severe, “unexpected” developments.
Now we have the story that the illustrious James Cramer is pleading for a Fed “rescue”.
I’ve written repeatedly over the last couple of years about how our economy’s best hope was for growth strong enough that the Fed could comfortably raise interest rates back to, or even better, above historical norms in order to contain that growth and its accompanying inflation. A strengthening dollar which would give China room to revalue its yuan without crashing our economy or bond market. I felt, and feel even more so now, that such strong growth lies somewhere between highly unlikely and impossible.
I wrote that the alternative (tepid growth in spite of low interest rates- and mortgages still under 7%!- and in spite of an extremely weak dollar) would paint the Fed into a corner and leave them with no wiggle room to do anything but start lowering rates back towards zero to try and re-stimulate our irresponsible debt- and- spend binge, the cycle which has gotten us to this point in the first place. Lowering from here (the lofty 5.25% level!) would cause the dollar to go into a spiral. The Chinese and Japanese would have to buy massive quantities of U.S. Treasuries to try to keep their currencies cheap relative to ours. I believe the current figure is that China is now up to about 1.3 trillion dollars worth of… us. At what level do we start referring to them as “lord”? When their ownership exceeds our GDP (about 10 trillion right now)?
The hangover we’re just beginning to feel is a very intense one, built up starting with the Greenspan-Bush delay of the 2002 “recession- which- wasn’t” by flooding the economy with unprecedented liquidity, resulting in the explosive increase in prices (stocks, homes, etc) we’ve subsequently seen. Milton Friedman would be proud. Not.
It’s not unlike drinking a fifth of whiskey to avert the pain we brought on by sucking down a 12-pack yesterday. We have not averted the pain, we have simply delayed it… to be paid later, with interest. And what Cramer is calling for is the equivalent of yelling, “Bartender!“. The problem has developed over years, and will resolve over years. It’s why I laugh when I hear silliness like, “Do you think the housing slowdown is over?”… it’s not a slowdown, it’s a drastic reversion to the mean, and at best, we’re at the “end of the beginning,” with the fun part yet to come. This stuff takes time.
Let’s hope the Fed does not “rescue” the billionaire parasites until their bleeding begins to threaten the entire economy (admittedly, that won’t take too long). For the long-term good, let’s fess up, take a couple of aspirin, and get ready for our hangover.