low rates-credit expansion-inflation!!- wealth transfer from savers to borrowers- welfare state- socailsim!!! the largest advocate of capitalism and crusaders against communism is actually the most sucessful central planning economy in the history of mankind.. it's all a illusion.. and in case you are not aware of it, foreigners are the largest creditors of the US, so they do have a interest in the US 's prosperity. you don't know your left from your right ..man.. OK, lets see: You're a euro-leftist pissed off at the cheap USD and how great things are here in the US and how bad things are in Europe and I'm a conservative right-wing believer in buy/supply-side Economics. - How'd I do?
Look at Australia. They flew through the asian crisis due to a DEPRECIATING AUD and FALLING interest rates(sound familiar?). They now have a massive housing bubble that threatens to deflate. Why? because their Reserve bank are basically shit scared of a boom bust cycle in housing- having recently lived through one (90-95). The first part of the R.E. Boom was just playing catch up from the lack of growth in 90-95. The second half(that since 9/11) is purely liquidity driven and that has been CORRECTLY recognised by their Reserve Bank as being the most dangerous part ie the Bubble. We all know(or should know) that any market needs to do some back filling in order that a strong appreciation in prices is sustainable. Unfortunately just when the Aussies needed to do some back filling (via interest rate adjustments upwards) a couple of lunatics flew into the world trade centers. Their bank responded quickly to Greenspans interest rate cuts and did the same. They also realised quickly that they had over estimated the existing stimulus in the economy, and that by cutting rates they were only adding fuel to the fire. The big difference between the Australian Economy and the US is that the Australian Economy took its medicine early and restructured. Floated its currency in early 80's (starting a nearly 2 decade decline in the AUD), removed trade barriers(allowed inefficient manufacturing industries to decline and move off shore) so that now they are a much more balanced and competitive economy. BUT it has become unbalanced due to the excess liquidity resulting from 9/11. The US on the other hand has allowed massive excesses to build up rather than restructure their economy. The US will have to do this eventually but is fooling itself into thinking that they are the only game in town. By this I mean the massive currency flows that are needed to fund the US Twin Deficits. For the past decade there has been a mind set in the US that the USD had a right to be the reserve currency. When you have a reserve currency you can make comments to the market about owning the printing presses. Foolishly honest comments. With Japan in "deflation" and the Eurozone with its problems there has been no alternative reserve currency. With systemic shocks occuring with greater regularity(asian crisis, LTCM, Russian Default, Y2K, 9/11) and becoming bigger, the US it is fair to say has been the benefit of the "flight to quality" allowing an artificially high USD-as a result of these currency flows. The Bond and stock market have as a result gone though big bubbles. The bond market is yet to be pricked because greenspan keeps making outrageous statements such as the Fed will keep rates low "the Committee believes that policy accommodation can be maintained for a considerable period." Such statements ignore the markets ability to choose where they invest their money. Asia has become the new home of innovation and manufacturing. China and Japan(which has now started to grow again and reflate) provide extremely attractive growth and valuations respectively in their markets. The US. Well it has a declining currency, rates ready to spike upwards(like a beach ball being held under water), massive deficits, manufacturing moving overseas, record unemployment that is not improving , a Fed that hasnt yet realised that international investors only care about US consumer demand and not the US economy. Many other negatives there including Bushes obsession with Free trade agreements which can only further expose the US economy, a declining housing market and an equity market that is overvalued again.Corporate profits that have surged again but mainly in response to layoffs and outsourcing to China as well as temporary tax incentives and unsustainable government spending. The Fed knows the problems but as usual will not admit them. Instead of allowing the US economy to restrucure Greenspan is trying to stave off the inevitable by keeping the interest rate beach ball below water for an extended and as yet undetermined period. What will end it? Who knows, but the most obvious thing on the horizon is the US Elections. The uncertainty will start to weigh on the markets soon. We may just find that international investors have lost patience and move their money elsewhere.
Genius? Wrong conclusion. This economy is a sinking turd. Everyone knows if you can pump enough air (liquidity) into a sinking turd you can get a floater....but it is still a turd. It is all an illusion. Business spending is nil, the whole economy is people doing re-fi mania on their homes, spending and dragging crap they don't need home from the mall and taking vacations. This re-fi money is like crack cocaine, not nutritious in the long run. These bills will have to be paid eventually and eventually interest rates will have to be increased because of inflation. Right now Greenspan is doing his best to hide the inflation but the day is coming. The party will then be over and wreckage will be vast in the consumer arena.
I think one thing that might be in the back of the mind of the Fed is the case of Japan....after thier initial slump in the early '90s they started to recover and then the central banked raised rates too quickly and squahed any type of recovery and now ten years later Japan is basically in still has a sluggish economy....granted this is an oversimplification but I do think that the Fed is worried about this type of scenario
Discipulus - I agree that the low rates are moronic if deflation is not seen as a threat. However, the point I'm arguing is that they don't even make sense on a Keynesian/orthodox view. Longshot - regardless of how strong or weak the US economy is, there is still a large discrepancy between US rates and those of, say, Europe, Canada, UK, Australia etc. If the US is in "depression", then Europe can hardly be described as anything else (unemployment of 10%, slower GDP growth, even less competitive goods and services, ageing populations and a worse pensions crisis etc), so why the discrepancy in rates? Or do you think Europe and other G7 countries are vastly outperforming the US? Also, if the stockmarket is getting pumped up way beyond fundamental value due to low rates, then you are admitting that the low rate policy is creating another unsustainable asset bubble. This would indicate that rates are far too low, given that pumping up asset bubbles is not an appropriate goal for responsible monetary policy. Razorack - the Bank of England has a surprisingly similar view to the Australians. Both banks are now pursuing a rate rise cycle and are taking pre-emptive measures before the liquidity boom gets spectacularly out of hand - they are well aware of the dangers of creating asset bubbles by artificially low rates. They are basically following reasonable, albeit IMO tardy, responses to conditions (a free market in money would have hiked rates far sooner). This is what makes the Fed's decision so puzzling - if Bernanke is right, then the rest of the world's central banking community (except Japan, which has had *actual* deflation to contend with) is flat out wrong. What's more, cheap dollars are fuelling asset price booms outside the US - for example emerging market bonds and stocks. So the rest of the world is going to face the consequences of Bernanke and Greenspan's policies too. There are already developing trade tensions due to the weaker dollar, but the fallout from a US-driven worldwide liquidity boom and then bust (when rates eventually rise) could create serious political and trade consequences. The final nail in the coffin is that Fed policies have led people like Buffett, Soros and others like them to bet big style on foreign currencies and assets. Is it a good central banking policy that results in the world's most informed speculators moving their capital out of the country?
Many posters here and my own experience focus on spiraling costs of health care, fuel, plumbers, etc. yet there can be no doubt that the FED is PARANOID about deflation. It is to them the end of life on earth. The only way I can reconcile this is that they are looking at a much broader concept of deflation than we are. So, to their way of looking at things they would include the fall in real wages. They would acknowledge a run up in costs for plumbers and critical care nursesbut decry the drop in pricing power for surgeons and doctors, lawyers, and accountants due to falling reimbursements, competition, whatever. If there has been a 21% fall in used car prices that we notice, they are also looking at the collapse in value of used mobile homes, plant equipmet and machinery, etc. They are looking at the drop in business pricing power and disincentive to hire because of the costs. In short, they must be including a much broader class of assets and return on assets the value of which is falling in their view. Does this make sense? Geo.
If wages fall along with prices (hi China), real wages would remain the same, so in that sense deflation isn't so much a problem; it's the debt that kills us as all the numbers go nominally lower except the principle outstanding on any loan. Carrying as much debt as we currently have in this country, longer-term deflation will cripple the system by encouraging default over repayment (why pay off your 400K mortgage when the house is now worth only 300K?). Can you imagine what would happen if declaring bankruptcy in this country becomes 'en vogue'? The Fed will go all-out to eventually inflating away our debts and risk hyperinflation as opposed to letting things collapse the other way. Deflation wouldn't really be the evil that everyone assumes it to be if we weren't trying to deficit spend our way out of every problem.
That's the truly disgusting thing about all of this, that the fed encourages and rewards over-borrowing, and punishes saving and thrift. Several comments have been made that the economy since 2001 has been cash-out re-fi driven. I couldnt agree more. People who got hurt in the 2000 market fall got a lot of criticism, but for the most part at least it was their own money. Now, people are rewarded for "sure-thing" bets made with very high leverage (home speculation)
There is one other side effect of global reflation ... which is that it pumps a lot of liquidity first into speculative capital markets. The tremendous growth of the hedge fund industry and the revival of online trading are, I think signs of this.