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  • Expectations For Lift-Off Solidify For September [View article]
    The lift-off date is clearly predicated on expectations of a recovery in Q2. The Atlanta Fed is not predicting much of a Q2 bounce in GDP. If the economy doesn't improve, do you expect that date to be pushed back again? Yellen has said, after all, that their decisions are now data-dependent. How long can the lift-off be pushed back before the Fed has credibility issues (I mean more than today)?
    May 15, 2015. 06:40 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Can Employment News Change The Fed's Course? [View article]
    Sorry, the link didn't work. Just google "NYSE investor credit and the market" and look at the first image. The S&P is way higher and market credit balance is now about $200 in the red.
    May 4, 2015. 09:09 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Can Employment News Change The Fed's Course? [View article]
    But couldn't you at least have put up the more recent (and much scarier) graph from Doug Short (;_ylt=AwrB8poCF0hV_QUA...
    May 4, 2015. 09:06 PM | 1 Like Like |Link to Comment
  • China Vs. USA: And The Winner Is... [View article]
    Yes, we in the western world have perfected the art of corruption in govt. If I give you money to do something while in power, that's bribery. If I promise to give you something (say $250,000 per speaking engagement) after you leave power, that's okay. They both look corrupt to me, but one version is legal. (Turn away, nothing to see here.)
    May 1, 2015. 03:04 PM | 2 Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    Hello David,

    How sustainable do you think it is for CBs to own debt (some of which is presumably worthless)? At what point does it get recognized as monetization and lead to currency devaluations as in the yen's case? Clearly QE can't be forever, though many countries seem determined to make a go of it. Do you think The FED should re-implement QE at this point or at some other point where there is no crisis (outside of the stock market) but the economy is not doing great? Where/when would they stop? Or are we just stuck in this secular stagnation forever?

    The economies you mentioned are largely service-based economies with around 60% of GDP generated internally. Hence the difficulty in generating inflation simply by devaluing the currency, even for an exporting economy like Japan or Germany. Is the primary competitive strategy between exporting industries of various countries going to rely on currency devaluation rather than productivity increases or innovation?
    Apr 29, 2015. 05:18 PM | Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    Hello David,

    Thanks for your considered reply. If capital has been leaving the US for a long time (presumably seeking better opportunities abroad) then would you recommend some kind of protectionist tariffs to level the playing field vis a vis globalization? (Also clearly not a monetary solution.) What are your thoughts on the various currency wars taking place under the guise of "only intending to increase local inflation"?

    Because you have been asking the question for some time, do you believe that the current monetary policies are actually the only policies that could work in this situation (we'll ignore QE1 as almost everyone agrees that was essential)? If not, what would you recommend.

    Thanks again for your analysis. I've enjoyed reading your comments at length.
    Apr 29, 2015. 04:57 PM | Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    Hello David,

    Thanks for your comments. I will attempt to address them in order.

    1) True that high interest rates do not obviously support economic growth. But by that reasoning, we should just lower interest rates to -10% (yes we'll pay you to borrow from us). That would really get the economy going. On the other hand, what the CBs really want is reasonable growth without unreasonable inflation. I think one could make the point that raising interest rates here could increase inflation perhaps, for example by putting upward pressure on wage demands.

    2) No the market could not support higher interest rates. But are you more interested in the market or the economy? In the next decade (at most), it will become obvious that pension plans will not be able to make their promised payments to pensioners in many countries/states. Many people are already laying the blame for this at the feet of near-zero risk free interest rates. Clearly the pension plan market can not support current low interest rates. So, which market are we more concerned about

    As for your comment on the cause of interest rate drops over the last 30 years, I can agree that the Fed seems not to be in complete control over determing the Effective Federal Funds Rate. If you want to blame that on excess credit availability versus demand, that might be reasonable. In my mind credit availability should increase with high household savings (as the source of bank deposits). But that was decreasing for every country (except China and India) from 1980 to 2008 (after which it went up a bit globally). So was the global money supply growing faster than personal savings and the economy as a whole in this period? Probably. Or was a heavily over-indebted consumer simply unable to go to the debt well anymore? Certainly after 2008 for a little while though that seems to have recovered with such low interest rates.

    Still, for an entire economy to depend on debt for its growth seems unsustainable in the long term. If that's where you're saying we are, then we're in even more trouble than I think.

    3) I agree the FOMC seems trapped in a cage of their own making. Apparently Larry Summers believes they will have to turn to non-rate adjustment mechanisms (such as reverse repos) to exert upward pressure on rates. Difficult when so much of the rest of the world is just discovering QE and its short term benefits.

    Certainly it's not clear that it's wise to raise rates at this point but core inflation is approaching 2% and the Fed will have to start adjusting its target number upward if they don't move soon. Otherwise they may have to move faster to cool the economy and then we get into positive feedback loops where the moves amplify in each direction.
    Apr 29, 2015. 04:04 PM | 1 Like Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    Hello David,

    I will agree with you that none of my rambling was monetary policy but your question is (to paraphrase) "What monetary policy would lead to the best economic outcome?" So I addressed what we need to do to get the best economic outcome. I don't believe that what we need is more interventionist monetary policy. I would recommend: 1) dropping forward guidance. Leave the market guessing; it's good for them. 2) Returning to historical interest rates and keeping them in a reasonable range even when the markets have a hissy fit. Show the market that risk still lives and the liquidity machinery of Central Banks will only back up the system in times of outright panic (even then, it should be slow to act).

    I think studies have shown that in excess of 80% of all market gains have occured in the three days prior to the FOMC meetings. The system should not be so easily gamed. It is time for Central Banks to realize they can no more plan the global economy than could the Soviet Politburo.
    Apr 29, 2015. 02:53 PM | Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    David, Short(er) answer follow-up to the longer ramble.

    The American dream was an illusion built on debt that the country could only get away with due to some interesting coincidences. 1) The existence of the western frontier and a lot of space to support a growing population. 2) The dire situation of Europe, Japan and the UK following WWII and the ready ability to help out (while benefiting, itself). 3) Military superiority and the ability to make friends with oil exporters while the USSR struggled. This led to the petrodollar as THE global reserve currency. 4) A brilliant strategy (supported by huge state funding of scientific R&D) of importing talent from throughout the world. At one point in the 90s, over 50% of all post-doctoral fellows in the US were foreigners.

    These factors (and others) allowed govts to increase debt without destroying the value of the dollar. This is not true for Japan, Europe of China where debt and the monetary policies to try to continue a society of debt have mostly hurt the currency. More importantly, beneficial demographics have fueled the growth, leading to increasing demand, more debt capacity, etc. But those days of boundless growth seem like they are coming to an end. Though the US demographics are considerably better than the EU, Japan, and China, the world is aging.

    This means we can no longer count on debt to fuel growth as that debt can't easily be inflated away with an aging (more conservative) population. Japan illustrates the problem perfectly. Deflation leads govt to desire inflation. It increases debt and devalues currency (through more QE) to try to get inflation. Inflation requires increase in interest rates to cool off a bit. Interest rates increase govt debt as tax revenue is insufficient to service debt at new interest rates. Increased debt reduces the economy leading to deflation. Repeat until collapse.
    Apr 28, 2015. 08:59 PM | Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    Okay, so if we assume that QE has led to asset inflation, poor capital investment, financial repression (leading to a big future problem for pension plans), and financial engineering (favoring stock buybacks over investment in growth), all leading to a potentially fragile system, let's see how we can relieve pressure and build toward something better.

    Deflation is viewed by everyone as a problem but is it any worse (given our current demographics) than financial repression. Low yields on risk free investments are pushing the most risk averse (pension plans and people nearing retirement) into risky investments that we know have to lose value at some point (stocks go up, stocks go down). However, so-called "risk free" investments are impossible because they are debt-based and global debt is reaching a critical point without growth. So, my conclusion is not to avoid deflation but to encourage growth. Deflation is simply measuring the global lack of growth.

    So, I agree with you that we (desperately) need economic growth (and its resultant inflation). How to get growth in a world without frontiers (like the old American West)? Can we find frontiers? Well, perhaps not physically as there's not a lot of habitable, unexplored space on the planet. So, we either engineer a new frontier or something frontier-like.

    Economic frontiers can be made simply by repeating what we've done with China. Open up new manufacturing centers in countries with low incomes. The Japanese, Chinese, and Indian experiences might not be easily replicable because more education and training is required the more advanced our technologies get. And there's another problem. If other countries become economically developed, how does that help the developed world when we start losing jobs to them? Not much. And you can certainly see that in the huge developed world trade deficits (ex Germany). The only export the developing world wants from the developed (after training) is its money. That is not sustainable.

    We could resort to war as a way to increase demand for growth (post-war, of course) and it seems like many of our leaders continue to keep that "solution" on the table. Or we could simply allow a major correction to global debt and economies that would put all of the pain into as short a span as possible in order to create demand for "growth" afterward. Or we could just make a new definition of growth (perhaps highest number of Facebook visits). But redefining GDP doesn't seem to have done much for the economy.

    Okay, sorry for the almost stream-of-conciousness rambling, but it IS a tough question. I don't see any monetary solution to our problems only indefinite kicking of the can. Maybe that's the wrong place to look. I can see a number of ways to get real growth and that is what I think we actually want instead of all this fiscal b.s.

    I think it's time we took a serious look at the limit to global resources and made a move to colonize space, but not the moon or Mars but rather the asteroid belt. We can hollow out asteroids and fill them with air-producing ecosystems. Doing that would provide growth for several millenia, I think. But it will require stepping down from the economic "games" we have been playing here on Earth through our various currency devaluations, etc.

    That's probably quite severe and I can't imagine any current govt understanding the need to look off planet for growth. But, the reason we can't have that growth on Earth is because of bad demographics which is mostly because of the recognition of limited resources. We either figure out how to lift the lid on those limits or we resign ourselves to a very different kind of economy for a very long time. At least until we can start getting global population growth again.
    Apr 28, 2015. 08:37 PM | Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]
    Hello David,

    I don't mean to be stubborn but does your question mean you are looking for 1) an optimal policy with the best outcome up to Dec 31, 2015. Or does it mean, 2) what is the best policy between now and Dec 31, 2015 that will lead to an optimal outcome in the n years following?

    Just to clarify.
    Apr 28, 2015. 08:05 PM | Likes Like |Link to Comment
  • Japan Needs A Bigger Hole? [View article]

    I have read your comments for quite a while and I believe your question/challenge is incomplete. You need to ask what alternative policy might work better "over a given period of time." So, if I want a policy that has a big positive result over six months, I would literally print trillions of dollars and drop it from a helicopter. That would make everybody in my country feel good (maybe even for the whole six months). Then the rest of the world would wake up and realize what I had just done and devalue the dollars I created. Bad longer-term effect.

    While many of us agree that QE policies worked well in a very short period, at least initially, it seems clear that they are creating huge dislocations and will have bad effects in the longer run. What would have been better? Stopping at QE1, maybe even letting a few banks fail then nationalize them. Would it have had deleterious short-term effects to do that? Almost certainly. Would monetary and fiscal responsibility have led to a stronger economy after a period of difficulty? Who knows? Nobody is willing to let their economies have a breather so we can't find out. Probably the break will be (harshly) imposed on them - that will not have a pleasant short term or even mid-term result.

    I kind of view this as breathing. It feels really good short-term to inhale but at some point I have to exhale (fortunately our biology is such that the exhalation also feels good). If I try to prolong the short term goodness of inhalation at some point I will feel distress. This is our current global economy. It just needs to exhale before taking the next breath in.
    Apr 28, 2015. 06:52 PM | 1 Like Like |Link to Comment
  • Monitoring Bubble Risk In The U.S. Stock Market [View article]
    I double-dog guarantee it! No way you will ever, ever lose! Impossible!
    Apr 9, 2015. 03:37 PM | Likes Like |Link to Comment
  • Stress Tests Are Imperfect: Global Data Indicates GFC-2 Is Imminent [View article]
    I would request your other stats and further analysis please. I already have trouble sleeping at night and it would be good to put some facts to the general worries.
    Apr 3, 2015. 09:51 AM | Likes Like |Link to Comment
  • Netanyahu declares victory in Israel [View news story]
    Declared by the candidate based on exit polls. Let's wait for the official counts. Then wait for negotiations among the parties. Minority govt means top two parties both courting Moshe Kahlon. The only official data I've seen is voter turnout at a high 71.8%.
    Mar 17, 2015. 05:33 PM | 2 Likes Like |Link to Comment