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Why We Won't See a Normal "Tightening Cycle" for Many Years to Come

Despite continued weak economic numbers like today's jobless claims, the financial blogosphere is buzzing with 'how to play the coming tightening cycle.'

 

I would humbly submit that there is a very real possibility that we won't see a full blown tightening cycle for many years to come.

 

Including my editorial published in today's issue of The Bulletin, I have written pretty extensively about the prospect of a prolonged "balance sheet recession" driven mainly by consumer deleveraging.

 

The amount of debt at the consumer level is massive. It was built up over many years by the combination of literally no savings and chasing the twin internet and real estate bubbles:

 

 

Consumers spending is by far the largest driving force of our country's economy. Understanding that consumers are both unable to take on more debt to continue their multi-decade spending frenzy AND that they are, in fact, beginning to embrace a more frugal mindset (for both environmentaland socioeconomic reasons) can only lead one to expect an extended period of economic weakness.

 

For the Fed to pursue a normal tightening cycle in the midst of this scenario would be asinine for its detrimental effect. With his unparalleled knowledge of the Great Depression, the last major period of deleveraging, I believe Ben Bernanke understands this well and, as Paul Krugman recently suggested, may soon be known as Bernanke-san. 

Disclosure: none