Defining the “extended period”

November 13, 2009

Another tidbit from Rosenberg, who offers guidance on what the Fed means when it says it will keep rates low for an “extended period”…


The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are $2.7 trillion of debt coming due through 2011 and another $1.5 trillion of leveraged loans….In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.

I’ve argued in this space many times that the Fed is trapped. Our monetary system, which is fueled by credit expansion, simply doesn’t work in reverse. To avoid deflation, credit must always be expanding in the aggregate. If the private sector won’t borrow, the public sector must….and vice versa. If they de-lever in tandem, we get deflation.

We’re told to be panicked by the prospect of deflation and yet the solution we’ve been given — unprecedented public credit expansion + inflation of new asset bubble — leaves us worse off than when we started.

Alan Greenspan’s 1% interest rates inflated a disastrous credit bubble. We think 0% rates and quantitative easing will lead to a different result?


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Ironically, the captcha question for this comment is “toast”, which is what I think the entire monetary system is.

From what I gather, there’s at least 480 Trillion dollars of interest bearing paper out there needing to be serviced.

I’m not exactly confident this Hail Mary rescue can be pulled off… Period.

IMO within two years new, non-debt based currencies will be issued (either country by country, or globally), since it’s pretty clear to everybody that rapid, unsustainable creation of debt is what caused this mess to begin with.

Posted by Dave Narby | Report as abusive

Rosenberg incorrectly assumes that fed rates are the end all for debt pricing. LIBOR as shown that, while it generally correlates to Fed Funds, it is willing to go its own way. Also, banks can, and recently have, installed “floors” on many loans limiting the idex rate of the loan to no less than a certain level (which you might imagine is something higher than 0%).

Also, the rate hikes coming on the renewals just from lender pricing is going to be significantly greater than what most would expect the Fed to do this year (talking 200-300 basis point increase in margin above the base index rate).

Of course, you might think that this is a reinforcement for not increasing the fed rate, but in the end it would come out to be close to the same: as index rates (fed, prime, libor) increase banks are willing to take less spread above the index.

Posted by Andrew | Report as abusive

Not to imply that Rosenberg isn’t smart enough to figure that out, I just don’t think his logic is sufficient to make his case.

And I think attacting enough cash to fund the Gov’t debt/budget is going to take priority over trying to manipulate debt pricing largely out of the Fed’s control anyway.

Posted by Andrew | Report as abusive

Success brings profit; failure brings loss. If that’s a fundamental tenant then it has been profoundly violated.

Error #1 – Excessive credit expansion has brought an economic explosion that resulted in huge failures. America economic managers have deliberately allowed this to happen after 2000.
Error #2 – Much of financial failures were covered up, by transferring them to the government books. This was the deliberate act of Hank Paulson and Congress.
Error #3 – With the government books, which are already loaded in giant debt, bloated in further debt, it now tries to hide it by setting basic interest rate to zero. This is a deliberate Fed policy of Bernanke.

#1-#3 are nothing more than bailouts and cover-ups. The grand managers who were responsible for explosions tried to stabilize the explosion. This game of hiding has now reached a stage of no-more-buck-passing. Interest rate must be maintained at zero because any attempt to raise it will blow up the government and the economy further. This is the Japan Black Hole. It can last for decades – the Lost Decades.

So there you have it. America squandered the benefits of USSR collapse, did not learn from Japan post-bubble mistakes, and destroyed its own industrial base for the quick money. It refused to accept the same painful measures it, under the arm of the IMF, dosed out to Asian countries who blew up in the 1998 Asia Economic Crisis.

What arrogance, what disregard for sound economics, what irresponsibility to current and future generations! What betrayal to the millions who hold trillions of America bonds. If this is capitalism, America version, then no country in their right mind will want to adopt it. America richly deserves the gift of the economic black hole.

Posted by The Real Deal | Report as abusive