If central banks continue refusing to raise interest rates during these weak economic times, oil prices may double from their current levels. So I think central banks, especially the Fed, will begin raising interest rates early next year or even late this year. I don’t think it would raise rates willingly but wants to cool inflation expectations by showing an interest in inflation. Hence, the Fed will raise interest rates slowly, deliberately behind the curve. As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs.
This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn’t believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.
Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down — and keep them down for a long time.
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Comments 7
Why assume the direction of the economy will follow the shape of any of the letters of the Roman alphabet? Chinese ideograms seem much more suited to the current and foreseeable state of things.
August 21st, 2009 at 12:58 pm
(1)” As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs”
How will inflation feed our GDP which depends on Consumer spending? I can see inflation making it easier to pay our credit card debts/mortgage debts,but I don’t see how it will stimulate NEW spending.
Our “true”unemployment rate is now 50% the rate that we had at the height of the Depression(16% is now the “true” rate),however,we have 3x the population that we had in the thirties,which creates more instability. It looks like this Bubble isn’t a job creator,and without jobs a recession starts to blend in to a Depression,right? Or,God Forbid,maybe I’m reading this incorrectly.
August 21st, 2009 at 1:48 pm
@RCAR – RCAR – you should go to the linked page and read through all of Andy Xie’s recent posts. I think you’ll find a kindred spirit and a coherent view of the global economic and political situation, with an emphasis on China and what others have called “Chimerica.” His treatment of inflation – esp. his insight into spot inflation, how it works, and the purposes it serves and dangers it poses – are very helpful.
August 21st, 2009 at 2:22 pm
RCAR – nice to hear from you again!
This currently is a jobs nightmare and it is fueled by the governments overall poor decisions. While I have never held to RCAR’s gold vision, we are clearly not holding to my productivity one either – making it the worst of all worlds.
WHile job loss has slowed, although last week had a blip go the other way, hiring is at an all time low. Employers have built ample flexibility via their reduction in hours actions so that they will have no immediate need to hire. The regulation environment is right now so unknown that small employers are refusing to hire because they don’t have any idea what the new hire will cost, and large multinationals, as well as employers eyeing international opportunities can utilize the excess available hours of their domestic facilities and then look to investment in China and India where their capital will be treated better. Obama is death to jobs. As long as jobs are at risk, people are sitting on their money. What improvement in the economy occurs will come from refilling inventories because they have no choice.
The financial sector is getting ready to get hit again, as the second wave of home mortgage defaults begins, just as many predicited. 1 in 6 fixed rate mortgages are late – a ratio higher than when the ARMs began to unravel. In addition commercial real estate is just starting to hit as well. More bankruptcies are coming as they can no longer afford their commercial property as prices have dropped about 40% and they now owe more than the building is worth.
While we can eat some inflation with the efficiency gains as hours worked recover, it won’t be enough and certainly won’t cover all the money printing the Fed has been doing. We know the latest auctions were less than inspiring and that the Chinese are not interested in their current debt being any more risky to hold. Tax receipts are way down due to the economy and still the dems want to spend. Gold is making another run to $1000 and oil is priced $15-20 a barrel above its actual supply/demand level. Oil is really the new gold in a way. The street thinks the dollar is going to fall further.
I love when we expect any government to take care of us!
August 21st, 2009 at 4:01 pm
Well JEM,None of the Concerns that I have discussed have been addressed by the government or the private sector. There is no currency reform,just currency creation. There is no trade reform,just hoping that we will be back in the saddle buying up the world’s crap,ASAP,we’re still trying to practice capitalism without capital,a difficult task,we’re still hiding both the amount and the valuation of our debt,from others and ourselves,”lend and extend” is the Mantra,and the stock markets still go up as unemployment expands,and we’re still in love with asset,credit,and liquidity bubbles. In short,nothing has changed in two years except some of the short term tactics. The idea of just walking away from your debt is becoming more acceptable and more inevitable,in the very near term.
August 21st, 2009 at 4:59 pm
Interesting in view of the above, by the way, that both the stock market and oil prices surged today – maybe a good sign if you’re a speculator, rather troubling if you agree with RCAR and Mr Xie about the bubble being inflated both in the US and China. Really, let me recommend Xie’s recent columns again, especially for his view of Chinese policy and the Chinese bubble.
If inflation starts showing up on the macro level, world markets start to tumble, and the Fed starts tightening, how long do you think it will take for sentiment to turn?
August 21st, 2009 at 5:30 pm
The stock market surge is an illusion and reflects the devaluation of the dollar on global currency exchanges. Foreigners are buying stocks cheap. RCAR is right. Until more people are working, inflation can’t be a problem in the near term.
August 21st, 2009 at 7:00 pm
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[...] more serious answer: As noted in an earlier post, economist/bubble expert Andy Xie thinks that rising oil prices (fueled in the US by dollar [...]
[...] more serious answer: As noted in an earlier post, economist/bubble expert Andy Xie thinks that rising oil prices (fueled in the US by dollar [...]