Thursday, April 15, 2010
US Recovery 'Engineered Wrongly', Bubbles Forming
So warns David Roche, global strategist at Independent Strategy Ltd. No less a financial giant than George Soros stated at a recent meeting hosted by The Economist: "Unless we learn the lessons, that markets are inherently unstable and that stability needs to be the objective of public policy, we are facing a yet larger bubble. We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount." Unlike these gentlemen, I do not have much faith in the government's ability to engineer a recovery. All governments seem to know how to do is throw money in the general direction of problem, hope and pray things get better, and then declare victory when the market heals itself as they pile up a lot of debt. However, I do agree with Roche if we want to encourage saving instead of debt-funded consumption interest rates must be raised. I would prefer to see interest rate head up sooner rather than later in the US. But there is little political will to anything other than spend, spend, spend, when the exact opposite is needed.
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Bubbles are forming. They form whenever prices are controlled below market levels. Most economists learned that from the Nixon price controls. Bernanke and Greenspan apparently never got it. They pushed the most important price in the economy - short term interest rates - to 1% in 2003. Investors went searching for yield and Wall Street provided it to them in the form of auction rate securities, CDOs, etc.
ReplyDeleteThere's nothing new. Today we have rates controlled again and investors are desperate for yields. They are pouring money into junk bonds etc. They are moving out the yield curve. They are loading up on alternative investments.