Fed Inflates Away a Debt Bubble

Rob Mackrill - Mon 28 Jan, 2008

Lower interest rates will not be enough to get us out of this mess... At least, according to Dominique Strauss-Kahn, head honcho at the International Monetary Fund. In a new economic forecast due this week reports the FT the message is that this is a serious slowdown and it needs a serious response. That means the IMF green light for tax rebates too. This is an about turn from their previous position that such fiscal measures in the US and Japan helped cause trade imbalances in the first place...

Lower interest rates will not be enough to get us out of this mess...

At least, according to Dominique Strauss-Kahn, head honcho at the International Monetary Fund. In a new economic forecast due this week reports the FT the message is that this is a “serious slowdown and it needs a serious response”.
That means the IMF green light for tax rebates too. This is an about turn from their previous position that such fiscal measures in the US and Japan helped cause trade imbalances in the first place.

Asian stocks shared the concern. Investors voted out... again. The Japanese Nikkei closed down 4% at 13,097, China’s Shanghai Composite slumped 7%, Hong Kong’s Hang Seng was down 4.3% India’s Sensex was down over 1%.

Japan’s stock market is cheap says MoneyWeek editor, Merryn Somerset-Webb with some companies selling below book value. As of close today it’s cheaper still assisted by Tetsufumi Yamakawa, Goldman Sachs’s chief economist in Japan. He reckons it’s now odds on that given weak exports and domestic consumption, the country is probably now in recession.

European equities continue south this morning too. The FTSE is down 85 points in mid-morning at 5,783 with all major European bourses off by 1-2%. Rogue traders aside, Mr. Market is blowing a big fat raspberry at the Fed “super cut” and the anticipated follow up - a further 50 basis point cut tomorrow in the scheduled meeting.

Printing money and flooding the system with liquidity is the way to inflate away the debt load says Bedlam Asset Management note in their January review...
“In conflict with their official mantra of ‘targeting inflation’, across the world they [central banks] are now printing money at a frenetic rate. US money supply growth is running at a 47-year high as the authorities seek to inflate away the debt bubble and prop up house prices. Clearly printing such huge amounts of money is not great for the exchange rate. A weak dollar has forced the hand of other central banks as they try and keep their currencies competitive with it.
Welcome the era of competitive depreciation.”

And with UK interest rates significantly higher than those of the US, the EU and Japan, sterling is at the front of the queue to fall. 

The other consequence of printing money is that you’re provoking the very same problems that are causing the trouble in the first places says long-term US bear, Morgan Stanley’s Stephen Roach:

“Aggressive monetary easing sets the stage for yet another bubble-led recovery. And fiscal stimulus for a saving-short US economy puts the onus, once again, on foreign lenders to pick up the tab. In short, it’s ‘same old, same old’ in Washington – hardly a comforting sign that US authorities have learned much of anything from another bubble-induced implosion.”

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