After my holidays
I went for a few days home and did not have the time or energy to write until now.
It has been an interesting time. Bernanke's comments led the market to believe that the interest rate tightening cycle is over. However, reading his official statement one needed a definite positive bias to interpret the testimony in such a way. Bernanke said that the Fed will adopt to upcoming data, no more no less. In my eyes, it seems that officials are aware about the mutually unsolvable problems inherent in the US economy. Global growth is pushing inflation beyond the values of past years. A tightening would be necessary to deal with this issue. On the other side, the trade imbalance would require a USD depreciation accomplished by lower rates to correct for the distorsions at the moment. Last but not least, home equity extraction and aggresive financing in the real estate sector during the past few years has driven consumption. To avoid a bust in the speculative housing market would need lower/stable interest rates.
Fed officials appear to hope for economic data that would release them from the contradictorily problems. Be it either a continuously slowing real estate market, or a drop in oil prices or the voluntary appreciation of the Chinese Yuan from Chinese officials.
When I compare the economic situation with a car, the US economy has been accelerating too fast during the past years fueled by low interest rates. Now, the economy is too fast and stepping weakly on the interest rate break does only work if the road is clear and straight. I expect the economy heading towards a turn and the gentle breaking meaneauvre will not be enough to avoid serious trouble.
The most likely action from the USA might be cooling of the US economy with higher rates to stop speculation in the housing market and bring oil prices down. Then, a major devaluation of the USD would bring the trade imbalance with China to a more sustainable level and also reduce the debt burden of the US economy (the trade deficit and fiscal deficit in real terms are reduced!). The cooling of the US which will also reduce growth in Asia will put some pressure of the energy markets and the devaluation of the USD would not cause such a great problem to the trade balance. The weak USD would then stimulate exports and the US economy could continue to grow.
It has been an interesting time. Bernanke's comments led the market to believe that the interest rate tightening cycle is over. However, reading his official statement one needed a definite positive bias to interpret the testimony in such a way. Bernanke said that the Fed will adopt to upcoming data, no more no less. In my eyes, it seems that officials are aware about the mutually unsolvable problems inherent in the US economy. Global growth is pushing inflation beyond the values of past years. A tightening would be necessary to deal with this issue. On the other side, the trade imbalance would require a USD depreciation accomplished by lower rates to correct for the distorsions at the moment. Last but not least, home equity extraction and aggresive financing in the real estate sector during the past few years has driven consumption. To avoid a bust in the speculative housing market would need lower/stable interest rates.
Fed officials appear to hope for economic data that would release them from the contradictorily problems. Be it either a continuously slowing real estate market, or a drop in oil prices or the voluntary appreciation of the Chinese Yuan from Chinese officials.
When I compare the economic situation with a car, the US economy has been accelerating too fast during the past years fueled by low interest rates. Now, the economy is too fast and stepping weakly on the interest rate break does only work if the road is clear and straight. I expect the economy heading towards a turn and the gentle breaking meaneauvre will not be enough to avoid serious trouble.
The most likely action from the USA might be cooling of the US economy with higher rates to stop speculation in the housing market and bring oil prices down. Then, a major devaluation of the USD would bring the trade imbalance with China to a more sustainable level and also reduce the debt burden of the US economy (the trade deficit and fiscal deficit in real terms are reduced!). The cooling of the US which will also reduce growth in Asia will put some pressure of the energy markets and the devaluation of the USD would not cause such a great problem to the trade balance. The weak USD would then stimulate exports and the US economy could continue to grow.
stxx - 21. Jul, 01:28
