Many bullish forecasts are primarily based upon the Fed reducing interest rates to 2%. Back on June 9th, I predicted that the rate cuts would do nothing for the economy in a post titled “Bernanke Shoots Blanks“.
On Friday, my meme made it to Kudlow. At about 8 minutes into the show, economist Arthur Laffer (inventor of The Laffer Curve), made the same points that I made. Here is one of his quotes when Kudlow tried to counter with the Fed’s loaning of treasuries to banks:
“…that doesn’t expand the ability of member banks to make loans.”
Exactly! The Fed “stimulus” is doing nothing because the banking system is broken!
Note: Laffer cited the monetary base, and I use the True Money Supply, but it is the same difference.
Everybody knows that the tax-rebate checks provide only a temporary boost for retailers and create no jobs. Everybody knows that second-half earnings estimates need to come down. And now everybody knows that the Fed is powerless to stimulate the economy.
The bulls have nothing to support their argument except for some improperly-deflated GDP numbers, which nobody seems to be taking seriously any more.
I don’t know how many traders watch Kudlow on Friday nights, but Laffer’s comments will get around and bids will soon disappear.
The Fed might be able to help the economy by HIKING rates. That would help the dollar and could well tigger a drop in oil prices — by far the chief concern of Americans today.
Hi Matt,
why didn’t you call this post “Larry Kudlow is an Idiot #3″?
@Crimson
The FED won’t change their rates. They will keep on talking tough and that’s it. Higher rates would crash the American economy.
Crimson,
While the banking system is broken, the Fed’s policy has no effect on the economy. Anything they do at this point is merely symbolic. They could raise rates to 5% or lower them to 0% and it would make no difference. Banks are not lending; the economy is contracting, that cannot be changed. The price of oil makes little difference at this point. The viscous cycle of contraction must run its course.
Dressguard, I thought that the meme was more important then Kudlow’s idiocy. Besides, Laffer, who is usually Kudlow’s ally, beat him down pretty well for me!
Matt
Follow the Treasury Bills folks. That’s the rate that the FED will land on. They have to, to keep the money flowing between banks.
Matt: You’re right, not much the FED can do.
This is healthy, all the malinvestments need to be washed out. Housing in USA, factories in China and Oil Rigs in Norway.
Talking about sticking a fork in the market: The ECB will do it. They will hike rates on July 3rd. Dollar could tank, oil could go above $140 with a strong tendency to $150, markets would tank. Piece of cake.
Hi Larry,
Like Jeremy Grantham says, recessions clear out the deadwood so that the subsequent recovery can be more robust. So, I agree – recessions are unpleasant but necessary to improve prosperity in the long run.
Matt
Hi Dressguard,
I think there is a good chance that the ECB will back off just like the Fed has. I know rising prices are a bigger problem in Europe now, but I think the logic is roughly the same: raising rates during a recession is not a good idea.
Matt
Hi Matt,
ECB is heavily influenced by German monetary politics. As Germany lost twice everything in recessions they will hike rates. There was actually an article in Germany about this issue this weekend. (Unfortunately it’s only in German:
http://www.spiegel.de/wirtschaft/0,1518,561150,00.html. Headline: ECB chief economist announces rate hike.) They are setting expectations of a rate hike for the next meeting on July, 3rd.
Hi Dressguard,
Is this where Spain and Italy drop out and the Euro meets its demise?
I understand the German perspective, but the Euro is a strong currency, right? I don’t see the ECB running the printing presses around the clock to create hyper-inflation. When a cartel like OPEC is squeezing you, I don’t think fiddling with your currency will help much.
Matt
Hi Matt,
inflation in Euro zone is now at 3.7%. Much too high. The goal for the ECB is to stay below 2%. The € is strong in comparison to the $ but purchasing power is decreasing. As I told you before I live in Germany and in Dubai. The gas prices in Dubai have increased a lot over the last four years because the currency is pegged to the dollar. In € terms it increased only very little. The same of course would be true if you paid your gas bills in €.
Hi Dressguard,
Wall Street Journal headline this morning:
“German business confidence deteriorated significantly in June in the wake of record high oil prices and a weaker export outlook.”
Matt