Why the Fed will again have to slash rates to zero and relaunch QE
Real rates are rocketing, driven by a sudden jump in the “term premium”. Think of it as a credit crunch being imposed upon a feckless political class in Washington by global bond vigilantes.
A very slow-burning fuse has finally, and suddenly, reached the powder keg, confirming the Dornbusch adage that financial crises always take longer than you think, but then unfold much faster than you expected.
Bernard Connolly, the world’s foremost Wicksellian economist, says the US fiscal bubble is the latest in a long string of bubbles required to keep Western economies above water.
“If the fiscal deficit is reduced, the Federal Reserve will have to collapse interest rates,” he said.
For all the talk of permanently higher rates and bond yields, Mr Connolly says the West is still on the same conveyor belt towards “ever-lower real interest rates” requiring “ever-bigger bubbles”, whether in stocks, credit and property, or in fiscal excess, or all together.
It is a trend “incompatible with the maintenance of a democratic capitalist society, and thus with the maintenance of prosperity and freedom,” he warns in his brilliant magnum opus, You Always Hurt the One You Love: Central Banks and the Murder of Capitalism.
Markets have also concluded that a polarised Washington is too dysfunctional to do anything about it.
Congress had enough trouble reaching a stop-gap deal to keep the government open for another six weeks, it will be even harder after the defenestration of Kevin McCarthy by Trumpian ultras, the first time in US history that a Speaker of the House has been hounded from office in this way.
Fitch Ratings stripped the US of its AAA crown in August
Ambrose Evans-Pritchard Telegraph 6 October 2023
År det så hemskt att vi faktiskt inte vet hur vi skall undvika att den nuvarande ekonomin byggd på en allt högre belåning av stigande huspriser skall kunna brytas och ersättas med något annat, vad det nu kan vara?
Rolf Englund 8 juli 2014
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