4. The federal government, ever in thrall to the Keynesian idea of stimulating aggregate demand, will respond to the economic slowdown in the usual manner: the Federal Reserve will lower short-term interest rates and increase the money supply while Congress steps up deficit spending.
I disagree with the fed reducing interest rates. I don’t believe it can reduce them this time. To have deficit spending, one has to either issue more Treasury Bills or print more money. To have Treasury Bills bought/picked up, they have to have a high enough of a return to offset the inflationary risk and the change in foreign exchange rates that would result. We are already seeing foreign countries drop US Treasuries (and other ‘fixed’ return investment vehicles). It is most evident in the change in foreign exchange rates. http://www.x-rates.com/ US to Chinese Yuan US to Euro Tables instead of graphs
My suspicion is that we will have increased deficit spending through both issued Treasuries and ‘printed’ currency. To cause these Treasuries to be picked up and to keep a dampener on inflation, interest rates would have to go up.
On item 7:
7. Fundamentally sound stocks of companies involved in the real economy of trading goods and services will soon recover and head to new highs. Meanwhile, the stocks of companies that have benefited primarily from the debt-fueled, speculative financial economy will continue to languish (in inflation-adjusted terms, at the very least) for years.
I would agree, but for a different reason: A debt fueled company will have a harder time during higher interest rates. A company with a good, clean and strong balance sheet will do well.
The Federal Reserve doesn’t control mortgage rates. It’s all up to the MBS market. The Federal Funds Rate direct affects the Prime — the rate at which business borrow.
I don’t see how a low interest rate regime in America is sustainable because we need to attract foreign investors to finance our deficit spending.
In the 1980s Reagan spent out way to a recovery. Unfortunately, we don’t have that option anymore because of the Iraq War and most importantly because our deficit and debt are already too high.
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