Saturday, May 7, 2016

Like Khan, James Bullard Should Think in More Dimensions

May 5, 2016
CNBC: Outspoken Fed Official Frets About Following Japan’s Path

James Bullard, president of the Federal Reserve Bank of St. Louis, doesn't know when the American economy will fall into another recession. But he says it's increasingly likely that it will happen before the Fed has a chance to return its benchmark interest rate to a historically normal level.

The effective federal funds rate averaged:

1980s: 10%
1990s: 5%
2000s: 3%
2010s: 0% (so far)

For those who believe in first derivatives, we are already at a historically normal level. Simple extrapolation from where we are should put us at the historically normal level of -3% in the 2020s and the historically normal level of -5% in the 2030s. I say this somewhat tongue-in-cheek. Somewhat.

Just stay on the current path I say. Japan only screwed up because they stopped at zero. NIRP, it's what's for dinner someday, lol. Sigh.

In an interview last week, Mr. Bullard said he wants to raise rates. He really does. It just seems as if the necessary conditions keep slipping away.

Yes, yes. He grapples with thee. I get it. The problem is clear. Bullard does not believe in first derivatives. He's just an add up all the historical data and average it kind of guy. Good luck on that.

You see, when the lifeblood (credit) of the economy goes up, the interest rates must come down, lest the economy implode. Even then, there's still a long-term problem.

A $100,000 debt at 5% is not exactly the same as a $50,000 debt at 10%. It just seems that way if one only looks at the current interest paid. And under no circumstances will we ever reach an infinite debt at 0%. That's just crazy talk. If push comes to shove, like Japan, we'll certainly give it a shot though, lol. Sigh.

Disclosure: Sitting in long-term inflation protected treasuries under the belief that I probably won't live long enough to see the real financial fireworks that seem destined to arrive. Kick that can. Kick it. Sigh.

1 comment:

innerscorecard said...

Funny how simply going to the 1st derivative (2nd level thinking) can get you quite far...