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Minyan Mailbag: Addicted To Liquidity

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.


Prof. Succo -

Maybe I am dead wrong (not an economist and all...) but here is one problem I see with the 'faith' the markets are placing in the ability to control inflation domestically.

We won't be able to stop it by raising rates and we are in a worsening position if rates get cut and the dollar falls even further.

Why?

Seems to me that the dead obvious thing happening in front of our eyes which is different this time, is that the US is not the driver of commodity price appreciation. China is.

Although the Fed can tap on the brakes all they like, my reasoning is that unless we were magically able to stop consuming goods produced overseas and especially from China, it won't make a bit of difference.

Sure, it can dampen some demand, but it does so at the risk of other unintended consequences doesn't it?

That puts us in the position of being a passenger, not a driver, with a deteriorating currency position to boot. How did we get here? What could [if anything] get us out of this trap?


Minyan B-


Exactly, and thus the Fed (and the U.S.) are in a corner.

This all began I think back in 1987 when after the crash AG let loose unprecedented liquidity. After the job of stemming the crash, he did not do enough to withdraw that liquidity and put our economy back on the track of growing through innovation and productivity. The productivity "miracle" most talked about is really in my mind just over liquidity. This has made any growth experienced overly dependent on credit expansion.

AG could have increased margin requirements after the crash thus reducing speculation in financial assets. But he did not.

Instead the Federal Reserve has met every crisis and bubble with more liquidity and never subsequently withdrew it. We were able to do that because all our debt is denominated in dollars.

When things got really bad we convinced Japan to print yen like crazy and thus facilitate our printing. It has kept our interest rates artificially low for extended periods.

We are now "addicted" to liquidity.

Prof. Succo

No positions in stocks mentioned.

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