Prudent Bear - What about raising interest rates? -Dec 4 2009

Prudent Bear - Dec 4 2009

"The reliable old Monetary Process - where Federal Reserve and GSE reflationary measures would immediately stoke rapid (and self-reinforcing) mortgage Credit growth, housing inflation, inflating household net worth, equity extraction, spending and government receipts - is no longer operable."

Noble writes that reflationary dynamics, including 0% interest rates are not stimulating the u.s. economy, but are leading to the routing of dollars offshore and towards commodities.

however it seems, even at 0% interest, foreign holdings of treasuries are increasing. that part of the dynamic seems to be holding and preventing any collapse of the dollar and its inflationary excesses. instead of going into the securitization process linked to real estate with quasi backing by the government, it is exiting the country to pump up foreign bubbles.

noble would like to see a quicker turn up in interest rates to turn off these reflationary tendencies which are doing nothing to help the domestic economy. easy dollar policy distorts investment away from production into commodities and other hard asset bubbles. what might be expected from raising interest rates now? banks might be even more reluctant to lend as they would need to assure a greater return even though a small one, the process of recapitalization of the banking industry would slow, the us would owe greater interest payments to foreign bond holders. would the domestic industry experience a benefit? banks might not be any less careful in their tight lending processes. it may be that reflating the rest of the world, thus stimulating a rise in us exports might not be so bad. asia has the potential policy option to increase export price in dollars and to invest dollars in something other than treasuries, but that is not their choice.