January 2010 - outlook on leading indicators

at a snail's pace... a catalyst for sustained leveraging is much needed. i believe equity prices have quite a ways to go on the upside. speculation will heat up. there is synchronized global stimulus efforts to blow up the next bubble. can it play the role that sub-prime mortgages played in the us?

a.) corporations are sitting on mountains of cash. watch for stock buybacks to push equity prices.
the glut of dollars continues to grow. these dollars ultimately must be revalued downward. stocks will rise than fall from the wave of dollars seeking something above 0% interest.


b.) manufacturing output increasing:

philadelphia, new york indexes improve 5th month in a row

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 22.5 in December to 15.2 this month. The index has now remained positive for five consecutive months (see Chart). Indicators for new orders and shipments suggest continued growth this month, but they also declined somewhat from their December readings. The current new orders index, which has remained positive for six consecutive months, decreased 5 points. The current shipments index fell 4 points. The current inventory index, although still negative, increased 4 points, to its highest reading in 26 months. Indicators for unfilled orders and delivery times edged higher and are both positive, suggesting stronger economic conditions.

Labor market conditions have been stabilizing in recent months, and for the second consecutive month, the percentage of firms reporting an increase in employment was higher than the percentage reporting declines. The current employment index increased 2 points, to its highest reading since February 2008.

c.) exports increasing.

china's growth at 10.7% for Q4. banks ordered to slow loan rates.

d.) deleveraging proceeding

e.) unemployment trending lower but way too slowly

f.) war spending stimulus: continues to expand

g.) housing: prices stabilizing, but foreclosures continuing and threatening to rise.

h.) commercial paper: half the size of August 2007

an upside surprise?

we have a rather unique confluence of economic determinants, which include slow but rising manufacturing profits (in large part due to a restructuring to lower debt), a weak dollar and ultra-low interest rates. low interest rates are not furthering corporate borrowings but can leak out into the usual leveraging channels for interest sensitive investments. it is widely expected that when the fed ends its purchase program of mortgage back securities that long-term interest rates will rise. but there just might be a compensating market for the leveraged products from the massive yield hunting market. none of it will get very far without some significant employment gains and continue debt deleveraging of household debt.

Brenner on the 2002 recovery through asset targeted Keynsian policies:

What actually created the foundation for the new cyclical upturn turned out to be an historic decline in the cost of long term borrowing. From 1995, the yield on ten year Treasury bonds fell more or less steadily and, to the surprise of many, it continued to do so through most of the ensuing expansion, until 2005—declining in this interval from 7.09 per cent to 4.29 per cent in nominal terms and 4.49 per cent to 0.89 per cent in real terms (adjusted by the consumer price index). How is this extraordinary, indeed epoch making, drop-off to be explained?


The economy was rescued, in effect, by its own debility. Between 1973 and the
later 1990s, part and parcel of the long term system wide deceleration, the rate of
investment on a global scale (investment/GDP) steadily declined. With their capital
accumulation slowing, businesses’ call for credit slowed correspondingly, reducing the pressure on long term interest rates. The world crises of 1997-1998 and 2000-2002
sharply accentuated this trend by bringing about a further slackening in the growth of plant, equipment, and software and of employment on a global scale, which further
undermined the demand for loans, and the ensuing business cycle of the years 2001-2007 witnessed the slowest increase of investment, and of growth more generally, within the advanced economies, including the East Asian NICs and Little Tigers, since 1945.

During the same interval, as the US federal budget once again skyrocketed and the
current account deficit set new records year after year, East Asian governments made
ever-greater purchases of dollar-denominated assets for the purpose of holding down the exchange rate of their currencies and reducing the cost of borrowing in the US so as to sustain competitiveness and subsidize demand for their exports. As a consequence, the supply of credit continued to ascend, further easing the cost of borrow0ing. Federal Reserve Board chairmen Alan Greenspan and Ben Bernanke deemed the unexpected failure of long term interest rates to increase a “conundrum” and evolved the convenient theory of a “world savings glut”, originating mainly in East Asia, to explain it. They thereby rationalized record US borrowing and consumption in terms of a distinctive, if not implicitly irrational, East Asian failure to consume—which US policymakers just happened to desperately require to keep American interest rates down and enable the reflation of the enfeebled American economy on track. “The East Asians made us do it.”
Nevertheless, the supposed conundrum and its resolution are both redundant. There was
no global trend toward increasing saving, only a decreased tendency to invest almost
everywhere in the world outside of China.16 It was, in effect, the worsening of the
secular economic slowdown in the advanced capitalist countries plus the drive by East
Asian states to sustain the region’s investment-driven, export-dependent form of
economic development that made for the continuous reduction of the real long term
borrowing right through 2005-2006 that proved the saving grace for the US and global
recovery.

Periphery reflating - PrudentBear Dec 31, 2009

To an extent never before imagined, economies around the globe could partake in aggressive fiscal and monetary stimulus, rapidly expand Credit, reflate markets and economies – and have little worry about currency vulnerability or an outflow of speculative finance (a far cry from the ‘90s). The world had changed, and global asset prices were revalued based on a backdrop of expected ongoing dollar devaluation and newfound resiliencies in Credit system and financial flows to (“undollar”) “Periphery” economies and non-dollar asset classes.


i will suggest that 2009 marked a historic inflection point in global finance. I have argued that years of policy mismanagement led to the breakdown in the dollar reserve “system” - that for more than 60 years worked (with varying success) in restraining global Credit expansion. This year saw key inflationary/reflationary biases move decidedly from the “Core” (U.S.) to the “Periphery” (notably China, Asia, Brazil, India and the “emerging” markets). Importantly, a discredited dollar and the prospect of ongoing U.S. policy-induced currency devaluation created a backdrop of extraordinary market accommodation for “Periphery” Credit systems.

Treasury Results for 2009

Treasury Debt Sales Top $2.1 Trillion for Year .ArticleComments (6)more in Markets

By MIN ZENG
Wednesday's successful $32 billion seven-year note auction wraps up a record year of debt sales by the U.S. government.

The Treasury sold more than $2.1 trillion in notes and bonds this year, more than in the previous two years combined, to fund a widening budget shortfall and finance programs to rescue the banking system and support the economy.

Yet, despite the supply onslaught, buyers—from foreign central banks to U.S. households and domestic commercial banks—flocked to the sales. As a result, the government's borrowing costs fell to historic lows in 2009. That provided further support to the economy because Treasury rates are the benchmark for many types of corporate and consumer borrowing.

Strong demand for U.S. debt came when the U.S. economy was in dire straits, with unemployment rising as high as 10.2% and the government's deficit ballooning to $1.4 trillion in the fiscal year to September 2009. Beside the prospect of a recovering economy, concerns that buyers could stay away from this week's record-tying $118 billion in note sales led to a sharp spike up in Treasury yields in December. Two-, five- and 10-year yields rose to their highest levels since mid-August this week.

View Full Image
Associated Press DEBT PROTECTION: The Treasury's debt auctions like the large ones this week are run by the markets desk at the Federal Reserve Bank of New York, shown above in April.
.
The average yield in the two-year note auctions dropped to 1.002% in 2009, down sharply from 2.078% in 2008 and 4.307% in 2007, according to Ian Lyngen, senior government bond strategist at CRT Capital Group LLC. The average auctioned yield for the 10-year note fell to 3.262% from 3.681% last year and 4.632% in 2007, he said.

Wednesday afternoon, the benchmark 10-year note was up 6/32 point, or $1.875 per $1,000 face value, at 96 21/32. Its yield fell to 3.786% from 3.809% Tuesday, as yields move inversely to prices. The 30-year bond was up 22/32 point to yield 4.605%.

"It is a victory for the U.S. government," said Amitabh Arora, head of Citigroup Global Markets' U.S. rate-strategy group. Had the auctions not gone so well, he said, interest rates would be much higher, raising borrowing costs for homeowners and companies.

But, for investors, Treasurys weren't such a good investment as an improving economy boosted the returns on riskier assets such as stocks and corporate bonds. After a 14% return in 2008, Treasurys have handed investors a loss of 3.43% through Tuesday in 2009, putting them on pace for the worst annual return since at least 1973, according to data from Barclays. In contrast, U.S. high-yield corporate bonds have delivered a return of 57.9% this year.

Nonetheless, demand at Treasury auctions remained resilient throughout the year as the Federal Reserve held rates near zero amid the still fragile economic recovery and subdued inflation pressures. The Fed's $300 billion Treasury-buying program to support the economy also helped, while many foreign central banks bought Treasurys as a way to temper gains in their own currencies, which would have undermined their exports.


Timothy Geithner
.Foreign investors, including central banks and private investors, are forecast to buy a net $333 billion in Treasury notes and bonds this year, up from $315.4 billion for 2008 and the average of $282.9 billion from 2003 to 2007, according to a research report earlier this month by Mr. Arora and colleague Vikram Rai. The strategists expect net buying from foreign investors to be $325 billion in 2010.

China, the biggest owner of Treasurys outside the U.S., bought a net $71.5 billion through the end of October, according to the latest data from the Treasury Department. Japan, the second-largest foreign holder of Treasurys, was the biggest buyer this year, with a net purchase of $120.5 billion over the same period.

Next year, the Treasury is expected to sell about $2.45 trillion in notes and bonds, setting another record. But yields may need to rise to entice buyers, particularly as the economic recovery gathers pace. Treasury Secretary Timothy Geithner said recently the economy is growing again and that job losses are expected to come down rapidly. That makes it attractive for investors to hold riskier assets in seeking better returns.

The U.S. government also will face more competition for investors' dollars as the broader credit markets recover from the financial crisis and the sale of corporate debt and mortgage-backed securities picks up.

The Fed's decision to end its $1.25 trillion purchase program of mortgage-backed securities in March next year, as well as expectations that the central bank could start to raise interest rates again to keep inflation risks at bay, will also push up Treasury yields.

"We expect 2010 to be a tougher year for the Treasury to sell record amounts" of securities, said Adam Brown, managing director of Treasurys trading at Barclays Capital Inc. in New York.

Icahn Goes to Market
Icahn Enterprises LP is offering $2 billion in new senior bonds, its first such sale since 2005.

The notes will fund the buyback of $967 million of 7.125% senior notes due 2013 and $353 million of 8.125% senior notes due 2012 at a total consideration of just over 102 cents on the dollar.

"It's nice for the bondholders, taking them out early and giving them a little extra premium above par value," said Barbara Cappaert, an analyst at high yield bond research firm KDP Advisors. "It also takes care of refinancing risks in 2012 and 2013."

The investment management firm, controlled by activist investor Carl Icahn, didn't announce the maturity of the new bonds, which is being handled through private placement, so there was no disclosure in public filings.

Chief Financial Officer Dominick Ragone on Wednesday declined to comment further on the offering.

.The company also said in a statement it is in negotiations to acquire majority equity stakes in American Railcar Industries Inc. and food packaging firm Viskase Companies Inc., in each case from affiliates of activist investor Carl Icahn.

"The company will now have a good war chest to go out looking at other investments," Ms. Cappaert said, noting that Icahn Enterprises is using equity to fund the two company acquisitions and has historically been careful to maintain a large cash balance. "It will be interesting to see what sectors they see value in and decide to go after."

Many companies over the past year have bought back bonds due in the next few years and sold new, longer-term bonds to benefit from low rates now.

"It makes sense, taking advantage of the cheap capital sloshing around the system," said portfolio manager William Larkin at Cabot Money Management.

Icahn Enterprises' 7.125% notes due 2013 gained 1.35 points to 100.5 on Wednesday in thin late-December trade, according to online bond trading platform MarketAxess, which didn't list any trades for the 8.125% senior notes due 2012.

Moody's Investors Service rates Icahn Enterprises as Ba3, and Standard & Poor's puts it as BBB-, the last rung before junk status.

Mr. Icahn has taken positions in companies ranging from Take 2 Interactive Software Inc. to CIT.

Write to Min Zeng at min.zeng@dowjones.com

12/26/09 - the prospects of asset-backed keynsianism

treasury increases commitment to back freddie and fannie, removing any limit to the funds that would be used to support these agencies and reinforcing the administration's stake in trying to jump-start an asset-backed, comsumer-led keynsian econ revival. by stabilizing asset prices, most essentially home prices, it is hoped, will stabilize consumer spending which is the targeted engine of econ growth through the maintenance and increase of demand. demand thus leading the way to production, rather than vice versa.

the prospects of asset-backed keynsianism
a.) structurally impaired by shrinking credit available to consumers
b. the consumer is saving, repariing over-extended debt purchasings
c.) those on fixed incomes are constrained by near-0 interest rates
d.) a loss of 17 million jobs
e.) a second wave of foreclousres await with any future fise in interest rates or the ending of tax subsidies

deflation-inflateion prospects

a.) it looks like a draw
b. asset price inflation will reflect the effect of a weakening dollar, rather than a strengthening economy
c.) commodity price inflation will actually pressure corprate profits and to lead to alessening of demand for commodities. there will be little wiggle room for pass-through pricing of rising commodity costs.


capitalism's reappraisal

a.) an economic system is not a theoretical creation, it is successful insofar as it meets the needs of a society and that society's power relations between classes.

b.) capitalism exists under many different political systems or states: china, germany, japan, the us

c.) the 70s proved the vulnerabiliites of even the strongest domestic economy to extra-territorial forces, - oil shock, increasingly competitive japanese and euro imports.

d.) the domestic space was unable to remain self-regulating - the symptom was inflation

e.) neo-liberalism's reign will challenge the political space of the nation-state.

f.) capitalist success often involved the political choice to ignore social and environmental costs in the calculation of profits.

Lending Squeeze Drags On - Dec 9 2009 WSJ

DECEMBER 9, 2009.Lending Squeeze Drags On .ArticleComments (58)more in Economy ».EmailPrinter
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. Text .By LIZ RAPPAPORT and SERENA NG
Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.

The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. Before then, borrowing by U.S. consumers -- including credit-card debt and auto loans, but excluding mortgages -- had been growing for more than a half-century.

Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.


It's not just consumers having trouble borrowing. For all the talk of a revival in financial markets and a perception that the economy is on path to recovery, many companies lack easy access to borrowing.

"Despite the general improvement in financial conditions, credit remains tight for many borrowers," Mr. Bernanke said in a Monday speech, "particularly bank-dependent borrowers such as households and small businesses."

In the process of adapting to post-crisis realities, the nation's lending markets have changed significantly. In particular, markets where the U.S. government is either a big borrower or a de facto guarantor are ballooning, while some corporate-lending and consumer-finance markets have shriveled.

A Wall Street Journal analysis of data from the Federal Reserve and private research firms shows that these corporate- and consumer-credit markets have shrunk in size by 7%, or $1.5 trillion, in the two years through early November.

The financial markets that support credit-card lending, auto loans and home mortgages not backed by the government are between 10% and 40% smaller than they were in the second half of 2007.

On the other hand, Treasury debt outstanding has jumped about 40% as the government races to finance its deficits and investors seek the safety of U.S.-backed debt. The market for securities backed by mortgages that are effectively guaranteed by the government has expanded by 21%.

Credit markets have healed considerably, after having nearly shut down more than a year ago at the height of the global financial crisis. In the process, prices of almost every type of bond have bounced back from their historic crisis-era lows.

But the rally in prices doesn't mean borrowers have more money available. "Most of the money that's going into the markets is not flowing through into the economy yet," says Thomas Priore of ICP Capital, a small investment firm in New York.

Journal Communitydiscuss..“ It appears that lenders have now gotten back to using sound business principles and trying to actually determine if borrowers can repay their loans.
”
.— Edward Harris.
One measure of the retreat in consumer lending: In 2005, over six billion credit-card offers flooded consumers' mailboxes. This year just 1.4 billion have been sent out, according to Synovate, a market-research firm. Earlier this year, Visa reported that people for the first time were using their debit cards (which draw cash out of a bank account) more than credit cards (which use borrowed money).

The result of tighter lending: Consumers spend less and businesses are more reluctant to hire and invest. The changed credit markets, says Mohamed El-Erian, chief executive of bond-investing giant Pacific Investment Management Co., will mean the economy grows only 1.5% to 2% a year, a slow pace compared with the 3% that typically defines healthy expansion in the U.S.

"The idea that we will reset to where we came from is false," Mr. El-Erian says. "It is a bumpy journey to a new destination with significant long-term effects."

Some of the decline in lending is also due to lower demand as borrowers focus on paying off the debt they already have.

In the past 25 years, household debt has exploded. It now stands at 122% of total disposable income, up from just over 60% a quarter-century ago. At the end of last year's third quarter, household debt started to decline as Americans began belt-tightening.

The hardest-hit markets since the crisis were ones at the heart of the financial problem -- the "securitization" markets where loans for everything from mortgages to credit-card debt get sliced up and repackaged into complex securities.

The size of the market for securities backed by loans tied to homeowners' equity has shrunk more than 40% since the second half of 2007. The market for securities backed by auto loans has shrunk 33%. For securities backed by riskier mortgages, the decline is about 35% since the end of 2007, according to the Federal Reserve and data provided by FTN Financial.

These securitization markets provided as much as 50% of consumer lending in the years leading up to the crisis, says Tim Ryan of the Securities Industry and Financial Markets Association, a financial-industry trade group. "Without [the securitization markets], it's very difficult to replicate the amount of money moving into the economy," he says.

Classic short-term credit markets serving businesses have also withered. Commercial paper sold by businesses to finance payroll and other short-term cash needs has slumped by 35%.

The shrunken markets for short-term debt are also complicating life for investors in money-market funds.

These funds invest in short-term debt and have a reputation as being safe places to park cash. Worried investors (both individuals and corporations) have piled money into these funds. Money-market funds still have nearly $1 trillion more in assets than they did in mid-2007 before the credit crisis kicked off, according to iMoneyNet.

But the shrinking market for corporate short-term debt has limited the funds' investment options and forced them to funnel cash into government-issued Treasury bills that mature in three months or less. This heavy demand helped drive yields on some Treasury bills into negative territory last month.

In the corporate-credit markets, a strong rebound has created haves and have-nots. The market for investment-grade bonds, including debt sold by banks and backed by the Federal Deposit Insurance Corp., expanded by about 13% from November 2007 until November this year, while the junk-bond market receded about 7%.

Even companies that are able to borrow are being hurt because their suppliers are struggling. To help, Wal-Mart Stores Inc. is telling lenders it is standing behind its suppliers and encouraging lenders to let the suppliers use Wal-Mart purchase orders to obtain cash advances if needed.

Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com

Lending Squeeze Drags On - WSJ.com

DECEMBER 9, 2009.Lending Squeeze Drags On .ArticleComments (58)more in Economy ».EmailPrinter
FriendlyShare:
facebook ↓ More.
.StumbleUponDiggTwitterYahoo! BuzzFarkRedditLinkedIndel.icio.usMySpaceSave This ↓ More.
. Text .By LIZ RAPPAPORT and SERENA NG
Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.

The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. Before then, borrowing by U.S. consumers -- including credit-card debt and auto loans, but excluding mortgages -- had been growing for more than a half-century.

Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.



Click to enlarge PDF.
.How markets have changed since the start of the recession
.Federal Reserve Chairman Ben Bernanke emphasized Monday that the economy is unlikely to experience a "vigorous" recovery. Even though unemployment for November was better than expected, he said, the picture for U.S. job growth remains unclear.

It's not just consumers having trouble borrowing. For all the talk of a revival in financial markets and a perception that the economy is on path to recovery, many companies lack easy access to borrowing.

"Despite the general improvement in financial conditions, credit remains tight for many borrowers," Mr. Bernanke said in a Monday speech, "particularly bank-dependent borrowers such as households and small businesses."

In the process of adapting to post-crisis realities, the nation's lending markets have changed significantly. In particular, markets where the U.S. government is either a big borrower or a de facto guarantor are ballooning, while some corporate-lending and consumer-finance markets have shriveled.

A Wall Street Journal analysis of data from the Federal Reserve and private research firms shows that these corporate- and consumer-credit markets have shrunk in size by 7%, or $1.5 trillion, in the two years through early November.

The financial markets that support credit-card lending, auto loans and home mortgages not backed by the government are between 10% and 40% smaller than they were in the second half of 2007.

On the other hand, Treasury debt outstanding has jumped about 40% as the government races to finance its deficits and investors seek the safety of U.S.-backed debt. The market for securities backed by mortgages that are effectively guaranteed by the government has expanded by 21%.

Credit markets have healed considerably, after having nearly shut down more than a year ago at the height of the global financial crisis. In the process, prices of almost every type of bond have bounced back from their historic crisis-era lows.

But the rally in prices doesn't mean borrowers have more money available. "Most of the money that's going into the markets is not flowing through into the economy yet," says Thomas Priore of ICP Capital, a small investment firm in New York.

Journal Communitydiscuss..“ It appears that lenders have now gotten back to using sound business principles and trying to actually determine if borrowers can repay their loans.
”
.— Edward Harris.
One measure of the retreat in consumer lending: In 2005, over six billion credit-card offers flooded consumers' mailboxes. This year just 1.4 billion have been sent out, according to Synovate, a market-research firm. Earlier this year, Visa reported that people for the first time were using their debit cards (which draw cash out of a bank account) more than credit cards (which use borrowed money).

The result of tighter lending: Consumers spend less and businesses are more reluctant to hire and invest. The changed credit markets, says Mohamed El-Erian, chief executive of bond-investing giant Pacific Investment Management Co., will mean the economy grows only 1.5% to 2% a year, a slow pace compared with the 3% that typically defines healthy expansion in the U.S.

"The idea that we will reset to where we came from is false," Mr. El-Erian says. "It is a bumpy journey to a new destination with significant long-term effects."

Some of the decline in lending is also due to lower demand as borrowers focus on paying off the debt they already have.

In the past 25 years, household debt has exploded. It now stands at 122% of total disposable income, up from just over 60% a quarter-century ago. At the end of last year's third quarter, household debt started to decline as Americans began belt-tightening.

The hardest-hit markets since the crisis were ones at the heart of the financial problem -- the "securitization" markets where loans for everything from mortgages to credit-card debt get sliced up and repackaged into complex securities.

The size of the market for securities backed by loans tied to homeowners' equity has shrunk more than 40% since the second half of 2007. The market for securities backed by auto loans has shrunk 33%. For securities backed by riskier mortgages, the decline is about 35% since the end of 2007, according to the Federal Reserve and data provided by FTN Financial.

These securitization markets provided as much as 50% of consumer lending in the years leading up to the crisis, says Tim Ryan of the Securities Industry and Financial Markets Association, a financial-industry trade group. "Without [the securitization markets], it's very difficult to replicate the amount of money moving into the economy," he says.

Classic short-term credit markets serving businesses have also withered. Commercial paper sold by businesses to finance payroll and other short-term cash needs has slumped by 35%.

The shrunken markets for short-term debt are also complicating life for investors in money-market funds.

These funds invest in short-term debt and have a reputation as being safe places to park cash. Worried investors (both individuals and corporations) have piled money into these funds. Money-market funds still have nearly $1 trillion more in assets than they did in mid-2007 before the credit crisis kicked off, according to iMoneyNet.

But the shrinking market for corporate short-term debt has limited the funds' investment options and forced them to funnel cash into government-issued Treasury bills that mature in three months or less. This heavy demand helped drive yields on some Treasury bills into negative territory last month.

In the corporate-credit markets, a strong rebound has created haves and have-nots. The market for investment-grade bonds, including debt sold by banks and backed by the Federal Deposit Insurance Corp., expanded by about 13% from November 2007 until November this year, while the junk-bond market receded about 7%.

Even companies that are able to borrow are being hurt because their suppliers are struggling. To help, Wal-Mart Stores Inc. is telling lenders it is standing behind its suppliers and encouraging lenders to let the suppliers use Wal-Mart purchase orders to obtain cash advances if needed.

Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com

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.