An excellent article in the Financial Times analyzes what’s really coming with the Zero Interest Rate Policy adopted by the Fed and other central banks.
In essence, the world avoided a total meltdown but has not really come to grips with the scale of the losses to come. Many banks have not yet come fully clean, the Fed’s carrying a couple of trillion in bad loans on the balance sheet, and there’s a need for a responsible exit strategy that allows the US economy to adjust to de-leveraging and a lower standard of living.
On the other hand, far more fiscal stimulus is desperately needed in the short to medium term, because of high unemployment levels, a lack of corporate investment, and the banks’ hoarding of capital/tightening of credit.
The big test will be the extent to which fiscal and monetary policymakers can regain control in the long run.
There’s way too much hawkish chest beating about deficits, which aren’t really a problem in the next 2-3 years, and the dollar’s decline, which is actually very good for the US economy.
Will the Fed raise rates too soon? Or will we see another bubble based on the dollar carry trade?
Gorilla answers: “Yes and yes. Go long Pepto Bismol!”
