Can the US lift interest rates without causing a recession?

Pyongyang fired off another rocket over Japan on Friday, bringing the region and the globe closer to catastrophic conflict.

Japanese citizens fled to safety as warnings blaredand US military chiefs were visibly rattled by the growing possibility North Korea soon may be able to strike American territory.

In response, US President Donald Trump, whose approval ratings have lifted as tensions escalate, tomorrow heads to the United Nations General Assembly — an organisation he’s previously described as an “underperformer” — to implore world leaders, including China, to rally behind the US in its opposition to the hermit kingdom.

But if these are the most dangerous of times, you wouldn’t know it by checking global stock markets, where the euphoria created by a decade of experimental monetary policy continues to trump logic.

Wall Street advanced to new records Friday night, while earlier in the day Japan’s Nikkei index and Seoul’s Kopsi both stacked on healthy gains.

The UK, however, was a different story — the FTSE 100 dived to its lowest level in almost five months on Friday, but not for the reasons you would most suspect.

Barely a thought was given to the latest attack on a London train when trading opened in the city.

Instead, it was a vague hint from the Bank of England that it may consider raising interest rates from current emergency levels of just a quarter of a per cent.

And there’s the key — it is the fear of rates, not rockets, driving global markets.

It’s likely the Donald’s big speech will be given scant regard by investors on Tuesday.

Instead, all eyes will be trained on the woman he despises and would desperately like to replace, Janet Yellen, the head of the US Federal Reserve.

They successfully dragged the global economy back from the brink of collapse almost a decade ago by flooding the world with cash and slashing interest rates.

But they solved a debt-fuelled crisis by piling on vastly more debt — so much of it in fact, that some fear it is impossible to unwind without causing chaos.

Central bank debt was sitting around 17 per cent of the size of the global economy when the financial crisis hit. It’s now approaching 40 per cent, worth about $US20 trillion.

It’s pumped up asset prices across the globe, rewarding borrowers and penalising savers.

That’s why real estate from Sydney to Melbourne and London to Beijing has soared.

It explains why Wall Street values are now stretched way beyond the dangerous levels of 2007 and are heading towards those that immediately preceded the dotcom collapse.

But how to unwind all this without sparking an even greater recession than perhaps we would have experienced in the aftermath of the financial crisis?

The US central bank has more than $US4 trillion worth of government securities and other debt instruments on its books.

It bought them from financial markets after the US Government issued them, through a mechanism quaintly called quantitative easing.

Essentially, it was a fancy form of money printing, a method to inject cash into the economy.

On Wednesday, after her two-day meeting, expectations are running hot the US central bank chief may explain not just her interest rate intentions but also her plans to begin selling that huge pile of debt.

And that’s where the problems begin. Selling them involves reversing the whole exercise. It will soak up cash, push interest rates even higher and cause panic on financial markets.


when they do this rise up will be excruciating..

“The US central bank has more than $US4 trillion worth of government securities and other debt instruments on its books.”


~ by seeker401 on September 22, 2017.

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