If however, this fails, then yes, the US will be heading for a decline (perhaps, not a double dip, but who knows). But, Nickoo, now that I have done you the courtesy of answering your questions, I suggest that we each perhaps you could also do me the courtesy of answering my question (also, simple), below:
If the USA were to continue with its rate of recovery, what moderating activity should the Fed /Government introduce, to ensure the continuation of that recovery, considering the limitations of:
1) a sub-neutral Fed rates level which, in order to return to a neutral policy stance, would need to increase by 225bp(+);
2) without overheating the economy (ie: through the re-engagement of boomtime conditions);
3) without impacting against capacity constraints /shortages which would feed directly back into inflation; and
4) without re-igniting inflation whilst moving to moderate the unsustainably high level of services inflation.
Nickoo, I agree that we could debate this endlessly. But froma HC2 perspective, I believe that our colleagues are also benefitting from our ongoing exchanges on this (and, at least, are getting 2 different points of view - sort of like a balanced point of view). Best Regards, Grant62
If there were a sustainable recovery in the US, then inflationary pressures would surely be a major issue.
What actions could the Fed/Government introduce to moderate inflationary pressures in a situation of accelerating growth?
Interest Rates
- I am not currently aware of the exact percentage of investors in the US property market vs actual home owners, or the differential between rental yields and the home loan rate, however, my estimation is that rises in the fed funds rate of any significant magnitude would, place extreme pressure on property investors, and also high leveraged corporates.
I doubt the Fed would increase the fund rate by = or >2.25bp- this would in effect double the cost of servicing debt.
NO economy can survive such an extreme increase in the costs of borrowing over any period less than 3 years.
Thus, my belief is that if a recovery were to eventuate, the Fed would be constrained to increasing by a maximum 125/150 bp over a minimum period of 18 months.
Capacity Constraints
- Correct me if i'm wrong, but manufacturing capacity utilisation currently stands at approx 80%- this is still very low historically.
If there were to be a significant uptick in growth, then a move to 90%+ utilisation would certainly place extreme pressure on prices... this is a possibility if the recovery you describe eventuates where retailers with depleted inventories start ordering again.
Further depreciations in the USD would also make US exports more competitive, and thus also place increased pressure on capacity.
Services inflation
- Import labour on short term visas!
That's clearly where globalisation is heading. Pure economic rationalists have long argued for free trade in labour, and now their wishes are starting to be granted.
I am very against such a policy, however, it is a clear solution to you fear of services inflation!
Without overheating the economy.
- This is the million dollar question!
It would be alot easier for the Fed to reach the delicate balance between acceptable growth and controlled inflation from the starting position of a 5/6% fed funds rate, than it will be from a starting point from 1.75%.
I do not know the answer to this question. It is impossible to answer without knowing where all the various variables are placed...
Let me conclude by saying that i think the likelyhood of the Fed having a runaway inflation problem in his hands in the medium as very slim.
All past experience shows that when debt bubbles burst (I know you view is that it won't burst! -that's the REAL contentious issue), they have massive deflationary consequences.
The USA's currently more leveraged than at any other point in its history.
