Kessler in WSJ: Watch out when interest rates rise.

The first time I read a hysterical story about this topic LSU had just won its second BCS national championship.

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hysterical story

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So you disagree that a rate increase is imminent?

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There is nothing in the OP story which predicts an imminent rate increase.

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Maybe "imminent" is too strong but I see some stong hints in there, from the authors point of view:

The experiment to kick-start the economy with near-zero interest rates has failed. Maybe our central bankers have figured out that low rates are what is holding back lending and hiring and growth.

I don't know enough to agree or disagree but it makes sense that the market will become real dicey if the sentiment of higher rates starts to take hold.

I'm not even going to think of predicting when one will happen or what the effect will be. I've been reading such predictions since 2008 as well. I still find it interesting and worth discussing.

WHat happens if unemployment doesn't drop that low? At some point he does have to raise them.

I would like to know how many similarities our rate of interest and the overall economy is to what happened in Japan which is referred to "The lost decade".




Well this article doesnt give me a warm fuzzy feeling

LINK

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I would like to know how many similarities our rate of interest and the overall economy is to what happened in Japan which is referred to "The lost decade".

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Similarities:
- Large housing bubble that burst
- Extreme central bank invervention
- Very low interest rates
- Large benefits given to an aging population
- Taxes were raised not too long after these bubbles burst (consumption tax was raised from 3% to 5% in '95 I believe?)

Differences:
- We have a large manufacturing sector
- We have natural resources
- They are an export driven economy
- Their housing bubble was even bigger than ours relative to their economy
- Our politics suck more (opinion)
- We aren't strangled by previous decisions to latch onto other powers (choosing the US after the Oil embargo in '73 and the high yen recession after the Plaza accord in '86)

Would you put that in similarities or differences? I think I know your answer but the handling of banks were much different because the structure of the BoJ to it's banks are much different than the Fed to it's member banks. Japan also didn't allow a Lehman event and our bailouts have been mostly paid back.

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Similarities:
- Large housing bubble that burst
- Extreme central bank invervention
- Very low interest rates
- Large benefits given to an aging population
- Taxes were raised not too long after these bubbles burst (consumption tax was raised from 3% to 5% in '95 I believe?)

Differences:
- We have a large manufacturing sector
- We have natural resources
- They are an export driven economy
- Their housing bubble was even bigger than ours relative to their economy
- Our politics suck more (opinion)
- We aren't strangled by previous decisions to latch onto other powers (choosing the US after the Oil embargo in '73 and the high yen recession after the Plaza accord in '86)

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Good list. The biggest two are the natural resources and the difference in housing bubbles. At the end of the one in Japan, banks where actually offering 100 year mortgages!

I linked and quoted this very article in the original post of my thread created on February 23: LINK.

Most of Kessler's article is routine, and I would go so far as to say obvious, but there was a part that was of particular interest to me (which is why I quoted it in the other thread) about why ZIRP really does hold back bank lending and economic growth. I really think people are crazy to not see that ZIRP causes immediate economic drag effects on the economy, regardless of whatever you think the immediate net effects are.

A couple of other points to make: citing Japan's lack of natural resources seems almost completely beside the point to me. There are big differences in the monetary situations the USA faces now, and those faces by Japan over the last 25 years, but availability of domestic resources is not one of them. Does it make a difference? Yes, but still, I just don't see the need to focus on it.

Finally, as to Bernanke's statement about 6.5% employment, it's laughable to think that he has the freedom to keep his word on this. If inflation rises and unemployment stays well above 6.5%, then he will have no choice but to attempt to restrain inflation. That's his job. Thus, his statement has certain assumptions embedded in its logic, and if Bernanke's assumptions turn out to be false, then he will have no choice but to go back on what he said. It's his job, you know.

xxx

Anyway, like others have said, I don't think Kessler is predicting imminent inflation or rate hikes or anything like that. He's just pointing out the plain facts about what must happen when inflation and rate hikes finally do arrive... whenever that is. That being said, I think the historical example from 1994 is quite interesting, because it shows that it possible for rate hikes to catch Wall Street by surprise. Obviously, Bernanke does not have the same disposition now that Alan "Irrational Exuberance" Greenspan did in the mid-1990s, but that doesn't mean that Bernanke won't be forced to hike rates for reasons other than those that motivated Greenspan.

I've had one helluva busy week, and it ain't over week, so I'll probably hold any other comments until the weekend.

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There are big differences in the monetary situations the USA faces now, and those faces by Japan over the last 25 years, but availability of domestic resources is not one of them. Does it make a difference? Yes, but still, I just don't see the need to focus on it.

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Instead of going at all of your post I'll just focus on this point, because this really is everything. Japan wouldn't have attacked the US in WW2 if we didn't cut their oil lines, Japan wouldn't have had to pick between the Arab world and the western world in '73 if they had oil, and Japan wouldn't have had to latch itself onto the western world for exports if they had oil.

If you have natural resources your options are more broad because you can sustain your country, if you don't you don't and you have to find different ways to stimulate exports simply to buy natural resources. The availability of domestic resources has driven every move by Japan ever since General Pershing drove into Tokyo Bay in 1853, and saying the differences in the availability of natural reasources isn't a big difference is just flat out not correct. That's like saying availability of warm water ports isn't a big difference between the US and Russia.