Thursday, 16 April 2009

Chairman Bernanke's Gotchas

Henry Blodget has a really good article on Chairman Bernanke's four big challenges:

First, it will be hard to confidently assert that the economy in full recovery. Remember, in 2007, Ben (and most other people) thought the economy was in great shape as far as the eye could see. He and most other observers missed that disastrous turning point. So why do we think he'll correctly spot the next one? Especially because, if he blows it by jacking up rates too early, he'll kill the recovery.

Second, there will be intense political pressure to MAKE SURE that the economy is in rip-roaring health before hammering consumers and businesses by raising interest rates. Everyone loves low interest rates. And they'll only stop screaming about your taking them away when they're fat and happy (which will be long after inflation really gets going).

Third, the US government desperately needs low interest rates to fund its soon-to-be-monstrous debt load, so there will be another source of pressure on Ben to keep rates low. When we finish with all this stimulus, we're going to owe a boatload of money. We're really going to allow our Fed chief to send interest rates to the moon and jack up our refinancing costs?

Fourth, many of the assets that Bernanke has been buying to print money won't be easy to sell. This time around, the Fed isn't just buying easy-to-sell Treasuries. It's buying trash mortgage assets, et al. To reduce the money supply, it will need to sell them to someone. But who?

The real "gotcha" is the third reason - the massive debt that will need to be financed as far as the eye can see.

It is becoming increasingly apparent that if you don't want to take an apocalyptic view of this issue you have to buy completely into the underlying assumption in the government forecasts that the US will remain in a benign environment as far as long term rates are concerned for years to come.

I don't think even Bill Gross believes that.

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