The Trump Fed will be politicized and stigmatized by its Democratic opponents no matter what they do. Howls for outside controls and oversight will rise in the night.
Global Contagion
The parlous state of the economy is not just an American problem, or a European or UK or Japanese or Chinese one. It is global.
I wonder whether Janet Yellen truly appreciates the degree to which Federal Reserve policy affects the entire world. Like it or not, the US dollar is the entire planet’s ultimate medium of exchange. One way or another, almost every financial transaction eventually settles in dollars. China and others would like to change that. Maybe they’ll succeed someday, but it won’t be this year or next.
That being the case, the way Fed policy impacts the dollar could make the inevitable crisis much worse. Looking only at the US, there’s a strong case for raising – oops, I mean “normalizing” – rates. Going to even 2% or 3% won’t kill our economy. But hiking rates will likely create other victims whose problems will soon become our problems, too.
Think of all the dollar-denominated debt owed by various emerging-market governments and businesses. Higher US rates will strengthen the dollar and make that debt costlier to service, almost certainly causing some defaults. In today’s highly leveraged markets, the pain caused by those defaults will quickly spread to lenders in Europe, Japan, and the US.
You might respond that more stringent capital requirements mean today’s banks are better able to withstand such scenarios. That’s partly true. It’s also true that the bank executives hate those requirements and are working assiduously to loosen them. These banks are also far larger than they were in 2008. Yes, they pass the Fed’s stress tests, but the Fed can’t test every possible adverse scenario. Generals always fight the last war. The next crisis probably won’t originate in residential mortgage loans. It will come from somewhere else, and we have no idea whether the banks are actually ready for it.
You and I can’t control whether banks are ready, but we can control whether we are ready. I am working on a number of fronts to help you. My brief time away convinced me beyond any doubt that a crisis of historic proportions is once again bearing down on us. We may have little time to prepare. We definitely have no time to waste.
Barefoot on the Beach
As I mentioned at the beginning of the letter, Shane and I did get married on the beach in the Virgin Islands last week. We stayed at the fabulous Ritz-Carlton Hotel on St. Thomas, and I have to tell you it was one of the most pleasurable hotel/resort experiences of my life. At least for one week, we were living large. But it’s an important week, got to admit. The entire hotel team was fabulous; the venue was great; and the food was awesome. Highly recommended. And not just for getting married – we do hope to get back.
Your beginning to wonder if the nudge over the edge comes from our own central bank analyst.