February 18th, 2014 4:08 PM by Nick Rapplean
The topic today is... the coming changes of focus in the credit markets. We've been living in a world where the Fed whips interest rates higher and lower by relatively predictable means. For years, the Fed only needed to whisper that it might abandon the current Quantitative Easing program and rates would spike all over the world.
Not so any longer.
Another change is that the Fed can no longer be seen as just about the only force acting on interest rates the world over. In fact, here's a prediction I'm pretty confident about: Over the coming years and months, we'll see countries we haven't even thought of for years playing leading roles in the direction rates--and local economies go.
Some prescient economists are warning us that we're not ready for the next, nearly inevitable crisis. Eduardo Porter said recently, "The cycles of boom and bust seem to keep getting worse. Whether the Fed continues removing monetary stimulus at the same pace or it pauses, perhaps worried by sluggish job growth, long-term interest rates eventually will rise. The world, evidently, is not prepared. And, it's even less prepared for the bigger crisis that we seem doomed to suffer after this one."
It's a strange spiral we may have entered, a boom and bust cycle in which each bust is worse than the last. He quotes Lawrence Summers, who calls this syndrome 'secular stagnation,' which is persistent low growth caused by the fact that there are more savings around than profitable investments to be made.
This is beyond the conceptual reach of the life experience of most of us. The cause of this cycle is nearly impossible to describe, and few economists can suggest a way to bring it to an end. But, we all saw the money that dropped into weirder and weirder subprime mortgages eventually blow up the real estate market and the whole economy. The issue, in a very real sense, is what to do when there is too much money sitting idly and too little incentive to invest it actively. It just sits. Our jobs market is an example. Its owner’s feel better and safer about just holding it, than they feel about risking it. Who, after all, is at risk if instead of hiring new workers who may not be needed, a company simply holds on to its money for the next inevitable rainy day?
In fact, we are all at risk, but it's doubtful that we all can coordinate our actions wisely. What is needed, therefore, is a larger and more energetic conversation among those who are increasingly aware that this economy is waiting to burn everyone's fingers.
And, as you can see, it will take courage and wisdom to get us past our aging assumptions about how interest rates work so that we can stop talking about whether the Fed should slow down or speed up its Quantitative Easing programs.