The message from the May FOMC is “that it can be cautious in removing its policy accommodation.” A slight mood change from January’s “patient” to today’s “cautious” is a clear view that the Fed is gearing itself to move out of the emergency/deflation prevention level of 1%--a level which PIMCO’s Bill Gross {1}, the King of Bonds, believe we should’ve never be at in the first place.
The Fed’s mood is a double edge sword. The “cautious” comment will spawn a flood of marketing efforts urging consumers to obtain every last drop of cheap money before June’s FOMC. While the refinance game has slowed considerably {2}, we will see record level mortgage loan and credit card debt this summer, as the hypnotized lemmings madly dashing to meet loan officers, and reach the credit limit of ever credit cards, even their grandparents if they can get their hands on them. And what we will see is over consumption and over borrowing--not that it hasn’t already happened. The pace will quicken and the number increased. The rising retail sales {3.1} {3.2} fueled by hyper borrowing level will generate over estimated manufacture orders; thus, cause over inventory {4} in the future, and increase the amount of debt delinquencies and bad debts {5}. Hence, the notion of raising interest rate is a double edge sword, as it will accelerate sales (where most economists mistaken as economy recovery), but at the expense of debt, which will burst in two main areas: housing market and credit card debts. This will result in the final collapse of the financial world.
I can not tell you when it will happen. But instead, I can assure you that the higher borrowing will not generate record retail sales and revenue in the coming quarters. We’ve simply passed the optimal rate of return, which means it will take more than $1 of borrowing to drive $1 of revenue. Consumers are now refinancing their own debts, where they pay off debt with new debt. It is a vicious cycle, and a downward spiral.
posted by jason @ 10:19 PM
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