>The Fed is likely to hike rates much more aggressively [...]
I agree, and they're about to start letting the balance sheet run off too, though at half the rate they accumulated.
My question for the wonks here: will it be difficult or expensive to hold rates above, even say, 5% for very long if needed? US national debt is over $30T. Assuming inflation persists and rates are raised to 5%, the approximate steady-state cost of servicing the debt is $1.5T/year, more than pre-pandemic US discretionary spending, and more than 33% of federal revenues. I asked a friend about this and they said not to worry, it takes a while for the national debt to roll over, but looking this up it seems most US debt is in instruments with a horizon of less than a few years.
also, I imagine Debt:GDP is not the most appropriate stat here but in the 1970s it was 30-35% and now we're over 120%. Some other countries are over 200%. And in a recession, by definition the denominator gets bigger. Or maybe the broader question is at what point does national debt matter?
I sort of feel the Fed is playing everyone's expectations, talking to cool things off and even name-dropping Volcker while hoping to keep interest rates more at 4% than his 20%. I'm not crying conspiracy or complaining -- if it works they could get their soft (now "soft-ish") landing.
isn't this a bit more complicated than that? for example in housing though the prices are propped up by the tech companies (and startups), which can pay all those high salaries thanks to their valuations and cashflows (which are fueled by cheap credit, eg. credit cards). but also low rates allowed people to get bigger mortgages. so in that sense the fundamentals (cashflows) are there, but things with limited supply blow the fuck up, whereas wages barely moved up in comparison, and PCE was slightly below 2% (which was the target).
> There are a lot more crazies in power.
very underappreciated risk.
> At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break.
yes, but also these valuations are so high because the expected cashflows are also high, because almost everything (not just tech) is global and the world got a LOT richer (eg China)
the risks are structural (politics, eg. wars, crazy tariffs, brexit), but the potential for solving them are too (easier migration [eg Japan], more trade harmonization [US-EU], education and healthcare reform [US])
Why? There's an easy way out of depressions / recessions.
NIRP and QE Infinity part III.
In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008.
None of this started in 2008.
What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is likely to hike rates much more aggressively in order to stop that from taking off.
When you talk about inflation, though, asset prices and commodities don't matter anywhere near as much as wage inflation. And wage inflation is high due to the low number of job seekers, likely a result of other factors like death and disability due to the pandemic removing workers from the workforce and boomers retiring. As a result the rate hikes are likely to be more severe and the downturn is likely to more severe.
I would be worried that this downturn looks more like a depression than a recession. Of course it may just unwind as before and as the economy pops they slash rates and do ZIRP and the rich people buy up even more of the economy and the cycle continues.
I think there's a good chance the average Millennial gets pretty decimated by the next downturn and crypto should get tested and there's a pretty good chance that the Ponzi all unwinds and goes to zero (which will destroy all the Millennials using crypto as a 401k). I'm still not sure that crypto has gone up enough so that a few billionaires couldn't rescue it and keep the game running though.
I still think we're going to see a relief rally short term though and that the downturn won't really take off until 2023/2024 when the yield curve inverts. We're not quite there yet.
We've also had prices being out of whack with fundamentals for decades, that is also nothing new. Also don't go predicting hyperinflation or raising long rates. That has been predicted for decades as well, and it never happens. The Fed raising rates is designed to cause a recession and disinflation. Long rates won't rise and long-term inflation will remain contained. We're not in the 70s and we're not going back to the 70s.
The thing to be MOST worried about is political. Since the 2008 crisis there's been a rise of people who just seem to want the system burn and where they won't bailout the system in the event of a financial crisis. That increases the chances that the economy could really lock up and institutions could fail. There are a lot more crazies in power.
At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break. I think its way too soon to call it as broken though. The commodities inflation that we're having right now is not that unprecedented (and a lot of it is ultimately transient and due to bullwhip effects) and the Fed is showing that they're going to take action to stop it. That means that we're likely to just have another recession then another long period of ZIRP and asset bubbles and crazy valuations continuing again.