Heisenberg posted today on those topics, while my humor makes light of the problem, this is both a very tough problem and a complicated set of information – not for the feint of heart or intellectually lazy 🙂
If you have yet to discern the power of US Fed so far … my question (to the conclusion) is how long will Fed be successful and what happens when not?
The conclusion – totally quoted:
“Things get really – really – messy when you start to think a few steps ahead.
In the absence of a material upturn in ex-US economies (and/or a reinvigorated Phillips curve stateside), there may be no way out of the situation for the Fed. Indeed, anything they do could make things considerably worse.
If all of this already “smacked of inevitability” in Sparks’s original exposition of the problem, Kocic drives the point home emphatically. To wit:
What could happen if the Fed cuts rates in order to weaken the USD? A (temporarily) weaker dollar would imply a stronger EUR (or CNH), which would undermine the effects of foreign QE. As a consequence, the market would likely price in more severe (or extended) QE abroad, which would further compress their yields and create another demand for US assets and USD and, thus, offset the effects of the Fed action — we would be where we started. This would force another round of rate cuts in the US with repeated response abroad causing further rate cuts until US rates catch up with their counterparts abroad This is the troubling destination that poses the most severe long-term risk. If we reach the point of zero rates without being able to inspire growth (and some inflation along the way) either abroad or in the US, we would find ourselves in the disinflationary world with low growth and no policy tools to combat it.