Too Hot to Change?

The Cunning Realist takes a look at limits:

Since the bursting of the technology bubble in 2000, there have been four distinct periods in which the Fed has flooded the system with an extraordinary amount of liquidity in an effort to boost the stock market:

1. Immediately after 9/11.
2. During the second half of 2002 in response to widespread accounting scandals and the meltdown in the corporate bond market.
3. During the summer and fall of last year, just before the presidential election (draw your own conclusions).
4. The past two months.

He thinks, though, that the extra liquidity has mainly been going into the oil markets. This has kept bond, stock and oil markets rising, an otherwise puzzling convergence. But he also thinks that $60 per barrel was the limit.

Either the Fed starts draining liquidity, or the mega-spike in oil prices is on its way.

Despite the fact that the Federal Reserve is supposed to be independent politically, records indicate that Alan Greenspan has been visiting the White House at an ever-increasing rate—far more than he has during any other presidency. One can be absolutely sure that Bush and his advisors are well aware of the liquidity dynamic as well as the Federal Reserve’s intentions. If Greenspan has indicated to the White House that the limits of Federal Reserve policy have been reached because of the crippling effect of any further rise in the price of oil, that will influence political and geopolitical strategy.

It’s a plausible set of responses. I’m too far from a Bloomberg box to text much of it, but since CR is blogging anonymously, he’s not likely to be talking his book either.

Hard to see with any precision what the implications for Europe ought to be. Oil prices hurt, of course, and with the Fed and ECB going in different directions, there’s room for more currency volatility.

I should add that predicting limits on US growth has been a bit of a rum game for at least a decade. Shorting the American economy has not been the way to get rich in the financial markets. Last fall, I speculated that the lack of demand for a Treasury auction might be an inflection point. If it was, it’s hard to see nine months later.


(Parenthetically, while researching this post, I found out what has happened to my old boss, who has been nominated to be US Under Secretary of the Treasury for International Affairs. Apparently, a Senator from Montana has placed a hold on all Treasury nominations because of concerns he has about restrictions on trade with Cuba. Republicans are braying, of course, but given how much of this Jesse Helms, among others, did during the Clinton years, they shouldn’t be in the least surprised. The acting under secretary is thought to be quite good, for a Bushie.)