“Bubble or Recession: The Fed Must Choose”

Credit Growth Weak This Cycle And Now Falling

Number of OECD countries with inflation below 2% is continuing to trend higher!

How can the Fed possibly unwind QE?

Jim Rickards believes the next recession is already on the way

“Bubble or Recession: The Fed Must Choose”

The Fed will be facing dangerous dilemmas from this point on. Extreme consequences and/or extreme interventions will become more likely soon.

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Credit Growth Weak This Cycle And Now Falling

The chart above shows that credit growth has been astonishingly low for the whole cycle since 2008 and now it is likely to fall back below 2%, often regarded as a proxy for a recession red flag.
Another problem with further tightening is that the trend in the number of OECD countries with inflation below 2% is continuing to trend higher!

 

 

 

 

 

 

 

 

 

 

 

How can the Fed possibly unwind QE?

“…the Fed hopes to unwind its balance sheet into an upswing of a credit cycle over which it has no control. The Fed has set itself the impossible task of balancing the contraction of narrow money against the expansion of bank credit.

Therefore, balance sheet normalisation is little more than a wish, unlikely to be achieved. It is possible for the Fed to let some of its assets run off into maturity, and some balancing factors can be deployed, such as utilising repos, and reducing the level of outstanding reverse repos. But these are only temporary smoothing actions. Attempts to significantly reduce the Fed’s balance sheet will forever be deferred to a future date.”

https://www.goldmoney.com/research/goldmoney-insights/how-can-the-fed-possibly-unwind-qe

Jim Rickards believes the next recession is already on the way

http://www.theepochtimes.com/n3/2259610-james-rickards-fed-is-going-to-cause-recession/

Richard Duncan Writes:

“Bubble or Recession: The Fed Must Choose”

“Janet Yellen and her colleagues are facing a difficult predicament. If the Fed does not tighten monetary policy, then a destabilizing asset price bubble could run out of control and wreck the banking sector again. However, if the Fed does tighten monetary policy, then credit is likely to contract, in which case the economy would enter a severe recession. The latest Macro Watch video considers the Fed’s no-win situation as well as how the Fed’s next moves are likely to impact the financial markets.
The Fed’s plans to launch Quantitative Tightening could suck $1 trillion of liquidity from the economy and the financial markets by the end of 2019. Such a radical removal of Liquidity would very likely cause interest rates to rise sharply, asset prices to crash, credit to contract and the economy to enter a severe recession or worse.

Economic growth and wage growth are weak and Consumer Price Inflation is below the Fed’s 2% target. So, why would the Fed undertake such a dangerous reversal of Monetary Policy now? The explanation must be that the Fed is worried that if it doesn’t act now, the asset price bubble will become so large that it will set off a new systemic crisis in the financial sector when it implodes.

Bubble Zone
Asset prices clearly are very stretched. The Wealth to Income ratio has never been higher. The Shiller CAPE Ratio has only been higher twice: before the great crash of 1929 and before another great crash at the time of the NASDAQ bubble.

But here’s the problem. Asset prices are high, but credit growth is weak. If the Fed tightens monetary policy to rein in asset prices, credit could begin to contract. Since credit growth drives economic growth that would throw the United States and the rest of the world back into severe recession.”

The Fed will be facing dangerous dilemmas from this point on. Extreme consequences and/or extreme interventions will become more likely soon.

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