www.armstrongeconomics.com
QUESTION:
Hi Martin, I have been reading your blog with interest for six years
now and recently I subscribed to Socrates. Thanks for all the insights.
I have a question regarding the repo crisis and interest rates.
Socrates correctly predicted the start of the repo crisis back in
September. When will the Fed give up or scale back intervening in the
repo market? When do you/Socrates expect rates to rise as you have been
predicting?
Thanks.
W
ANSWER:
The Fed is trapped. It cannot exit the repo market or else short-term
rates will rise sharply. By lowering rates when the credit risks are
rising, we create a real nightmare for the Fed. Credit risks are rising
as many fear that some will be unable to make debt payments and
states/provinces will suffer sharp declines in tax revenues. All of this
points to rising interest rates — not lower rates. We have a real
paradox forming here which is a completely new nightmare scenario all
because of the ECB and BOJ are trapped into negative interest rates
which have undermined the entire Keynesian Model.
The Fed cut rates but the market6 still crashed. This is reflecting the underlying collapse of Keynesian Economics.
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