As I pointed out recently in Interest rate reality check I agree that it will be quite a while until rates normalize. The analytical criterion is of course when the ratio of monetary base to GDP returns to longer term averages, which would require the ratio to drop to about 25 percent of its current level of ~0.22.
One way for this to happen would be for the Fed to charge off all the bad debt it is hiding for the banking system, and to stop paying them interest on fictitious reserves.
I don’t know how bad the debt in the monetary base is—no one does, even within the Fed, apparently—but this (absent a huge increase in GDP growth) is what would have to happen. And as base has been growing at >20 percent annual rates and GDP at… well, you know.
John Hussman deserves credit for saying that it is the illusion of solvency created by FAS 157 that has sustained the (stock market) recovery.
Will the Western banks do this? Not a chance. The Fed and ECB seem determined to kill their economies and start another world war.
Another indication that the big tiger may leapfrog us is Jim Rogers’ assertion that the PBOC is actually requiring banks to charge off bad debts. A sharp contraction followed by really robust growth (after a couple of years) would be the implied forecast.
Even Barry Ritholtz is questioning whether FAS 157 should remain in place.
But it won’t matter, if the Fed keeps buying up and hiding all the bad debt, will it? Thanks Alan, thanks Ben. Martin Armstrong says his sources in the big “banks” (i.e., Goldman et al., the hedge funds stealing money from the American people via the discount window and Fed largesse in general) tell him the Fed is saying they’re only going to bail out depositors next time—which is exactly what I said they should have done last time, which would have let the system clear and avoided a hell of a lot of moral hazard—and to get their trading risk models tuned accordingly.
We shall see. I hope Janet is up to the task.