Newsgroup: it.economia.borsa
Titolo: Per chi usa ancora il proprio cervello

Di seguito una autorevole opinione per chi ha il prosciutto sugli occhi
Ciao
Andrea
OPINION-The U.S. interest rate policy dilemma
By Chua Soon Hock, Chief Strategist, Sanwa Bank Singapore
SINGAPORE, May 6 - The Federal Reserve's interest rate policy is in a
bind as it contends with the twin phenomenon of low consumer price
index (CPI) inflation, but escalating asset prices in the form of equity
and real estate valuations.
In this policy dilemma, what should be the sensible approach to ensure
long-term economic growth without allowing the asset bubble to
develop further, threatening the global economy?
In examining factors contributing to the low CPI inflation in recent
years, strong competition in goods and services in the global
marketplace,
coupled with restrained domestic wages (not including employee share
options) have been significant.
However, another central but less publicised component has been the
overall strength of the dollar -- particularly against the yen -- over
the
past few years. This has fueled the economy with cheap imports,
industrial inputs and cheap yen financing through the interbank market.
It is the coming together of all three factors -- global competition,
restrained nominal wages and dollar strength -- which have allowed for a
sustained period of low CPI amid a spectacular bull run in asset prices,
especially the S&P.
Yet the current situation is unsustainable as continued dollar strength
will further increase the growing trade deficit with Japan and Asia,
expected to become a serious political issue by this summer.
This, coupled with a likely Japanese economic recovery, due to effects
of significant stimulative packages, is expected to exert strong
downward pressure on the dollar.
With the prospect of a weaker dollar around the corner, the likelihood
of continued low CPI inflation and foreign capital inflows is greatly
reduced. The Fed will in turn be forced to raise rates to stem outflows
as 43 percent of outstanding U.S. government debt of $2.8 trillion is
held
by foreigners.
Even assuming that the trade deficit issue does not come to the
forefront and the US dollar remains strong in the foreseeable future,
can the
Fed ignore the rising asset prices and focus its interest rate policy
solely on low CPI inflation?
Such a course of action has an alarming and nearly identical precedent
in the spectacular Japanese bubble economy of the late 1980's that
ended in early 1990.
Between 1986 and 1990, Japan was faced with strong yen, low CPI
inflation and soaring asset markets -- just as in the United States
today.
The BOJ was too slow to curb lending and asset prices, leading to
extreme leverage and the subsequent Tokyo stockmarket crash.
Today, the low CPI is fuelling sky-high investor confidence in the
United States, resulting in highly-leveraged stock and bond trading,
excessive lending, property speculation and strings of mega-mergers.
CPI viewed together with asset inflation would give a more accurate
picture of overall inflation in a modern society.
To argue that retirement funds invested in high share prices, together
with high housing costs, do not affect actual purchasing power now and
in the future is to ignore reality. Housing and the management of
retirement funds are probably the two items with the biggest financial
impact
on any U.S. household today.
The Fed will find it extremely difficult to pour cold water on a great
bull run in which everyone is seemingly getting rich. The greater the
bubble,
the more numerous the self-interests -- especially from Wall Street
brokers -- seeking to perpetuate the status quo.
Yet short term, sectoral interests should not be allowed to overwhelm
long-term considerations, or sober realities.
The truth is that this party is due to end. The longer the drunkeness,
the more painful will be the hangover. The current parallels with events
leading up to the Crash of 1929 almost 70 years earlier are ominous (see
Footnotes).
It is time for the Fed to appreciate the perils of the current highly
leveraged situation and act now to prevent a calamitous crash as
occurred in
1929 and Japan in 1990 -- before it is too late.
The Fed should move to gently restrain the excessive levels of bank
lending and rein in the exuberant bull market. The writing is on the
wall:
record PE ratios, faltering earnings, and still soaring stock prices.
The psychological money game has gone too far.
Moderation is the theme for the moment. Otherwise, the dreams of yet
another generation may well be crushed. Can lessons be learnt, or will
the 90's close out with the same old story of greed and despair?
                      FOOTNOTES:
    In the 20's                   90's Equivalent
    -----------                   -----------
1.  radio & movies                computers & multi-media
2.  Radio Corporation of          Microsoft
     America
3.  Goldman, Sachs & Company      Goldman Sachs
     (bull on market)              (bull guru, Abby Joseph
                                   Cohen)
4.  extreme bull market           Dow has rallied 40% since
     psychology                    Greenspan's "irrational
                                   exuberance" remark
5.  popular President - Herbert   popular President - Bill
     Hoover (before crash)         Clinton (immune to scandals)
6.  mass retail participation     more than $3 trillion in
                                   mutual funds
7.  equity/bond boom              equity/bond boom, plus
                                   megalomaniac mergers
8.  Florida property boom         property boom in major United
                                   States cities
9.  communications revolution     multimedia revolution
     (Brave New World)             (New World Order)
10. "Everybody ought to be rich"  "Nothing could go wrong -
                                   America is number 1, and the
                                   only Superpower"
(Note - The opinions expressed in this article represent the views of
the author only. They should not be seen as reflecting
 
 


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