Posted on 08/25/2006 12:45:28 PM PDT by Toddsterpatriot
There are "wealth effects" associated with higher interest rates themselves, assuming your assets are allocated in a manner to benefit from them.
When Carter was President I sensed that troubled economic times were coming and paid down as much of my debt as possible and came out of it pretty good. Warned my co-workers that they should do the same. Some of them made a lot of money with the high interest rates and some lost almost all they had.
It was a rough time for a lot of people but you are right. We did survive it.
I'm not an economist and probably wrong but I just don't see those days ahead of us at the present time.
Dims can wail all they want in 2006 and 2008 but this old guy is still going to vote Republican. I figure about 2 more election losses by the Dims and some of them will be jumping off tall building in frustration and I want to be around to see it.
The Federal Reserve Bank of New York is a good enough resource for me.
Federal Reserve Bank of New York
Fed Funds Rate Aug 1986 was 5 7/8 - Dec 1987 was 9 3/4.
1997 is more complex. In the face of disinflationary Federal Budget surpluses the Fed tightened to HOLD RATES UP. Recall that Chmn. Greenspan made the "irrational exuberance" speech in Dec. 1986. Reading the Annual Report of the Fed for 1997, one can see that, even though Fed Funds stayed in a range of 5 1/4 to 5 1/2, reserves declined approximately 30% during the year.
Both circumstances are evidence of Fed tightening.
Thanks for the link.
Fed Funds Rate Aug 1986 was 5 7/8 - Dec 1987 was 9 3/4.
You misread, Aug 1986 was 5 7/8, Sept 1987 was 7 1/4. Not much of a tightening cycle. The Dow managed to rise 46% over that period.
Reading the Annual Report of the Fed for 1997, one can see that, even though Fed Funds stayed in a range of 5 1/4 to 5 1/2, reserves declined approximately 30% during the year.
I couldn't find that report. Link?
Yes, I did - should have been December 1988, an extension of the same tightening cycle.
Believe me when I tell you I remember 1987 as if it was yesterday. As I recall, having served as a Merrill Lynch Account Executive throughout the '80s, the DOW declined approx. 11% between December 86 and March 87, resumed its uptrend to a peak in July (at a backward P/E approaching 28x), fooled around in August and September, then entered the crash of October.
The Bond market began its collapse in the Spring of 1987. Within mere days after the May treasury auction the price bid for newly-issued bonds had declined more than 10% from the par issue value. I recall a ML trader noting over the Squawk Box late one afternoon in September that "retail clients are hitting the bit on the 30-year (Treasury Bond) at 10%." That is, the bond market had entered a steep decline, and individuals were selling their bonds in a panic (and that we should buy from the suckers).
After the truly alarming action of the 4th quarter 1987 - including the 22% decline of Oct 19th - corporate profits continued to rise, and the market steadily rose until the summer of 1990.
A downloadable copy of the 1997 Annual reort can be found here
The chart of reserve balances throughout 1997 is on the bottom of page 5.
As the old saying goes, economists have predicted 21 of the last 2 recessions.
Your source had a small math error. In December 1988, Fed Funds hit 8 3/4, not 9 3/4. So you blame the Crash on the tightening cycle? I didn't realize a 1 3/8 rise in Fed Funds can cause a 22% drop in the Dow. How much should a 4 1/4 rise make the Dow fall?
The chart of reserve balances throughout 1997 is on the bottom of page 5.
Thanks. That doesn't look like a 30% drop, maybe 10%. Now how is a 10% drop in required reserve balances to blame for the collapse of LTCM?
And if a drop from $60 billion to maybe $54 billion in 1997 is bad, the $20 billion in total balance requirements at the end of 2004 must be a total disaster.
Bingo
+
The Fed will not lose to inflation - it will keep raising its target rate until it gets ahead of perceived inflation - and at the margin something will break.
The doom-sayers' bet is, somewhere, sometime soon, a major institution will not be able to roll over its short-term borrowing line and will become "frozen." Looking back we will call that a "crisis."
Will it be Ford? Fannie Mae or Freddie Mac? A private mortgage lender? An insurer or re-insurer unable to settle claims after the next natural disaster? Gasoline at $4.00 in the Midwest?
Will some emerging nation nationalize energy or basic materials industry or default on external debt? Hedge funds chain-fail? Consumer mortgage borrowers who have some sort of floating rate loan or who have borrowed all the available equity against an unrealistic appraisal declare bankruptcy? Who knows?
The world will go on. Markets will recover. But ill-prepared investors and over-leveraged borrowers will make bad decisions out of fear and desperation. Better to be safer and more liquid and have nothing happen than to be on the wrong side of an overly aggressive portfolio.
Hilarious!!
Looking back we will call that a "crisis."
It's nice to be able to look at a crisis and blame a Fed tightening cycle. Not always correct, but nice. And funny! Like I said in post #57.
“You know it’s said that an economist is the only professional who sees something working in practice and then seriously wonders if it works in theory.” —Ronald Reagan
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