Kurt Richebächer is a heterodox economist who incorporates some Austrian concepts into his analysis. He has been a staunch critic of the lax Fed policy that has resulted in a series of asset bubbles and the obfuscation and obscurantism emanating from the Fed. In A Most Savage Credit Crunch, he looks at the impossibility of unwinding the bond bubble without some kind of crisis. Banks and speculators have been putting on the “carry trade”, borrowing from the Fed at the short end of the yield curnve and buying bonds. Now that the Fed is raising rates, eroding the profit margin in this trade, there exist no buyers in corresponding size to take on the positions.
Considering the huge amounts involved in the U.S. carry trade, we think that this bubble has, actually, become far too big to allow for orderly unwinding, by which we mean unwinding with moderate interest effects. Under the conditions created by the Fed, it was easy to create virtually unlimited leveraged buying of bonds on the way up. But there are few willing buyers on the way down.
In last week’s The Plug Factor (scroll about half way down the linked page to find the start of the article), Richebächer dissects some of the recent macro-economic statistics and finds that they do not support the Fed’s view of an accelerating self-sustaining recovery:
For us, this is a much too simplistic and superficial a view. Lost in the celebrations are the long-term costs of this recovery as manifested in the form of ever-mounting structural imbalances - namely record trade gaps, record levels of financial leveraging, record levels of personal indebtedness, a record-high budget deficit and rock-bottom national savings.
