On Thursday, Federal Reserve Chairman Alan Greenspan did not give any clues as to when the Fed would stop raising rates. He only said, "we will probably know it when we are there because we will perceive a degree of balance we have not perceived before."Well, so far his perceptions have confused even him. (See yesterday's post).
On June 10-11, Treasury Secretary John Snow is going to play hardball with the Chinese at the Group of Eight meeting in London. Snow is expected to call the Chinese on the carpet about pegging their currency to the US dollar. This of course has been the main culprit of the soaring Trade Deficit.
If the Chinese remain defiant, then the US could take more drastic measures by labeling China as currency manipulators, and begin imposing trade tariffs on Chinese imports. How will the Chinese react ? How about halting their purchases of our Treasury bonds that have been financing our deficits and keeping a lid on long term interest rates.
If you rely on the mainstream media for your news you may have thought that Alan Greenspan controlled interest rates in the US. Believe me, its not Alan Greenspan who wields the heavy influence, its Chinese President Hu Juntao. China has the power to put our economy into a tailspin by pushing the sell button on their vast hoard of our Treasury bonds.
A spike up in longer term interest rates would drive a stake through the heart of our economy and the real estate market. For those of you who do not believe we are in a real estate bubble, read these comments from Atlanta Fed Regional President Jack Guynn :
There are some markets, especially in coastal Florida, where I have heard stories for more than a year about behavior thats got to be characterized as nothing other than speculation. It makes me very uncomfortable. Some buyers, some builders, some lenders, are going to get burned in some of these local markets.
According to Realtytrac.com, even in the current interest rate environment, foreclosure rates are beginning to climb. During March and April, Foreclosure Rates rose in 47 of the 50 states. During the same period, nationwide Foreclosure Rates rose by +19.6% which translates into a + 117.6% annualized pace over the last two months. In states where the biggest speculation is taking place, Arizona, Nevada, and Florida, All Three posted foreclosure rates that were 2 times the national average.
If Alan Greenspan does stop raising rates, it maybe because the Chinese are going to do it for him. Stay tuned.
Comments (1)
Maybe that's what Greenspan wants. But be careful what you wish for. It could be self mutilation for both the US and China.
Posted by alan | June 10, 2005 12:03 PM
Posted on June 10, 2005 12:03