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20 Jun 2013
Flash: Bubblenomics - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes that each of the three significant financial bubbles of the last 30 years has been fueled by the Fed keeping policy rates below the nominal growth rate of the economy for far too long.
When comparing Nominal GDP and The Fed Funds Rate, he sees two conflicting issues. The first is that current policy is creating market and economic distortions just as past periods did. The reaction to taper talk in EM, commodities and volatility shows where bubbles have been inflated. He writes, “This is the most powerful argument in favour of the Fed taking the first baby-steps on the path away from super-easy policy.” The second issue is that nominal GDP growth is slowing - 3.4% y/y in Q1 2013 after a post-crisis peak at 4.5% a year ago. Juckes adds that SocGen economic forecasts look for a re-acceleration from here. He writes, “The Fed may not need evidence of a return to ‘old normal’ growth or signs of a re-acceleration in CPI or wage inflation to justify tapering. But nominal growth does need to turn a bit higher.”
When comparing Nominal GDP and The Fed Funds Rate, he sees two conflicting issues. The first is that current policy is creating market and economic distortions just as past periods did. The reaction to taper talk in EM, commodities and volatility shows where bubbles have been inflated. He writes, “This is the most powerful argument in favour of the Fed taking the first baby-steps on the path away from super-easy policy.” The second issue is that nominal GDP growth is slowing - 3.4% y/y in Q1 2013 after a post-crisis peak at 4.5% a year ago. Juckes adds that SocGen economic forecasts look for a re-acceleration from here. He writes, “The Fed may not need evidence of a return to ‘old normal’ growth or signs of a re-acceleration in CPI or wage inflation to justify tapering. But nominal growth does need to turn a bit higher.”