Tags: Trump Administration | regulatory | easing | fed | bubble

Trump's Regulatory Easing Might Force Credit Bubble to Pop

Trump's Regulatory Easing Might Force Credit Bubble to Pop


By    |   Tuesday, 14 February 2017 07:10 AM

Today, we get to hear testimony from the Fed Chairman Janet Yellen on matters of interest.

The markets principle concern is still with the timing of the next Federal Reserve rate increase. With what we know so far, it’s still difficult to believe the Fed is going to raise rates in March, and it’s not probable that the Fed Chair would be so direct as to communicate that today during her testimony. Of course, you never know…

On quantitative policy, there is a discussion about scaling back the balance sheet of the Fed more rapidly than the current organic tightening is achieving at least.

If more emphasis is placed on tightening by quantitative policy than there is less pressure on Fed funds.

On regulation, the Trump administration has asserted that the regulation of banks is holding back vital credit creation.

US credit creation has been averaging around 6 percent growth in the recent past and anything that would accelerate credit growth above that rate might be considered a bubble by the Fed.

If regulatory easing were to encourage a bubble, than the Fed may feel the need to tighten more aggressively on other policy measures.

The Fed Chair may feel the need to communicate that fact today. So, let’s wait and see.

In the US, the Senate has confirmed the nomination of Steve Mnuchin as the new Secretary of the Treasury, which will put an end to the informal grace period for the Trump administration for currency chatter.

Maybe it could be helpful to remind that Mnuchin stated at the end of January in a written response to a Senator’s question about the implications of a hypothetical 25 percent dollar rise: “The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America …  From time to time, an excessively strong dollar may have negative short-term implications on the economy.”

Chinese consumer price (CPI) and producer price inflation (PPI) were higher than anticipated with CPI at a near six year high of 2.5 percent year-on year (y/y) while PPI accelerated to 6.9 percent y/y, which is the largest rise since August 2011.

Investors could do well remaining cautious about these numbers because it’s obvious these data were distorted by the Chinese lunar new year that always creates comparison problems.

Over the last 20 years or so, Chinese inflation has had only a minuscule impact on consumer prices in the rest of the world as China’s exports, and notwithstanding they are important, stand at present at $1.51 trillion, while remaining below US exports that stand at $2.14 trillion, but that shows the numbers represent only a small part of world GDP that for 2016 is estimated at $75.2 trillion.

That may be being reflected, to some degree at least, in Washington now as the Wall Street Journal reports that the US administration is trying to find ways of referencing China’s currency without upsetting the Chinese and avoiding the issue of branding the country a currency manipulator.

Under the plan, which is being assembled by the White House’s new National Trade Council, the commerce secretary would designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China and if that would be the case, U.S. companies would then be in a position to bring anti-subsidy actions themselves to the U.S. Commerce Department against China or other countries.

To refresh our minds, it was in 1994 that the Treasury last labeled China a currency manipulator during the Clinton administration.

Over in the EU we got German GDP numbers showing an expansion of 1.20 percent in the fourth quarter of 2016 over the same quarter of the previous year. German annual GDP growth rate averaged 1.37 percent from 1992 until 2016.

Italian GDP expanded 1.10 percent in the fourth quarter of 2016 over the same quarter of the previous year, which is significantly below its annual average growth rate that was at 2.45 percent from 1961 until 2016.

In the UK, the Consumer Price Index CPI decreased to 101.40 in January from 101.90 in December while the factory gate prices for goods produced by UK manufacturers (PPI) increased by 3.5 percent on the year to January 2017, following an upwardly revised 2.8 percent rise in December, which shows that the effects of the weaker sterling continue to fall more heavily on corporates than on consumers.  


Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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If regulatory easing were to encourage a bubble, than the Fed may feel the need to tighten more aggressively on other policy measures.
regulatory, easing, fed, bubble
Tuesday, 14 February 2017 07:10 AM
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