Why Fed’s Role as Fiscal Shock Absorber Is Ending

[specuvestor]

Bank are like wholesellers. Not getting your widget at gross or wholesale price does not mean cost of input is faked. That's where disintermediation comes in, from MBS to REITS to your bulk purchase.

Since neo-monetarism, conventional wisdom is interest rates should track inflation for long term sustainable growth. Hence the concept of NAIRU. Ask EU under Trichet why he refused to cut rates even as EU economy tanked. The short term money supply and cost of money will form the basis for future inflation AND interest rates expectations. They are intrinsically linked. Not even Keynes or Hayek would argue otherwise, differing only in the mechanism.

Going forward REAL interest rates, as understood by the majority, would not be between 2-4% as in the 90s, because growth in the OECD is significantly curbed. That is the basic tenant of why Bill Gross of PIMCO coined the "New Normal".

In another thread I have stated that people overestimate the impact of Fed unwinding because the Fed can just let them mature, unlike "perpetual" securities like equities. Nonetheless the impact of Fed NOT buying bonds for QE is likely to be greater than Fed unwinding by letting the assets mature.