From an interview in the Feb. 28, 2011 Barrons with Stephanie Pomboy, president of MacroMavens, a firm that analyzes macroeconomic trends.
"If you look at the combination of higher rates and energy prices, we are really now running at levels that we haven't seen since just going into the financial meltdown....
Starting in April, there will be another wave of ARM resets. We had this last year, but it was muted because rates weren't an issue; lower home prices were a drag. Today, both factors are relevant, as home prices have re-accelerated to the downside. At the same time, mortgage rates are starting to notch up. So the reset wave this year could be much more punitive to the economy generally and consumers specifically than it was last year....
Clearly, growth will slow....I don't see the ingredients for a durable recovery. To say that the economy looks fine, excluding the fact that we are not creating any jobs, strikes me as a pretty major "except." We need to create real income....
I expect that, at the end of June, unless you have had one of the two things I mentioned -- a spontaneous increase in consumer borrowing or an increase in job creation -- the Fed will be forced to extend QE [quantitative easing], because it needs to arrest this back-up in mortgage rates before it starts to get into those ARM resets. And it also needs to mitigate the blow from higher commodity prices....
So if I'm correct that the Fed is going to have to continue this program to protect the U.S. recovery from these threats of higher rates, and food and energy prices, it is kind of ironic that they are going to be pursuing more aggressive quantitative easing, even though that is really what is driving higher rates and commodities....
The Fed continues with QE, it begets more of the same result, which is just to continue to inflate commodities. Then what happens is that we see commodity prices rise until they reach the point that something breaks. And my thesis is that, during my lifetime, interest rates have always been the catalyst for a crisis....This time, however, higher commodity prices will be the catalyst....
The problem is that we serially try to reflate our way out of these problems, rather than taking the pain and letting the economy actually cleanse itself....
The best-case scenario -- and what Ben Bernanke is working really hard on and what hopefully will happen -- is that by inflating assets, even nominally, and getting the equity market to recover a lot of the ground that it has lost, high-end consumers will feel emboldened to go back out and spend. And since they really drive marginal consumption in the economy, eventually their spending will motivate companies to go out and hire and really feel better about expanding or believe in the durability of the recovery."
