Curves Rhyme, Too

People have started to look back fondly upon the Asian flu. It was a global disaster, a dollar shortage which spread all across mostly Asia but not exclusively. The reason why it is talked about positively nowadays is LTCM and rate cuts. Popular myth has it that Greenspan’s Fed properly handled any economic fallout due to the former by enacting the latter.

Beginning September 1998, faced with “overseas turmoil”, the FOMC began a series of only three rate cuts. According to convention, this saved the US economy from sharing the same fate as Japan, Thailand, or perhaps Russia. LTCM was thereby rendered little more than a footnote, a weird curiosity (even though it shared so many of the same characteristics as Bear Stearns and Lehman Brothers).

In mainstream Economics, this is called the “soft landing.” Confronted by weakness, our best and brightest monetary stewards spring into action thereby, as Economists proposed in the eighties, filling in the troughs without shaving off the peaks. While the rest of the world experienced rough recession, Greenspan’s genius kept us to a mild slowdown.

A soft landing.

About two years later, toward the end of 2000, there was only talk of the same thing. Economists not only believe there is no good in recession, they really had thought by that point the modern central bank was the perfect vehicle to ensure there would never be another one. Academic papers talking about banishing the business cycle were rather trendy.

By 1999, Greenspan’s Fed began seeing an inflationary boom ahead. The unemployment rate was low and threatening to go below 4%. The stock market was booming, as was, importantly, the real economy. Rate hikes began and continued into the year 2000.

By the spring and summer of 2000, the US economy started to show signs of weakening. The Federal Reserve continued to push ahead anyway, clinging to their inflation risk scenario no matter the data. Among the most concerning was a determined shift in eurodollar futures – which by June 2000 had already started to bet against Greenspan.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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