The Markets Are Missing The Point: Rate Hike Will Cause A Deep Recession--That's The Whole Idea

Once again, the financial chattering class reveal how deeply they believe the financial markets are the center of the universe.

A basic point that seems to have escaped the Fed’s attention is that today’s everything bubble has been premised on the mistaken assumption that interest rates would remain ultra-low forever. By raising interest rates and committing to rapidly run down the size of its balance sheet, the Fed could very well trigger the bursting of those bubbles.

As occurred in 2008 after the US housing and credit market bubble burst, the bursting of today’s everything bubble certainly could precipitate a deep economic recession. That in turn might again unleash strong deflationary pressures in its wake that might again force the Fed to abruptly change course.

The implicit presumption is that a recession is intolerable.

A recession is painful. Potentially excruciating.

A recession is also necessary. A recession is the reset that restores price levels to equilibrium. A recession is the stiff dose of asset price deflation that brings Wall Street closer to the reality of Main Street.

Yes, interest rate hikes will produce a recession. That's the whole point (whether the Fed realizes it or not).