Fed and partial default

Bill Gross had a great sound bite at Forbes' annual investing roundtable:

I don't know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

Washington's Blog

Is it possible for the Fed to maintain negative real rates?

Sure, if the Fed has the cooperation of the economy in generating negative real growth. Producer margins will drop as producer inflation exceeds consumer inflation.

 Chart from Zero Hedge

Zero Hedge watches producer sentiment index. This one show how the net percentage of produces who have a positive outlook on profitability. The positive view keeps being revised downward. Once it heads down it needs 4-6 months to cause a reversal in growth.

First to adjust, consumer or producer?

I have gotten this wrong, and will likely get it wrong again.  Which one moves first?
The consumer and retail end have shorter inventory cycles than producers.  During the crash I thought it was the consumer, during the minidip in early 2010 I thought it was the producer.  I still have to work this out, but Econobrowser (Jim Hamilton) is hopefully on the case.   My guess is that we have a learned channel, consumer and producer have been through this twice during the downturn,  both producer and consumer reacting simultenously.

The answer remains, when the Fed wants negative real interest rates then within six months it will see negative real growth.