economy fed inflation S&P 500

Booms Don’t Die Of Old Age, They Are ‘Murdered’ By The Fed

"So when you ask what the big risk is, the answer is"...

"So when you ask what the big risk is, the answer is"...
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4 comments on “Booms Don’t Die Of Old Age, They Are ‘Murdered’ By The Fed

  1. Within the Federal Reserve and in the financial community at large there is considerable debate as to what the Federal Reserve should do next. I think this debate can be characterized as those who want normal interest rates versus those who favor normal monetary policy. Those calling for a normalization of interest rates suggest that interest rates should be returned to somewhere near the averages that prevailed since the end of World War II. In contrast, normal monetary policy has been to raise interest rates when it is clear that unemployment is too low, too many people have jobs and that wages are rising so rapidly that an inflationary spiral is likely.
    Those in the normalization camp want the Federal Reserve to hike interest rates now. The arguments for immediate rate increases are varied. Some claim that monetary policy is either ineffective or we have gotten to a point where it is no longer effective or warranted. Some say that the recovery from the 2008 super-recession has been very sluggish with real GDP growth generally less than 2% on average. They suggest fiscal policy should now be used to boost growth, rather than monetary policy. That some of these same people also claim that the economy is strong enough for rates to be raised is puzzling.

    One argument for higher rates is that the current level of interest rates is allowing “zombie” companies to stay in business. Presumably, higher interest rates would prevent these firms from paying their debt service. I suspect that the shareholders and employees and possibly customers and residents of the communities where the zombie firms are located think that putting those firms out of business is not a good reason to raise interest rates. Another argument often used to advance the cause of raising rates is that this would give the Federal Reserve more ammunition to use to counter the next recession.

    Certainly, lowering interest rates are a primary way to increase economic activity and counter recessionary forces. The logic of raising interest rates now so that when a recession occurs later there is more room to lower rates makes no more sense to me than one saying that since losing excess weight is a known way to treat type II diabetes, someone should go out of their way to become more obese now so that they have more weight to lose when they develop type II diabetes. The fallacy in both those arguments is that just as obesity can cause type II diabetes, higher interest rates can cause economic weakness and recessions…”

    • Irb says:

      Just let the damn market set the price of money, ie., interest rates. Just like a central planner shouldn’t set the price of bread, they shouldn’ t set the price of money either.

      • Anonymous says:

        Exactly. Wherever central planners have controlled food prices, it has ended in tears. So will controlling the price of money. The market will have the final say, with central banks left in ruins. The more they distort prices from reality, the worse the final outcome will be.

  2. Paul says:

    Whoa! You’re letting them get away with 1929 crash was followed by monetary tightening?? The other way around methinks – which is highly relevant to now!

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