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Wishing Upon A Star
If you read the weekly (it's in your inbox, and it's also here), you probably noticed the r-star discussion came up again.
I've done my best recently to demystify and, more importantly, contextualize, the debate around the long run neutral rate.
This is going to be more topical going forward and, indeed, the recent run of hot US economic data underscores the notion that it's becoming more urgent virtually by the week, if not by the day.
In the weekly, I quoted Bloomberg's Cameron Crise, who's
Another conclusion is simply that the relationship between inflation and interest rates has changed from when most economic theories were written.
If that is so, what further good will come from raising interest rates even higher? So far, the impact on inflation has has been outweighed by the collateral damage to Main Street. This is observable rather than a theoretical outcome from some model.
So why should we expect a different outcome if the rates tourniquet is tightened even further??
“Doctor! The patient has not improved after we bled him. Should we try something else perhaps?”
“Nonesense! We just need to apply more leeches. Everyone knows that bleeding is the only cure for gangrene.”
Do you believe the relationship between rates and inflation has changed? If rates were immediately moved to say 20%, I think the US economy would come to a halt and inflation would head down quickly. Please note I’m not advocating anything remotely like this.
I’m only speculating here but the pandemic liquidity spigot and de facto helicopter money was unprecedented. It’s possible that this “excess” money is still be sopped up by rising interest rates that need to rise further than anybody thought a year ago to truly tame inflation.
In fact, of course, the great lord Darth Volcker did exactly what you suggest, pushed rates quickly to 20% (prime rate based on funds rate of 18%). We didn’t all die. I was in the bottom 50% paddling like mad but I got richer so what the heck.
Collateral damage to Main Street? What are you referring to?
Housing affordability for those not in a position to pay cash. Same for autos. No positive impact on Healthcare costs. And, do higher interest rates do much to reduce food prices??
“When the only tool you have us a hammer, all problems look like a nail.”
“… what further good will come from raising interest rates even higher?” Well, borrowers will be punished and savers will be rewarded.
Ah yes, the old fable of “the Ant and the Grasshopper.”
Of course, I am delighted to see trust funders and others blessed with inherited wealth receive a higher rate of return on their savings.
But beyond the annoited ones, what percentage of Americans have more savings than debt outstanding? Or significant savings for that matter?
I’m amazed we have enjoyed such political stability.
Such as it is.
I haven’t had debt for 40 years but I buy it and it provides much succor for my portfolio (closeup of the twinkle in my eye).