Excellent, excellent article. Hey, Sidewinder, GB’s found a voice that wants to have savers and higher interest rates in a deflation!:
Woohoo! The Gospel According To Sidey finds new adherents every day. By this time next year I’m gonna make like L Ron Hubbard and start me own religion
Bow your heads and repent brethern, and remember that God needs €100 sent to this address…
Gerard Brookes of brookesnews.com has been preaching that for ages. Savings, investment, accumulation of capital. Not credit consumption. Consumption is destruction of capital.
Two things strike me:
- The Fed in 1930 was right to raise interest rates. It was lowering them again and again that was wrong. It may be that currency devaluation was required, but with the gold standard, it was surely possible to repeg gold as Roosevelt did. So it would be possible to inflate your way out without having to touch interest rates at all.
- If the Fed really wants to micro manage money supply, then surely they should leave the nuclear weapon of interest rates alone and do quantative easing and quantative tightening instead? Knowing how much money they are putting into the market or taking out, they could manage the money markets at a much finer granularity and with far fewer side-effects than smashing interest rates in one direction or another (after all, the reduction from 1% to 0.25% was a 75% reduction in the cost of money)? After all, isn’t QE/QT the fiat equivalent of repegging the gold standard?
By Quantative easing I mean the direct purchase of bonds from the US Treasury by the Fed. By quantative tightening, I mean the selling of bonds by the US Treasury on the open market with the proceeds going to the Fed’s balance sheet where they are either kept for later QE or destroyed.
Oh I’d agree, there are much more effective ways to manage the money supply than mucking about with interest rates on this scale. The other problem with the sledgehammer approach is that interest rate movements can take up to 18 months to feed through to the real economy, and you can never be entirely certain in which industrial sectors the changes in behaviour will manifest themselves.
Interest rates should be set once every 6 months with an eye to maintaining real rates at around 2.5%. That’s it. End of story.
They should use a mix of QE/QT; and regulation/tax to encourage/discourage certain forms of lending. That way you have as you say a much finer control over both the amount of money in the system and where that money is likely to end up. The aim should always be to encourage real wealth creation via savings - which in their turn get directed towards productive capital investment.
No point in flooding the system with liquidity if it all just sloshes into Yet Another Bubble in multicoloured widgets. And basing an entire global economy round the creation and destruction of pointless disposable Latest Fad bling is just stupid.
Unfortunately, the generation in charge have I think been indoctrinated by the simplistic analyses of the Chicago School since the early 70s and by this stage simply aren’t capable of seeing past interest rates to consider the other tools at their disposal. They’ve spent 40 years denying the other tools even exist. It’s a matter of religious faith with them now, essentially.
When all you have is a hammer, everything looks like a nail.
So should we post this thread to Herr Steinbruck, Herr Weber and Monsieur Trichet
It’s a shame all the monearist slogans are too long to spray paint on the front of the central bank.
It’s over two hundred years since Adam Smith said that the natural rate of interest is 5%.
No-one is claiming to have invented the concept. It’s just time it was reintroduced…