Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Is the Winner of the U.S. Presidential Election - 31st Oct 20
Gold and Silver Prepare For Another Price Advance - 31st Oct 20
Gold Is Likely to Win This Election - 31st Oct 20
Why Trump Can Still Win 2020 Election - Establishment Mainstream Media Wrong Again? - 31st Oct 20
Why Budgies Need their Own Feeders - Parakeets Feeding UK - 31st Oct 20
Can Trump Still Win? US Presidential Election Forecast Matrix 2020 - 30th Oct 20
Why a Biden Win will Keep Metals Prices Rocking - 30th Oct 20
Is Silver the Next Bitcoin? - 30th Oct 20
A New World Monetary Order Is Coming - 30th Oct 20
Do These Explanations Make Sense for This Intraday Stock Market Turn - 30th Oct 20
US Presidential Election Forecast Matrix, Stock Market Uncertainty - 29th Oct 20
Stock Market Turning? Look For These Support Levels - 29th Oct 20
Silver: A Conceivable Dead-Cat-Bounce on the Cards - 29th Oct 20
Stocks are Strong but be Aware of this Continuing Pattern - 29th Oct 20
The Most Profitable Way To Play The Gold Boom - 29th Oct 20
Why You Should Hire An Accountant To Complete Your Tax Return - 29th Oct 20
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Greatest Danger to the US Economy is the Fed

Economics / US Interest Rates Feb 11, 2008 - 02:56 AM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleAs I have said a number of times, the real economic problem that confronts the world today -- and that includes the US -- is lousy economics. Bernanke has made it clear that he follows fallacious line that it is the role of central banks to manipulate interest rates. We now have Charles Plosser, Philadelphia Fed President, stating that Bernanke's "aggressive rate cuts" will put the US on a growth trend of about 2.7 per cent by 2009. However, he claims that "if something can tip us into recession, the housing market is the biggest risk".


So why is Plosser comparatively sure about his growth figure? One reason could be the fact that the Fed's target rate is now below the 10-year bond rate. This means that the yield curve has turned positive. It needs to be understood that interest is the most important price in the economy. There is not a single factor of production that is free from its influence. It is the means by which the supply of capital is equalized with the demand for capital and then allocated through time, so to speak.

Like any other price, interest is a market phenomenon. Now if you were to suggest to Plosser or Bernanke that they should try to control the prices of houses, cars or televisions they would rightly laugh at you. Yet the very same learned men think they can control the price of time, which is what we call interest. In a pioneering work Knut Wicksell wrote in 1898 that

[i]t is important to notice that the long-term rate of interest (the bond rate of interest) must correspond somewhat closely to the short-term rate of interest (the bank rate of interest), or at any rate that a certain connection must be maintained between them. It is not possible for the long-term rate to stand much higher than the short-term rate, for otherwise entrepreneurs would run their businesses on bank credits -- this is usually feasible, at any rate by indirect means. Similarly it cannot stand lower than the short-term rate, for otherwise most capitalists would prefer to leave their money at the Bank . . . (Knut Wickell, Interest and Prices , Sentry Press New York, 1936, p. 75)*

Wicksell was absolutely right. He fully understood that forcing the rate of interest below its market rate sent out a false signal to consumers as well as producers. That this misbegotten meddling leads businessmen and consumers to make spending decisions that are unsustainable appear to be beyond the ken of central bankers. Misled by the artificially low rate of interest businessmen make unprofitable invest decisions because they think the supply of capital goods are being increased. Likewise consumers are also deceived with respect to such durable goods as houses and cars.

In the last couple of articles I explained how a cut in the rate of interest from 4 per cent to 3 per cent can result in a massive increase in the demand for credit. For example, if the maximum amount a couple could afford to borrow for a house was $300,000 at 4 per cent then by cutting the rate to 3 per cent the Fed would raise the couple's borrowing capacity to about $400,000. The same process applies to cars. This is because their heavy expenditure causes these consumer goods to share some of the characteristics of highly durable capital goods.

It should go without saying that for the interest rate cut to take effect potential borrowers should be sufficiently confident that the interest rate will remain low, at least for sometime. This returns us to Plosser's view that the "housing market is the biggest risk" the US economy is facing. But as we have just seen, changes in the demand for housing are directly linked to the Fed's manipulation of the interest rate. That Bernanke, Plosser and other Fed officials apparently cannot see this means that the biggest risk to the economy is the Fed itself.

Bernanke has been accused of continuing to implement Greenspan's "stop-and-go policies". What these critics have not grasped is that "stop-go", as it was called in 1950s Britain, are the result of monetary manipulation. Cutting interest rates stimulated credit expansion which in turn created balance-of-payments problems and "overheating", at which point the monetary brakes were applied. Critics are correct in noting that this policy disrupts long-term investment plans. Yet the same critics believe that using monetary policy to stabilise the price level will provide the necessary environment for business investments. They are blind to the fact such 'stabilisation' schemes are themselves inflationary.

The Fed seems to believe that with the right monetary management it can successfully maintain aggregate demand. As far as the Fed is concerned problems only emerge when aggregate demand exceeds supply. But this is to say no more than monetary demand has risen faster than output. Monetarists argue that keeping monetary demand equal to output will keep prices -- meaning consumer goods prices -- steady. Supply-siders emphasise the need for tax cuts to expand aggregate output, not realising that -- as the classical economists rightly put it -- supplies constitute demand. What has been lost to mainstream economics is the fact that this economic identity is severely disturbed by the kind of monetary policy well-intentioned monetarists and supply-siders promote. As always, the end result is recession.

*Wicksell was apparently unaware of the fact that Henry Thornton's An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802) contained the same conclusions.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules