Thursday, April 29, 2010

Unless the Fed does something stupid...



In my previous post I pointed out that the national debt has risen 13-fold in the past 30 years and interest rates have gone from 20 percent to zero. Yet despite this unequivocal proof that there is no connection between the so-called "debt" and rates, all of mainstream economics and the media continue to warn that spiralling debt will cause rates to spike.

They are flat out wrong...

Unless...

...the Fed does something dumb, like raise rates on the belief that rising debt will create a need to "attract capital."

I wouldn't put it past them. (Doing something dumb, that is.)

If you listen to Bernanke's recent remarks about the need to reduce the deficit and "fiscal sustainability," it appears that he, too, doesn't understand that it is the Fed--and the Fed alone--that determines rates. (You'd think he'd understand this by now after the historic exercise in rate reduction that has occurred by his own hand! Amazing!!!)

So when the idiots at Moody's S&P and Fitch downgrade America's credit rating (and believe me, they will!) the Fed's reaction to this could easily be to raise rates on the belief that they need to do that to attract capital.

This would set in motion a rate increase cycle of who-knows-how-high proportions. Not a pretty sight.

In contrast, a Fed that understood its role as rate setter, would counter the rating Agencies' credit downgrade, by pushing rates down to zero and keeping them there until everyone very clearly understood that the rate was going nowhere north of that level.

No...better yet...if the Fed were really smart (like, if it were run by me!) I'd wait until all the lemming fools shorted Treasuries on a credit downgrade, then I'd bury them all once and for all by pushing rates down to zero. Get rid of all the cockroaches at once!!

4 comments:

Tom Hickey said...

Mike, based on several things that Bernanke has said publicly and the actions of Fed to manage rates, both short and long, I don't see how the chairman could be ignorant about this. Ergo, he must be being disingenuous. It looks to me that he is on the "fiscal discipline" train not so much for economic/financial reasons as moral ones.

Or else, he is really, really stupid.

Matt Franko said...

Mike/Tom,

here is a link to Bernankes short speech at the Fiscal Commission on Tuesday.

I attended the Fiscal Sustainablity Counter Conference at GWU in DC on Weds. It was great to get together (in person!)to hear presentations from MMT experts in more formal setting with a small audience of folks of similar thoughts and even some who were new to MMT but were objective and willing to learn more.

One fellow drove all the way from Chicago to attend, another guy drove from NYC who I talked to.

But compared to the Govt Commission and Peterson juggernaut, MMT still has a lot of outreach to go...

Matt

Mike Sandifer said...

Great comments Mike. I'd like to see these short sellers bombed too.

Why hasn't anything been done about these big three rating agencies? They played a key role in develoing the housing bubble, profiting from overly friendly ratings on MBS and related derivatives. Why should these guys be listened to at all?

I recall what happened to Arthur Anderson after the Enron scandal broke, yet companies like these are left able to do business as usual.

I think it's time to outlaw financial conflicts of interest altogether.

sws165@psu.edu said...

How incredibly arrogant, misguided, reactionary, and outright illogical your comments are, Mike. With this logic, why wouldn't you just keep rates at zero forever? Aren't you worried about hyper-inflation? Aren't you worried that people's savings would be annihilated? How can you think that printing more money is the answer to these problems?
Mike, there are only so many goods in this world. Sooner or later, some other countries are going to want their share. At that point, it doesn't matter how many US dollars you have because they won't buy anything.
Please admit that your Keynesian paradigm is false, and accept the futility of arguing against the truth. I promise the exercise in humility will be truly liberating. You will be happier for it.