Posted on 07/30/2019 8:23:38 AM PDT by Kaslin
Suddenly, nearly everyone wants the Federal Reserve Board to cut interest rates. I've been arguing for this for nine months, so it's nice to see the economic intelligentsia is finally persuaded. The Fed has become a restraint on growth since last August thanks to ill-advised interest rate increases (and promises to raise rates more in 2019), which slowly squeezed out of the economy dollar liquidity and tanked the stock market.
Fed Chairman Jerome Powell is finally signaling a rate cut by 0.25 of a percentage point next week. This almost certainly will be accompanied by a reduction in the interest rate the Fed pays banks on reserves. That policy has reduced bank lending and shrunk the money pool as well. The stock market has reacted bullishly in anticipation of this decision to inject the economy with more dollars. The Fed's primary job should be price stability with minimal inflation, but for many months now, inflation has fallen below its standard target.
What is bewildering is that so much of the analysis for why the Fed should cut rates is upside-down. The New York Times editorial board and others argue that a slowing economy demands easier money. But that's outmoded Keynesian illogic based on the belief that money causes growth. It doesn't. In the 1970s, the Fed tried to juice growth with inflationary money injections; we got less growth and more inflation. But excessively tight money can choke growth, too.
The reality of the Trump economy is a lot different than the easy-money crowd thinks. Yes, it's true that the trade war and global economic sluggishness has slowed domestic growth here at home. The U.S. growth rate surged to more than 3.5% last summer with no signs of inflation to be found. Now, we are at closer to 2% to 2.5% growth, and some of that is due to excessively tight money.
There are all sorts of market signals of tight money. Commodity prices are still 5% to 10% below where they were this time last year. The consumer price levels have been close to 1.5% -- which is below the Fed's target. I don't want inflation, but the bigger threat right now in some markets is deflation.
There are many other warnings of tight money. Nominal GDP has contracted from last year. And consider the change in market indicators today versus last August, before the two rate hikes happened. Last year, the interest rate on the 10-year Treasury was 3.1%. Now, it is closer to 2%. This is a sign of declining inflation expectations. Even more amazing is that the five-year Treasury Inflation Protection Securities spread, which is one of the best forward-looking measures of inflation, has fallen from 2% to 1.6% over the last year. This means the market is betting on inflation of well below where the Fed wants it. Time for dollar liquidity.
Trump is battling a culture of limits to growth at the Fed. The president is correctly shooting for 3% to 4% noninflationary growth in the economy (as was laid out in the economic plan we put together back in the 2016 campaign), but most economists at the Fed and in academia believe this is an impossible dream. They think 3.5% real growth -- stoked by tax cuts, deregulation and domestic energy production -- will only accelerate inflationary impulses. Wages under this model have to be kept under wraps to avoid wage-push inflation.
No. Policy changes that promote the production of goods and services don't cause inflation. If anything, more output leads to lower prices. That happened in the Reagan years, when the economy boomed and inflation fell from 12% to 3%. Ronald Reagan proved high growth and stable prices can peacefully coexist. This happened in the Clinton years as well, when federal spending was cut dramatically.
Of course, the Fed should always keep a watchful eye on inflation, and if it rears its ugly head, the rate cuts and other liquidity measures should cease. But the limits to growth skeptics are wrong. This Trump economy has the capacity to grow north of 3% for years to come. Sorry, Elizabeth Warren, there is no recession or financial crisis around the corner unless the Fed mistakes like last year steer us over that cliff.
The Fed has become a restraint on growth since last August thanks to ill-advised interest rate increases (and promises to raise rates more in 2019), which slowly squeezed out of the economy dollar liquidity and tanked the stock market.
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The Federal Reserve manipulated short term rates to be much higher than what the market would charge. They justified the damage to the economy with their incorrect premise that economic growth causes inflation.
One thing to consider is can the increase in growth be absorbed by the entire populous? The growth currently is increasing in rates that the entire group can work with. Catching up to an inflated economy without the tools required by too many creates a further split in the wealth and drags the middle class down into the lower class. This is a weapon of the liberals to maintain their control: dependency.
An economy can’t be allowed to run loose as it will run over itself and harm the growth. You don’t sit down to one meal, you eat three a day, spread out, plus some snacks. Patience, neither Rome nor a strong economy was built in a day. And as Thomas Tusser said, a fool and his money are soon parted.
And we didn’t get to this state in two years, it took over thirty. Advance slowly, there are always those quick to harm. Compare the housing debacle to this, too much, too soon. Also compare a gold rush. Of the few that actually made it, many perished trying. A little doesn’t go a long way, it only goes for it’s worth. And then it’s gone. We have a long way to make this inflationary economy Trump inherited a reality, so slow and steady is the safest way. We’ve come a long way safely, so don’t panic because it is under control. And we have a business man at the wheel, not a politician.
rwood
Printing money creates monetary inflation which leads to inequities in the economic system.
BS. Stopped right there. Our tariffs are not slowing OUR economy down. They are hurting the Chinese.
You are soooo wrong.
Workers have such little economic bargaining power to increase wages due to unbridled immigration and off shoring of manufacturing ( wealth creation ) that there is very little chance of inflation. Very little chance at all.
I agree if we are talking wage inflation. Most certainly medical services, food, and other basic necessities of life have inflated far ahead of wages - most definitely since 1975.
Wrong? Just historical.
If the economy grows faster than it has capacity to, prices will rise quickly and things become more expensive. Economic growth is measured in terms of gross domestic product (GDP). Opening up the market for the uncontrolled access of the populous will incite this false and un-natural growth at an extreme rate without a governor on it. If GDP growth starts spiking above 4% for several quarters, it means there is an asset bubble. In the business cycle, the phase that follows expansion is the peak. If nothing is done, and the economy goes past that peak, the economy will go into recession. And it will force the rates right back up, and maybe higher than originally.
The latest example of this is the housing debacle that caused the recession in 2007/8. As homeowners lost equity in their homes triggered by initial artificial rate lowering and which increased sales by those who never should have been in the market trapped by an adjustable loan, it forced a cutback in spending as they could no longer take out second mortgages as they had reached their bubble, or gone beyond. This affected thousands of households that had come in at lowered prime rates loans Over time, it caused foreclosures at an incredible rate. It was the initial trigger that set off the Great Recession. Banks lost money on the complicated derivatives that were based on underlying home values. According to cnn money in 2008 alone U.S. foreclosure filings spiked by more than 81%, a record, and were up 225% compared with 2006. A total of 861,664 families lost their homes to foreclosure in 2007 alone, according to RealtyTrac,
Without a controlling device to stop the inflation of the economy at an uncontrolled rate of use, way too much questionable like in the early 2000’s, we will slide back into a recession and lose the gains we have made. It is apparent the populous won’t do it as that has been proven, so the rate must be protected. You can’t let the inmates run the asylum. They will run it into the ground. It’s happened many times.
rwood
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