The Fed’s recent decisions are part of a new effort to conduct monetary policy in the absence of “shocks.” This is the newest vision of monetary utopia that will permit the Fed to expand money and credit, be the lender of last resort, and maintain the world dollar standard, without having to face any negative consequences. The Fed is in for a shock of its own. [Full Text]
Source link: http://archive.mises.org/2218/the-myth-of-shock-free-monetary-policy/
The Myth of Shock-Free Monetary Policy
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The US Credit Boom set in motion after the recession of 1991 continues. Nothing yet has been able to bring it down. I believe that the inevitable recession has not yet arrived, and that it will not be over until the current account as a % of GDP is back to positive as in all other recessions post Bretton Woods.
Will the Central Banks allow the boom to end? It seems they are determined to push the US dollar monetary and credit system to the limit. The Asian central banks are willing to inflate to maintain the US credit boom. This is why foreign dollar holdings rise exponentially. Because the dollar is irredeemable, there is no mechanism by which these creditors can temper further credit growth. If the world sells dollars who buys?
Americans have no Yen, Euros, or Yuan. Therefore, the $US is destined to become a hot potato. All they can do is sell dollars to each other, or exchange dollars for US financial assets.
The malinvestments caused by the US credit boom are global. For example, China and the rest of Asia ramp up production to meet US demand fuelled by the credit boom. Europe, Canada, and the OPEC countries are flooded with dollars, too. They can not help but to shift investment to meet US credit induced demand.
The liquidation of malinvestments resulting from the US credit boom ending would touch virtually every market. Faced with this reality the Boom is nurtured and supported from all sides.
The Federal Reserve is determine to fight all enemies with more money. The 1930s Depression was the result of a tight Fed, they claim. Will the Fed allow this Boom to end? They know it means a severe recession and possible depression. This is not a possibility for them, so the only alternative is more credit. More credit pushes the system towards the Crack Up Boom which leads to a depression. Does the Fed have a real choice?
The War on Terror further complicates the situation. The international division of labour can not be maintained without peace. Peace is not on the mind of Bush or Kerry. The post Bretton Woods world has not faced a global war. I wonder if this is the real wild card? The USA is not Autarkic, in fact it has never been more far from it. The US does not even produce to pay for exports. $48 billion/month is the latest trade defict. $48 billion/month is how much the USA depends on the world to support of standard of living.
The War on Terror and the US credit boom do not mix.
Greenspan and Bernanke are the puppets. Milton Friedman is evidently the puppeteer.
Harry
I have read your article with a lot of interest. I believe your article should go hand in hand with an article published in “Sanders Research”. That article is titled: “The Negative return economy: a discourse on America’s black budget”.
In a nut shell if one stands back and takes a breather from all of this reading, reality comes through loud and clear. Truth is the Federal Reserve (which is not part of the Federal Government) runs the country along with their money supply which is funneled through a lot of channels. The end result is in my opinion makes little difference what the rate of interest is as long as the economy is moving in the direction they want. If it hits a hard place the rates come down and if a little pain is the order of the day, then rates go back up. Bottom line is always profits and control.
Austrians place a great deal of emphasis on the Fed but one could argue (http://www.hussmanfunds.com/html/fedirrel.htm) that since the early 90′s they are becoming less relevant as the rampant credit expansion/money supply is being generated by the free market. Lower/no reserve requirements, derivatives, hedge fund industry etc. are all results of less government intervention.
This somewhat undermines the Austrian’s confidence in the free market which seems in large part to be responsible for many of the ills we are supposed to believe are the fault of the Fed.
I suppose a riposte would be that in a gold backed currency, neither the Fed or the free market could take us to these extremes but this does not answer the observation that the blame for our current predicament should fall increasingly on the free market, the very forces of which we are meant to rely in absence of a Fed.
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