Will NZ interest rates go up?

reed's picture
Submitted by reed on Sun, 2011-07-31 22:43

Economists here say NZ interest rates will go up next yearish but I can't see why.

I have heard some reasonable arguments for the US interest rates going up but no arguments (reasonable or otherwise) about NZ interest rates.

I'm hoping Darren will answer this but I'm happy to hear from others too.


( categories: )

Re: the Fed

darren's picture

I believe the main argument for a central bank, at the time, was based on the idea that issuance of commercial bank notes by private commercial banks had to be made "uniform"; i.e., commercial banks -- all of whom practiced fractional-reserve banking -- ought to inflate their currencies uniformly. Thus, a cartel of banks would be created, and to ensure that no member would leave, government was brought in to keep the group cartelized.

Re: Christina Romer and Keynesianism

darren's picture

http://cafehayek.com/2011/08/q...

Recently overheard at the Cafe Hayek blog site -- the following post by Hayekian economist John Papola:

What I will say is this. We could imagine a way in which a Keynesian-like policy is enacted which is at least better.

During recessions: cut taxes

During booms: cut spending.

Romer’s work (when she wasn’t in government) suggests that Tax cuts are better “stimulus” and they also rely more on decentralized knowledge, so that’s better. Spending cuts are always good because government is a wasteful resource destroyer and the more we take away from it, the less destruction it will cause.

Maybe even I could call myself a Keynesian if THIS were the policy.

Alas, though, the sheer fact that Romer had to shill for a policy that went against her own life’s work is more proof that Buchanan is right and Keynesianism is corrupting when put into practice.

John Allison

gregster's picture

nice explanations

Doug Bandler's picture

So, in essence, producers are borrowing capital that doesn't really exist!

That was a very nice and clear explanation of how the Fed distorts capital accumulation and savings. What were the arguments for the existence of the Fed that were given in the early 20th century? Did the politicians want a mechanism to finance a welfare state? (My guess.) Or was it that they believed that "unhampered capitalism" didn't allocate funds "correctly"? How did they sell this whole Ponzi scheme? Isn't that what it is?

Regarding the Classical gold standard, I completely agree that it was far superior to anything that replaced it. And of course I wish we still had it.

@ bandler

darren's picture

Ron Paul has often talked about limiting the powers of the Fed and eliminating its ability to control the Fed Funds rate; ie to manipulate interest rates.

That's the same as saying "End the Fed." The Federal Reserve is simply a gov't-maintained cartel of banks. Its very purpose is to impose a rate of interest that differs from "Originary Interest", which is the social rate of time-preference existing amongst individuals in an economy. "Time Preference" determines the "savings rate", i.e., the ratio of preference for present goods over future goods -- the greater the preference for present goods, the higher the time-preference, the higher the rate of interest (and vice-versa). By imposing an artificial rate of interest (through pumping new money into banks), the Fed fools producers into believing that consumers have, aggregately, lowered their time-preference, and have decided, aggregately, to consume less and save more. When such a change in time-preference happens on the part of consumers voluntarily, the new, saved funds that producers can now borrow from banks exactly equals that wealth that consumers COULD have spent on immediate consumption but refrained from doing so. E.g.: consumers have $100 they COULD spend, if they wished, on immediate consumption wants; instead, they decide to spend only $50 immediately, and the remaining $50 they deposit in savings accounts. Obviously, banks can now lend $50 to producers who wish to start what they perceive as profitable enterprises. The $50 producers borrow exactly equals the $50 consumers decided not to spend. That's what normally happens in an unhampered economy. What the Federal Reserve mechanism does is to flood banks with new money, which has the same effect on the rate of interest as a real lowering of consumer time-preference would have . . . except that consumers have actually NOT changed their time-preference; they're still consuming and saving at their old rate. So, in essence, producers are borrowing capital that doesn't really exist! What happens is that consumers and producers now engage in a "tug-of-war" for the same amount of real capital . . . an amount that is smaller than the amount producers actually need to complete their new projects. What happens to an enterprise when it runs out of capital to complete projects it has begun? It goes bankrupt; it lays off workers; it liquidates what it can. Isn't this what happened in the last recession (and the one before that, and the one before that)? Yes. (The above is actually a thumbnail sketch of Austrian Business Cycle Theory or ABCT.)

So if Ron Paul is saying that the Fed should not have the power to manipulate interest rates, then he is simply using very genteel language to say "Just kill the damn thing." There's no reason for the Fed to exist at all if it can't tinker with the interest rate.

Even as early as the mid-1970s, Hayek was utterly pessimistic about the monetary situation in the west. In his view, the best way out of the mess was incrementally: repeal the Legal Tender laws, which mandate that people accept Federal Reserve Notes as payment for debts. The Treasury would still print US dollars, but people could now demand that they be paid in alternative currencies or in a commodity like gold or silver. The idea is to allow competition in the means of exchange. I agree with Hayek that this is probably doable, and it wouldn't require a politically difficult step like dissolving the central bank. The Fed could continue to inflate if it wanted to, but people wouldn't be forced to accept those inflated dollars. I'm not sure how payment of taxes would work under this system, which is why a necessary second step, I believe, is (i) to repeal the 16th Amendment (i.e., abolish the personal income tax), and (ii) cut taxes across the board and greatly simply the entire thing -- preferably going to a flat tax. I actually believe this second step is doable, too; it's just that no politician of any stature has made it into an issue.

Re the Ricardian gold standard:

This is actually referred to as "the classical gold standard", and while it's not perfect, it did an admirable job for almost 100 years (about 1815-1914) of preventing massive inflations and deflations. It doesn't attack the thorny issue of fractional-reserve banking -- commercial banks can still lend out more commercial notes than they have gold on hand -- meaning, there can still be some inflation, some deflation, and therefore, some business-cycle activity; but in general, it kept governments in check from ruining their own currencies. The beauty of the classical gold standard was that all national currencies -- all of which were paper, of course -- were, nevertheless defined objectively as a certain weight of gold. Thus, a paper currency called "the dollar" was defined as 1/20th of an ounce of gold; a paper currency called "the pound" was defined as 1/4th of an ounce of gold; a paper currency called "the franc" was defined as 1/100th of an ounce of gold; etc. (the ounce unit is just an approximation. I believe the actual unit used at the time was the grain). The fantastic advantage to all this was that, despite different nationalistic names for currencies, everyone was really using the same currency, defined as different fractions of a unit weight of gold.

The basic mechanism of how this all worked was actually first noticed by another British classical economist: David Hume. Briefly, what happens is this: as a government inflates its paper currency while engaging in international trade (call it country "A"), the trading partner (who, let us say, is not inflating its currency, and call it country "B"), which, of course, holds "A's" currency and is prepared to re-spend it back in "A", notices that prices are rising in "A" and that, therefore, the currency it's holding is dwindling in purchasing power. Obviously, it doesn't like that. Consequently, it's going to start buying some of the gold reserves in "A" because gold, being the actual backing of the paper currency, will NOT have increased or decreased its quantity, so its purchasing power will have remained constant. What the citizens of "A" notice, of course, is that its gold reserves are flowing out and disappearing. Obviously, they won't like that; so, political pressure can be brought to bear on "A's" government, by "A's" citizens, to stop inflating. This relationship between an inflating paper currency and the leaking out of gold reserves as a consequence was named by Hume "the price-specie flow mechanism."

As I say, it performed admirably during the longest sustained period of more-or-less unregulated capitalism from about the end of the Napoleonic wars (circa 1815) to the start of serious statism in Europe at the start of WWI (1914). The US was forced off the gold standard by FDR, who even criminalized private ownership of gold (with the exception of jewelry, dentistry, and some industrial uses). As you may know, FDR even ordered the construction of a "Gold Depository" -- Fort Knox -- to store gold that was stolen from US citizens.

The US never went back to a classical gold standard, and, of course, neither did Europe. We were on and off a kind of hampered gold standard that was permitted for big international trades only; and different hampered arrangements were attempted after WWII, designed by Keynes & Co. during the big monetary conference at Bretton Woods. That all broke down by the early 1970s. Richard Nixon (bless him) finally gave the finger to Europe and the rest of our trading partners by making a big televised speech in which he claimed he was going to "close the gold window" -- in other words, we would inflate away, Europe, et al., would not be able to redeem their dwindling dollars for our gold, and they could simply go ahead and sue us if they didn't like it. Yes, good old Richard Nixon.

After that, Milton Friedman's ideas on completely unbacked "floating exchange rates" were tried. They failed. Other ideas were tried. They failed. So, at present, international monetary policy is basically a mess.

We should be so lucky as to return to a simple policy like the old price-specie flow mechanism under a classical gold standard!

Darren

Doug Bandler's picture

More econ goodness coming from you. You utterly dismantled the "trade deficit" nonsense which is gospel to pretty much everyone today - both Leftists and sadly Conservatives (like Trump for example).

Let me ask you this. Ron Paul has often talked about limiting the powers of the Fed and eliminating its ability to control the Fed Funds rate; ie to manipulate interest rates. There is constant debate amongst O'ists and Austrians about the best way to end central banking. One camp argues for a Ricardoan gold standard while the other is arguing for a complete denationalization of the currency. Is either of these possible if we were to get some Tea Party President (a fantasy I know)? Resiman also has a proposal out there on how to end the Fed's control of the money supply but it has met with resistance from both O'ists and Austrians.

Returning to a "gold standard" is apparently not an easy task given our currently socialized currency.

Loaded question

gregster's picture

It would be interesting to imagine what a principled Austrian would do as Fed Chairman if it were ever possible for one to be appointed.

A principled Austrian wouldn't last long in the position because he would need to close the Fed down and allow private banks to issue. I think.

@ bandler

darren's picture

It would be interesting to imagine what a principled Austrian would do as Fed Chairman if it were ever possible for one to be appointed.

Unlikely. Even when Mises himself was once asked "What would you do if you were granted the power to be Absolute Ruler" he replied "I'd resign!"

And Bentham (I think) once said "Political economy: so much for a man to know; so little for him to do."

Probably the best we can hope for is to elect a principled pro-Austrian politician -- e.g., Reagan, who was an admirer of Hayek -- who will install someone he can control -- like Paul Volcker. When Reagan demanded that the Fed do whatever was necessary to reverse the double-digit inflation we had under Carter, Volcker complied. Additionally, a major tax cut helped revive employment, so Reagan was able to cut inflation and unemployment at the same time.

@ everyone

darren's picture

http://www.bloomberg.com/news/...

Policy makers this month pledged to keep their benchmark interest rate near zero until at least mid-2013 and also said they “discussed the range of policy tools” available, signaling they may add to their record stimulus.

Still, Bernanke’s decision to pursue the rate pledge signaled he may expand record monetary stimulus, with or without the full support of his fellow policy makers.
I really hate to say "I told you so", but . . .

@ reed

darren's picture

Understood. But the ruling Keynesian/mercantile philosophy now in control is not interested in propping up a falling US dollar; proponents LIKE a weak dollar because it functions as a de facto subsidy to our export industries (making them artificially competitive against foreign producers who might just be more efficient at producing the same goods). It makes our exports appear to be cheap compared to similar good produced by foreign countries.

The fallacy here is that it's somehow better for the US to export more goods than it imports; and this, itself, is based on the more fundamental fallacy that by exporting goods (rather than importing), foreign trading partners are "spending more money in our economy than we spend in theirs." Completely false.

Value trades for value, on the individual "micro" level, and on the big international "macro" level. Exports ultimately pay for imports; there's no way around it. In the final analysis -- as I'll show below -- Total Exports = Total Imports. This has to be the case, unless we're talking about a situation in which one country simply steals goods and services from another. Obviously, that's not going on here.

Let' say you and I sit across from each other at a cafeteria. We represent two countries that trade with each other -- say, China and the US. We each have one of those rectangular, plastic cafeteria trays in front of us. The trays represent the economy of each country. The trays, however, have a raised piece of plastic that divides them into a left half and a right half: the left half says "Consumption Goods" and the right half says "Production Goods." The consumption goods half is filled with finished goods: food in retail stores, clothes, toys, cars, lightbulbs, cigars, booze, etc. The production goods half is filled with the various kinds of tools needed in the production of all the stuff in the left half: real estate for farms, farm livestock, agricultural products, textile machinery, etc.

You get the idea.

Suppose I'm the US and you're China. An American housewife in the midwest learns from her neighbor that Chinese-manufactured disposable diapers (let's call them "Pampers") are available at Wal-Mart for half the price one would have to pay for a similar product manufactured in the US. Obviously, this is good for her. Stocking up for several months, she spends $100 on Chinese-made Pampers at her local Wal-Mart. That's a finished product on the left side of the US tray. What happens to that $100? After going through a number of middle-men (whom we'll ignore for the sake of simplicity), it ends up with the Chinese producer of those diapers in, e.g., Shanghai. He now holds that housewife's $100 and it's on the left side of the Chinese tray. Now, what can he possibly do with it in China! Nothing! Can he spend that $100 in Shanghai on food for himself and his family? No. US dollars aren't accepted as a medium of exchange in Shanghai. Can he buy things for himself and his family in Beijing? Again, no. Where's the only place he can spend that US$100? Obviously: back in the US. He can, of course, go to a currency-exchange and "buy" Chinese yuan with those dollars . . . but why would the guy who runs the currency-exchange be willing to part with yuan in exchange for US dollars? Obviously, because HE wants to spend those US dollars back in the US . . . or he knows someone else who will, e.g., give him Swiss francs in exchange for those US dollars because HE, in his turn, would like to spend them back in the US. Willy-nilly, that $100 will be spent back in the US or it won't be spent at all.

So let's stick with the idea that the Chinese diaper producer will re-spend that $100 back in the US. Suppose he and his family just love US-made candy -- e.g., they love Tootsie Rolls (an American-made consumption good, residing on the left side of the US tray). However, he doesn't want to spend all $100 on Tootsie Rolls; he spends only $50 dollars on that finished consumption good, and he spends the other $50 on buying stock in the Tootsie Roll company -- in other words, he INVESTS $50 in a production tool -- corporate stock -- that contributes to the production of FUTURE Tootsie Rolls. What the US sees on its cafeteria tray is: $50 returning to it from China, sitting on the left side of the tray (consumption goods in the way of finished, ready-to-consume Tootsie Rolls) and $50 returning to it from China, sitting on the right side of the tray (production goods in the way of corporate stock, contributing to the future production of Tootsie Rolls).

Question: hasn't the entire $100 originally spent by that midwestern housewife been returned to the US from China? Yes. But the arrangement or pattern of spending has changed: she spent $100 in the left side of China's tray; the Chinese producer re-spent that $100 in the US but split his spending into both consumption goods and production goods. So, ultimately, what she paid for as an import was exactly balanced by what we exported . . . it's just that we exported BOTH a finished product and some tools (i.e., corporate stock).

So far, so good?

Now, here's the big joke: Because of the way international trade is reckoned by accountants in the field, the complaint is made that, because we spent $100 completely on the left side of the Chinese tray, and China only spent $50 on the left side of the US tray, they declare that the US has a "$50 trade deficit." (!!!) Obviously, they're simply choosing not to include the right side of the tray in their accounting. They actually have their own names for the two sides of the tray that sort of obfuscate the economist's insight that the tray is ONE tray and that it doesn't matter how many little compartments you divide it into; it's still ONE tray (one indivisible economy). Trade accountants call the left side "Current Accounts" and they call the right side "Capital Accounts." Using this nomenclature (in this example), they would say "The US has a Current Accounts deficit of $50, but it has a Capital Accounts surplus of $50."

Therefore, a so-called US "trade deficit" simply means that China has chosen to re-spend some of the money the US spent on their finished consumption goods on the US's "tool box" -- real estate, stock, bonds, machinery, R&D, etc. -- rather than re-spend all of it on finished US-made consumption goods.

For some reason, this kindergarten-level logic is LOST on Keynesians and other mercantilists, who believe that we must artificially boost "exports", by which they almost always mean finished consumption goods. There are several ways of doing this -- none of them good -- such as tariffs, quotas -- including, making the dollar very weak in comparison to the trading partner's currency. What that does is to create the illusion that the other guy's currency is "strong" and leads foreign purchasers into believing that US goods are "cheap", i.e., "competitive."

The general name for this sort of monetary strategy, by the way -- in which each country tries to undercut the competitiveness of the other by weakening (also called "undervaluing") its own currency -- is called "Beggar Thy Neighbor." You can find references to this name at decent sites like "Investopedia" and probably "Wikipedia" too. Ultimately, the policy is inflationary -- China, for example, is following this policy in order to make Chinese-manufactured goods appear less expensive than they really are. China has a nasty surprise coming in the way of a huge inflation -- probably much sooner than western pundits realize. China's probably hoping that it can "produce its way out" of an inflation -- in other words, have such high productivity that their own consumer prices will stay about the same rather than soar. The problem is: they DON'T have such high productivity; they're just starting to catch up to western standards in terms of productivity, and they are still way behind average productivity of the average wage-earner in the US. They also have a huge, bloated welfare-state they have to contend with: guaranteed retirements, etc. I'm not bullish on China at all, though I think it's great that they've adopted capitalism at least to some limited degree. Anything's better than Mao's "Cultural Revolution" catastrophe.

I actually agree with Mark Steyn on this issue: I believe that China will grow old before it grows rich.

Anyway, I was just using US/Chinese trade as an example to illustrate the fallacy of "undervaluing" one's currency in order to boost exports for the sake of acquiring a "trade surplus" (and BTW, lots of people are unaware that the US ran a so-called trade surplus during the Great Depression. Did it help our economy? Did it create private sector jobs capable of re-hiring the 25% who were unemployed for 10 years? No!). It's actually an old, old mercantilist fallacy, but like most mercantilist fallacies . . . it just never seems to die permanently.

Bernanke & Greenspan

Doug Bandler's picture

The funny thing is that I truly doubt Bananaking personally believes Keynesian theory. He's a Ph.D. in econ at Princeton, and like most academic economists, especially at the Ivys, he's a mainstream neoclassical guy: he was weaned on theorists like Alfred Marshall and Irving Fisher. Same can be said for the two economists who recently resigned from Zero's "Council of Economic Advisors", Larry Summers (of Harvard) and Christina Romer (of UC-Berkeley). They don't believe Keynesian nonsense and probably never did. They believe (and teach) neoclassical nonsense, but that's a different issue.

Interesting. Then it would seem that Bernanke is like Greesnspan in that whereas Greenspan abandoned his Austrian/Randian principles when he became Fed Chairman, Bernanke abandoned his Neo-Classical principles upon becoming head of the Fed. Perhaps its unavoidable. To even accept such a position is to crave political power and prestige. Today, the Fed Chairman is expected to finance the American welfare state by manipulating money and credit. Keynes' theories were seemingly designed for that. Thus a Fed Chairman has no choice but to become a Keynesian. It would be interesting to imagine what a principled Austrian would do as Fed Chairman if it were ever possible for one to be appointed.

Darren - I remember the

reed's picture

Darren -

I remember the rationale now - it was suggested that the US would raise interest rates to prop up the falling US dollar.

@ bandler

darren's picture

The funny thing is that I truly doubt Bananaking personally believes Keynesian theory. He's a Ph.D. in econ at Princeton, and like most academic economists, especially at the Ivys, he's a mainstream neoclassical guy: he was weaned on theorists like Alfred Marshall and Irving Fisher. Same can be said for the two economists who recently resigned from Zero's "Council of Economic Advisors", Larry Summers (of Harvard) and Christina Romer (of UC-Berkeley). They don't believe Keynesian nonsense and probably never did. They believe (and teach) neoclassical nonsense, but that's a different issue.

No, I think that one is expected to become a Keynesian the moment one gets a position -- especially a high-level one like "Fed Chairman" -- in government. Keynesianism is based on the idea that markets experience inexplicable cyclical "systemic failures", and that the only way to correct these failures is through highly pro-active government intervention. Obviously, government bureaucrats LIKE this idea, as it makes them look like heroes (especially in their own minds, which is probably the only thing that counts with them).

I always think of Keynesian policy as a big sponge -- squeezing out or soaking up -- held by the big hand of government: if people inexplicably get spooked into reducing their consumption spending and increasing their personal savings rate, government comes in and "squeezes the sponge", i.e., SPENDS, in order to make up for the public's reduction in "aggregate demand." Conversely, if people are spending too much, and inflation results, government again comes in and uses its sponge to "soak up the excess demand", i.e., RAISES TAXES or RAISES INTEREST RATES.

You can see that no matter which way the spending goes -- up or down -- government sees itself as the corrective mechanism. The theoretical justification for this intervention is provided by Keynesian theory.

Bernanke and James Taggart

Doug Bandler's picture

It risks having to admit that the entire theoretical setup of Keynesian intervention is simply wrong.

They can never admit that. Their entire psychologies would collapse. These Keynesian lies have survival value for types like these.

It reminds me of the way Ayn Rand described James Taggart in AS. He would always have nightmares of a long dark hallway with a door at the end, and it was a door he feared to ever open. He was terrified of what he would find there. That door was his soul and when he opens that door at the end of the novel, he discovers that his worst nightmares were real - his soul was empty and dark. His lifelong lies had been exposed and it was at that point that he loses his mind.

Bernanke has the same psychology.

http://www.latimes.com/busine

darren's picture

http://www.latimes.com/busines...

The U.S. economy has officially been out of recession for two years, but fear of falling back into the abyss has dogged the recovery every step of the way.

Now, the prospect of recession no longer is a fringe view.

"Recession is not inevitable, but I think there's better than a 50-50 chance now," said Bill Gross, the respected investment chief at bond fund giant Pimco in Newport Beach.

Stock markets worldwide have been ringing warning bells since late July, as share prices have plunged in the steepest pullback since the 2008 financial-system crash. The Dow Jones index sank nearly 600 points combined on Thursday and Friday and slumped 4% for the week, its fourth straight weekly decline.

Given that stocks are crashing without the Fed raising interest rates, why would the Fed raise interest rates? The Fed traditionally raises interest rates when stocks appear to be "overheating" the economy, not when they're stone cold.

If the US slips back into recession -- meaning, if there are at least 2 consecutive quarters of negative growth -- you can bet that the Fed will perform more "quantitative easing." But I don't see it raising interest rates: it's trying to encourage people to borrow-and-spend, not discourage them.

Continuing with the article from the Los Angeles Times:

Still, by the standard measure of growth — gross domestic product, or the total value of goods and services the economy produces — the U.S. has been rebounding since the third quarter of 2009, after the deep recession that began late in 2007.

Actually, the US as a whole is beginning to screech to a halt with recent GDP of 0.4% -- locally, however, some individual states are doing pretty well. Texas, for example, has a GDP that is more than seven times the national average. Lots of people are leaving their home states to move to Texas -- especially Dallas -- in search of jobs.

Even as growth slowed in the first half of this year, analysts were quick to blame the deceleration on what they believed would be temporary factors: auto-plant shutdowns after Japan's devastating earthquake in March, for example, and the spike in oil prices amid widespread social unrest in the Middle East and North Africa.

Mind-boggling. If auto plants shut down in one part of the world, demand for cars will flow into other parts of the world. If the orange crop fails in Florida, demand for oranges flows to other parts of the country, or other parts of the world. It most assuredly does not cause some sort of general economic slowdown. That's ridiculous. As for oil prices, I love the double standard: If oil prices internationally rise, well, then, that must be the cause of a US slowdown in its economy; however, if oil prices rise in Texas, then that MUST be the explanation for the vibrant uptick in Texas's economy! We must NOT credit governor Rick Perry for a successful economy in his state -- it's just HIGH OIL PRICES!

Love it.

@ Reed

darren's picture

"Local economists on Monday forecast a modest rise in interest rates as stocks fell on the first day of trading since Standard & Poor's Rating Services downgraded U.S. debt, expressing pessimism about policymakers' ability to avoid a long-term fiscal crisis."

Thanks for the link. Frankly, I don't understand the author's first sentence (quoted above). Normally, we would expect a rise in interest rates when stock prices begin to skyrocket. The latter is seen as the sign of a possible "bubble" or sign that the economy is "overheating" with the inevitable result of inflation. To try to brake the threat of inflation, the Fed will raise interest rates . . . which itself can cause stocks to tumble (i.e., it "pops" the economic bubble, as happened in the housing market bubble when Greenspan raised interest rates).

As I see it, so long as the Fed is unconvinced that "aggregate prices" are rising -- the Keynesian notion of inflation -- they will not raise interest rates.

The main reason Ben Benananking won't raise interest rates is that, to do so, puts egg on his face (and egg is so difficult to comb out of that nice beard). It risks having to admit that the entire theoretical setup of Keynesian intervention is simply wrong. It would mean admitting that an easy money policy of near-zero interest rates does NOT translate into growth and increased employment.

The fact that raising the Fed Funds rate can crash the market does not mean that stocks can't crash for other reasons despite low interest rates. The stock market is already crashing without interest rates going up. I think Bananaking will only risk increasing interest rates IF he gets data convincing him that there's a threat of inflation.

The fact is this: with 2 multi-trillion dollar quantitative easings (printing money and injecting it into the financial sector) by the Fed, commercial banks in the US are flush with liquidity. The reason there's no inflation -- yet -- is that people aren't borrowing this new liquidity and spending it. The main reason they aren't borrowing it and spending it is regime uncertainty: they don't know what sorts of higher costs via Obamacare, Cap-and-Trade, more bailouts, etc., will hit them in the future. Ironically, that's probably a good thing! It's sort of funny in a dark, sadistic way: it's precisely the uncertainty brought about by Zero's social engineering policies that, for the moment, is preventing inflation from rearing its ugly head. Unfortunately, the uncertainty he's created and helped to sustain is also responsible for the continuing high unemployment. For example, although corporate profits in the US have, in general, made a healthy comeback since the start of the recession, corporations are still not hiring despite complaints of being understaffed! They need new employees and are ready to hire them -- but they won't, until they have more confidence in their economic future.

Reed

gregster's picture

A higher dollar/stronger currency is never a problem. It means that every imported good is cheaper. It can be rode out successfully and is not to be looked upon as a negative.

Bernanke is in thrall to a failed economic theory. Just as Greenspan thought he could keep his political masters happy by continuing low interest, easy money, so too does Ben Shalom Bernanke. This and this alone causes the current share market price bubble, and it's all smoke and mirrors.

That doesn't mean to say there cannot be money made on the gamble in the downturn. It's what to bet and when to jump.

Gold is at an all time high 0f $1900 and it's being said it will hit $5000 an ounce.

You're correct - Bernanke seems to have a priority above and beyond the good of the citizens - and raising interest rates will cause a drop in the share market, which the Fed has been artificially propping up for years.

I can't recall where I heard

reed's picture

I can't recall where I heard reports about US interest rates going up, probably on the radio. I posted this question before Bernanke's announcement. But here's a US story about rates going up.

I imagine low US interest rates will keep NZ rates from being raised. The rationale being that the Reserve Bank considers a high NZ dollar bad for exports.

Am I correct to think that Bernanke is avoiding raising interest rates because raising rates will cause a drop in the share market?

No joking here, but . . . . .

darren's picture

No joking here, but . . .

. . . have you really heard that US interest rates will go up? Where have you heard that? My best info at the moment is that Ben Bernanke (whom my friends are now calling "Ben Bananaking" since he appears determined to turn us into a banana republic) will keep interest rates at, nor near, 0%. The Fed wants to blow up another financial bubble as a way of dragging us out of our current economic doldrums. The facts are these:

Americans, in general, are saving more -- that's a good thing, and the proper, rational, reaction to the recent collapse. They're saving more because they understand (if only instinctively) that the key to their individual, future economic wellbeing, is to pay off debt. The gov't wants to encourage them to spend more and acquire more debt -- that's why they're forcing banks into an "easy money" policy. The problem is this: Americans ain't buying it! Banks have money to lend, but people aren't borrowing. Probably the main reason for this is that most people -- including, of course, individuals who own businesses -- see nothing but dark clouds of uncertainty in the foreseeable future. For example:

ObamaCare -- how will that affect my bottom line, and what additional costs of production will that impose on me? Answer: no one really knows. Businessman's Response: I won't hire more people (even if I'm short-staffed at work). [BTW, ObamaCare is currently going down in well-deserved flames, and has been explicitly declared unconstitutional by a number of federal judges. It hasn't yet gone to the Supreme Court, however. If -- when -- it does, we'll have to keep fingers and toes crossed that they kill it completely. We'll see.]

Cap-and-Trade -- how will that affect my bottom line, and what additional costs of production will that impose on me? Answer: no one really knows. Businessman's Response: I won't hire new people or expand my business.

More "quantitative easing" (i.e., printing money) by Ben Bananaking and the Fed -- how will that affect my bottom line? Most likely it will raise prices, but WHICH prices? When? Where? Answer: no one knows. Businessman's Response: I'll sit tight for the moment.

"Soak the Rich" policies -- how will that affect my bottom line? WHO will be defined as "rich"? Answer: no one knows, since the entire thing is obviously a desperate attempt at scapegoating by the left. Businessman's Response: I'll sit tight.

Etc.

So everyone in the US is waiting for the present "malaise" to pass . . . which is the same as saying that we're all waiting for Obama & Co. to leave.

I actually do not know the particulars in NZ -- frankly, you guys and gals are my main information link to what's going on there. If you raise your "fed funds" rate to your commercial banks, you're going to have to simultaneously cut taxes, or you'll find yourself with higher unemployment -- politically very unpopular everywhere (and with good reason). Like the US, you'll need to cut taxes AND cut spending. The higher interest rate will incentivize people to save more; the higher savings rate will *eventually* incentivize banks to bring their interest rates back down, which will then incentivize businesses, start-ups, etc., to borrow at the new, attractive rates. Those new businesses or expanded existing businesses will then hire new people -- leading to lower unemployment, expanded production, etc. But the main thing is to stop *displacing* private spending/investment by means of government spending. People don't realize it -- heck, lots of economists don't realize it -- but government spending is the killer. A recent "LearnLiberty" video uploaded to YouTube shows that for each 1% increase in government "stimulus" spending, the US loses about $4,000 per person in GDP! I'm laughing and crying at the same time! That's potential real wealth thrown out the window!

If I have time to look into what's going on structurally in NZ, I'll post something more substantive going forward. Until then...

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