Federal Reserve course (setting rates to growth) is disastrous
for years and years, the prudent and workable approach was to set rates roughly to the base inflation rate PLUS 1.5-2.0%... experts called the 1.5-2.0% margin "real rate of borrowing" or "inflation adjusted interest rate"... with FedFunds now at 6.5% and inflation somewhere around 3.0-4.0%, we now have historically EXTREMELY high real rates of twice the consistent level demonstrated to work
here is why the Lawrence Meyer approach linking interest rates to growth rate is disastrous... by the way, I have long regarded Meyer to be an utter fool & idiot, and that appointment by Clinton to be his worst outside the Cabinet
setting rates to the growth rate is like chasing a dog's tail that slowly shrinks to nothing... you never catch it... it is like chasing a scent that is slowly lost in the forest mist... by the time you apparently catch up to that growth rate (measured in the past), your new rates which have been operating on the economy for the past quarter have been to set into (un)motion a strict limiting effect that cannot quickly be reversed
if the Federal Reserve were to raise rates by 150 basis points over the course of three months, then remove all 150 bpts in the next three months, it would take the economy 6-9 months to recalibrate and stabilize... this is a delicate balance being fuxxed with, and it should never be fuxxed with
by the time interest rates approach the growth rate from the recent past, such rates are debilitating... eventually 12 railroad cars will be careening over the cliff, with 88 more cars behind destined to follow
the current state of economic data analysis and subsequent monetary policy is absolutely astonishingly utterly pathetic and inadequate now... Phillips Curve relating inflation to unemployment remains on the walls like dogma, yet has been disproved and challenged repeatedly
if Lawrence Meyer prevails over our more steady prudent Alan Greenspan, then we and the entire western world economies are in big trouble
I suspect Greenspan bought himself a controlling card to use in the next meeting, provided we see some moderating economic data shortly... like goddam soon
/ Jim Willie |
