I assume that your point is that we have inflation, not deflation? Oui?
Exactement :-)
Energy prices are rising, money supply is rising and still greenie is talking about fighting deflationary forces. All just a ruse so that there is an excuse to keep interest rates low and keep pumping the money supply? Are the deflationary forces this year's Y2K equivalent excuse?
I couldn't have said it better myself.
He may keep the rate low at the overnight counter, but I think that real interest rates are going up.
Real interest rates are negative at present. Actually they are the most negative they have been in more than 20 years, according to the graph of "Fed Funds rate minus CPI" that I am looking at now. Starts at 4% in 1980, quickly goes up over 8%, oscillates between 4-7% until 1985, gradually goes down and touches zero in 1993 or so, recovers to 2-4%, starts another decline in 2000, and is currently at -1.2% after having rebounded from -2% very recently.
The only way Greenspan has been able to keep interest rates at this level, imho, is that he has been fooling the masses on some imaginary "deflation" threat. Excluding energy from CPI calculation, for crying out loud. I am amazed most people swallow that whole.
Needless to say, this is a perverse incentive to move into riskier assets and not lose money after inflation, and will probably spur another round of mal-investment. Ah well...
As for your comment on real interest rates going up - Rationally, they should. However, they are keeping interest rates artificially low so as not to burst the credit bubble until the economy shows some signs of recovery. And they will probably continue with this pressure, pumping the bubble up. |
