Because raising interest rates would crash the economy and we would all be doomed. At least that’s what the finance types I talk with say, as well as the Bernank. In other words, they don’t want to take the pain now and, instead, want to drag out the pain, hoping for a recorvery.
So, since the malinvestments aren’t being allowed to be cleared, we’ll have stagflation.
As Tonto famously said, “What you mean, we?”
The USA is in a very bad position. The Fed can not raise interest rates up until inflation gets so bad prices increases go into hyper mode.
If not for the Fed lowering interest rates through the purchase of US Gov debt then the US Government would have to raise the interest rates significantly to attract even govenrment bond buyers. It would really have to jack up the rates to attract non-government bond buyers. With an interest rate rise there will be entire states that can not finance their debts: CA, IL, NY, OH, FL, NV, etc. The problem of states going bankrupt will be so acute that the Fed will have to sell its bonds to buy state bonds.
If the Fed raises rates, then the prices of homes, vehicles and other things purchased with debt will go down and maybe crash. This is especially true for housing. Then you will have hundreds of thousands to millions of home owners with more incentive to leave their homes to the bank as they will be even more underwater. This will of course put the member banks of the Federal Reserve in serious trouble as small banks fail across the country because of defaulted mortgages. The FDIC, HUD, Fannie, Freddi, etc will go bankrupt and need bailouts that will force the Fed to either create more money or exchange bonds and other securities for these bonds.
Commodity prices will collapse. Demand will drop and these balance sheets of corporations will swell even faster as corporations sell off inventory priced in the past. Corporate profits will rise as corporations lend profits to the government. After several quarters the profits of these companies will collapse as they lay off workers and reduce capacity.
Don’t look at me. Austrians have been warning about this for decades. The problem is that in the long term we aren’t quite dead yet, but we are wrecking the most productive economy in the world. And in 2008 the Fed had an opportunity to do something about this mess and refused to do so. So now the problem is just worse.
Bogart,
I think points 1 and 2 of your post are spot on.
I’m wondering about the third one though.
After all, China and other countries still want commodities, and the dollar will have lost purchasing power from when interest rates were low. Will that not keep commodity prices up in dollars?
I was thinking about expectations of commodity prices if the Fed would increase rates significantly. Me and a co-worker were discussing gold prices and what ifs and we agreed that gold prices would drop if there was a significant rise in interest rates. I should have added that condition that the rise had to be large.
Good points, but I also wonder about the commodities thing you said. As any sort of inflation situation starts, everyone will want to get rid of their dollars and get something that the Fed isn’t printing more of, aka commodities. Inflation in commodities will lead to wholesale inflation in everything else.
If you have commodity investments as I do you can not be afraid of massive drops. If the Fed raises interest rates even a little that could cause a sell of perhaps as large as 50%. Now when reality sets back in, the prices will start increasing but it could be several months.
Really, do you think Bernanke & Co. is that stupid? Come on. How can such a Close minded person, who as you suppose, cannot open his mind enough to realize the contradictive and inconsistent textbook explanations, get to the position of the (publicly) most powerful man in the world? The answer is he cant. For those that dont know already, there is little reason to use power in arbitrary manner when it can be employed profitably.
Fee Fi Fo Fum, I smell a newbie.
That would be Incorrect. I am a smurf. Yours dearly, Smurf Smurfen.
Can you clarify this? You say if the Fed raises rates then everyone will sell their commodities? For what though, dollars? Investors have to put their money somewhere and if things get shaky regarding the US economy are people really going to want to hold dollars?
If the Fed raises interest rates significantly, there would be a crash and probably wild volatility in the dollar, but barring civil strife, which is likely, the dollar would rise very much.
InHongKong,
A crash of what? What would happen?
A Smurf deserves a detailed answer. Here we go, with my comments in bold.
While we all talk about the effects of lowering the money rate of interest below the market rate of interest, what would happen if it was raised above the market rate of interest? I imagine that you would see a two-pronged effect; first, a contraction in first-order consumer goods industries as people invest more or their money, and second, a decrease in the length of the structure of production as the money rate of interest wouldn’t be allowed to fall with the increase in investment. An artificial bust, perhaps, as opposed to an artificial boom?
Are any of you aware of literature, Austrian or otherwise, written on this subject?