August 29, 2015

YOU CAN'T TIGHTEN IN A DEFLATIONARY EPOCH:

A Cautionary History of US Monetary Tightening (J. Bradford DeLong, AUG 28, 2015, Project Syndicate)

The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed's staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history - and of the current state of the economy - suggests that the United States is about to enter dangerous territory.

Unfortunately, there's a long history of new Fed chairmen feeling pressure to demonstrate their hawkish bona fides, even though there hasn't been any inflationary pressure since Thatcher/Volcker/Reagan crushed it in the early 80s.  So you take rates that are already artificially high and then drive them to usurious levels, inevitably triggering at least a wobble, or, even a recession. Even the underlying health of institutions can't withstand such high real rates.


Posted by at August 29, 2015 3:41 PM
  

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