A dark age coming

The headline story in The AFR today begins:

The federal government has slammed plans by business to go it alone on climate and energy policy but industry leaders are holding their ground and have the backing of Labor and the Greens.

It’s a new world out there.

Meanwhile, in the US: Is The Fed Trying To Tank The Trump Economy Before The Midterms? Want to breed uncertainty? Try this on for size:

Dallas Fed President Robert Kaplan said he still favors the central bank raising short-term interest rates three more times before deciding whether more increases will be necessary to keep the economy on an even keel.

This suggests the Federal Reserve should lift rates at its December, March and June policy meetings “unless something changes,” Mr. Kaplan said Tuesday in a Wall Street Journal interview.

Fed Chairman Jerome Powell said then that rates remain low enough to continue stimulating economic growth. But according to the Wall Street Journal other officials have expressed a range of views, and some uncertainty, about how high rates would have to go to reach a so-called neutral level that neither spurs nor slows growth.

A COMMENT ON RISING RATES: I have been asked about rising rates in the comments. And as I have said in the past, rates have been too low for too long which has lowered the productivity of our array of investments. The issue is not whether rates should rise – they should – but whether they should rise now immediately before an election. The effect on share markets was obvious enough. Front-page treatment of a falling market can move voter sentiment, specially the way it can be played on by the media. The Fed kept rates down throughout the Obama presidency and there was never any doubt it would push them up once PDT was elected. Optics is all, and even if the adjustments brought on by higher rates are positive for the economy, it may not look that way to anyone who is paying out more on their mortgages or small-business loans.

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22 Responses to A dark age coming

  1. This is Wall Street fighting back against Main Street. They will lose.

  2. Sinclair Davidson

    The mid-terms are less than a month away – hard for the Fed to tank the economy at this late stage.

  3. .

    Their focus ought to be on the low term, with predictable & stable (preferably zero) inflation, and within a band of variance in the short term.

    It always works better when MP and FP is coordinated. [JC – I hadn’t considered this morning in full] “Rubinomics” follows the Mundell-Fleming IS-LM-BOP model. Rubin reckoned that government spending determined the price level. At face value this appears to not be correct. The Fed could actually just be keeping money creation up with the fiscal effect which leads the MP (which is arguably ultimately more important). A lack of accommodation might lead to a banking crisis of sorts, but a very subtle, cancerous one.

  4. Dr Fred Lenin

    Those leftist “eelites “ of the left don’t care what the consequences of their filthy actions are ,they are consumed with hate for anything that deprives them of their ill gotten gains . The old saying “cutting off their nose to spite their face “ springs to mind . Still if they succeed they will suffer too ,much more than those without privileges ,the higher the top the longer the drop ,the people despise and hate them now God knows what they will do if the left looks like succeeding defeat at the mid terms is the best option when people get used to voting against them more will do it . Like the failed communists in Russia whose support gradually diminished to irrelevece .

  5. Chris M

    I’m glad you posted this Steve…. looking for the opinion of the Economists here. Are the rises in fact justified? I mean the rate was rock bottom all through Barry’s reign as he intentionally drove the economy down into the gutter, at least as best he could.

    So interest rates bumping along near zero are not normal or a sign of a health economy right? So question is are the rate rises legit or too rapid i.e. should be be worried about a possible conspiracy / Clinton meddling?

  6. Empire 5:5

    Steve

    As per Chris M, I recall you opining that rates were too low for too long.

    What is your view on the merit of the increase, politic optics excepted?
    Were the big market punters looking for a catalyst signal or is the correction a coincidence?
    What are the implications for our national interest?

  7. Empire 5:5

    Since our fakestream j’ismists won’t ask these questions, I’d appreciate your considered opinion.

  8. RobK

    It’s a new world out there.
    Whilst the legislation of the RET drives the profits, there can be no other way.

  9. mh

    The Federal Reserve actions should be seen as acknowledgment that Trump is making the US economy great again.

  10. entropy

    I remember the RBA doing the same in 2007 a month prior to the election. Within six months they were dropping rates like a fat girlfriend

  11. .

    Chris M
    #2837462, posted on October 12, 2018 at 5:12 pm

    I’m glad you posted this Steve…. looking for the opinion of the Economists here. Are the rises in fact justified? I mean the rate was rock bottom all through Barry’s reign as he intentionally drove the economy down into the gutter, at least as best he could.

    So interest rates bumping along near zero are not normal or a sign of a health economy right? So question is are the rate rises legit or too rapid i.e. should be be worried about a possible conspiracy / Clinton meddling?

    I think they are in the long run but I think the orthodox view on persistent low inflation is wrong. It should be persistently around zero in the long run, within a band of short term variance.

    There are also banking aggreagtes and fiscal policy to consider. They might be playing follow the leader with respect to fiscal policy.

    On quantitative easing, my view is that the QE actually doesn’t work, it doesn’t work in theory and it also doesn’t work in practice, moreso, it did not work when coordinated with fiscal expansion (monetary policy works better when it is coordinated with FP).

    Obama actually saw deflation during 2009, after the banks were propped up, during a massive fiscal and monetary expansion. We can conclude that the biggest experiment in demand management through FP and QE failed. The idea is to create inflation so that markets can clear. It actually backfired because it destroyed/substituted so much real private sector output.

    The thing about it is the IS/LM/BOP and AD/AS models do not work here because it is a little-known fact but during extreme conditions, the typical MV = PY equation breaks down. My take on it is that the system cannot process the change in information even with rational expectations, or that it signals a downturn and it does the exact opposite of what the demand management policy is meant to avoid (saving leading to “underconsumption” [a term I am loathe to use]).

    The change of rate of inflation is probably more important than the change of rate of the price of credit. The interest rate can be signalled and if it is done properly with credible policy, it works and done properly the cost of credit may not change in a disruptive manner.

    The change of rate of inflation can create largely unseen but insidious damage to the balance sheets of the financial sector (hey, it affects us all – our savings, investments and a sign of a developed economy with proper credit markets and adequate business financing). Another issue is FP which I keep on bringing up.

    Going back to the IS/LM model, the way to do things right is aim for no stimulus – no change in output in the short term from our policies. That way P and GDP remain “constant” but the rates go up.

    This is done when the money supply (rate of change, really) and G-T (part of IS/AD) are lessened together in a symmetrical fashion.

  12. Sean

    Rates will need to rise a bit or if there’s another recession they will be missing a key lever.

  13. .

    My other comments whilst talking to JC about this. I’ve changed my mind a little bit over the day.

    http://catallaxyfiles.com/2018/10/10/wednesday-forum-october-10-2018/comment-page-5/#comment-2837236

    US inflation is still running at 2.7%.

    I’m sure there are deep stating arseholes at the Fed that would want to crash the economy to ruin Trump, but the optimal inflation rate is zero, with some flexibility in the short run.

    Fed tightening is what ended every cycle since the First World War.

    …but why did the cycle start in the first instance?

    It is as though the business press just choose to ignore the last 63 years of empirical macroeconomic research, von Mises, Hayek…even other nobel winners like Kydland and Prescott, in favour of cranks like JM Keynes and Major Douglass. First principles don’t even rate a mention. As for NGDP, they will agree with it in the short term as long as it supports a short-term accommodation.

    If you want to ramble about shills, these are the people you should be having at.

    ———————————————————————————————————————-

    http://catallaxyfiles.com/2018/10/10/wednesday-forum-october-10-2018/comment-page-5/#comment-2837239

    .
    #2837239, posted on October 12, 2018 at 11:10 am

    Another thing to remember is that a change in the inflationary environment can wreak havoc on banking balance sheets. Also too, the rate of change of inflation can also be destructive if not signalled correctly – expectations cannot form rationally.

    So the Fed could even cause moderate inflation and create a liquidity crisis in two ways.

    It also helps if you cut spending and coordinate fiscal and monetary policy.

    ——————————————————————————————————————-

    http://catallaxyfiles.com/2018/10/10/wednesday-forum-october-10-2018/comment-page-5/#comment-2837252

    Once you target zero, QE has to be a readily available policy tool to prevent it falling through, because the only tool below 0 is QE.

    I don’t see why any inflation at all below zero predicates QE; surely normal monetary accommodation suffices? A lot of the movement the CB wants really occurs in the banking system anyway.

    I can’t see what you’re saying though a (very rough!) IS-LM and aggregate demand/supply model. Nothing in that necessarily means that zero inflation represents a liquidity trap.

    If the inflation rate is low and predictable, GDP should be able to expand and the rate and prices should be stable.

  14. Fisky

    The globalists who control the central banks always do this to non-Leftist governments. It’s basically a given that they will throw elections to the Left.

  15. sdfc

    The Fed’s raising rates because inflation has hit the target, the unemployment rate is at the lowest level since the 60s and real GDP growth is running at around 3% yoy.

  16. sdfc

    The Fed’s raising rates because inflation’s hit the target, the unemployment rate has hit the lowest level since the 60s and real GDP growth is running at around 3% yoy.

  17. J.H.

    Well if you want to grow the savings pool of money, you have to make money worth something…. Sort of ironic isn’t it?

  18. Peter Greagg

    Late to the party, but…..
    I think there is a creditable argument for a lowish and reasonably stable rate of inflation to assist the adjustment of sticky prices and wages.
    No one likes the idea of falling wages but sometimes they do need to fall in real terms (because of falling productivity, say). With some price inflation, an adjustment in real wages could occur if wages rose by less than the price rises.
    The same with prices.

  19. Tel

    I think the Fed are right to keep raising rates, so long as they do it cautiously.

    The fact that Trump is on the nose with all the establishment types is a good thing, because it allows Trump to act properly independently and also allows the Fed to act independently. They aren’t supposed to be getting along all buddy-buddy.

  20. Tel

    https://www.schiffradio.com/gold-breaks-bitcoin-breaks-ep-399/

    This is kind of interesting to listen to, here’s the Schiff predicted scenario:
    * Fed keeps blindly raising rates.
    * Stocks tank and people run to US bonds for safety.
    * Economy goes into major recession as a result of raising rates and bubble deflation.
    * US dollar dramatically loses value as price-inflation gets loose.
    * Gold takes off big league.
    * Fed goes into a panic and cuts rates back to zero.
    * Trump loses 2020 election and gets replaced by a socialist who goes nuts smashing stuff.

    OK, here’s my take on that:
    * The Fed is highly situation dependent, they know much more than they are letting on, and it’s to their advantage to ensure they don’t give away too much if they are intending a change of strategy. They are normalizing rates, and that’s a good thing.
    * Yes raising rates tend to make stocks less attractive and bonds more attractive, that’s normal and nothing to freak out over. US stocks have had a dang good run and everyone has to expect there will be times when the market price drops.
    * Yes we are due for some sort of recession, it’s been slow and steady growth since 2008 but there never was a “big boom” under Obama, and there hasn’t been such a boom under Trump either so the bust will not be so bad in the scheme of things.
    * I think that the Fed wants the USD to lose a little bit of value, but if push comes to shove and it loses too much value, then you bet they will defend it, and they are in an excellent position to tighten up if they want to do so. The USD might fall a little bit, but it’s a controlled fall.
    * Gold as ever is an inflation hedge… if you want to own it then see it as a long-haul thing, because trying to double-guess the short term ups and downs is not a good strategy IMHO.
    * I’m quietly expecting the Republicans to do OK in the mid-terms, not brilliantly because both sides are pretty entrenched, but so far so good I think they will do better than many people expect.

  21. .

    I think there is a creditable argument for a lowish and reasonably stable rate of inflation to assist the adjustment of sticky prices and wages.

    This is an implicit admission that labour market regulation is actually a bad policy.

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