Yesterday the Federal Reserve cut its key rate by .75%, the biggest cut in some time. I argued against this move. Apparently Fed Chair Ben Bernanke does read this blog. My suggestion was that such a cut will only spur already high inflation. Robert Samuelson argues that the interest rate cut is a major gamble by Bernanke:
Still, Bernanke's gamble isn't guaranteed to succeed. Since World War II the Fed's greatest blunder was to unleash double-digit inflation. In 1960 consumer prices rose 1.4 percent; in 1979 the increase was 13.3 percent. With hindsight it's clear that Fed policies were too loose, creating too much money chasing too few goods. But that was not so apparent at the time, when the Fed responded to public pressure to minimize recessions and keep unemployment down. It loosened money and credit, and the effects on inflation showed up a couple of years later. There was a steady upward creep; that is the risk Benanke is now running.
The Times of London worries that this rate cut is a more of a political move than good policy, a theme echoed by the Wall Street Journal. The Journal takes Hillary Clinton to task for her "stimulus proposal" and the preposterous claim that such spending bill doesn't have to be paid for.
Some Democrats still think that government stimulation of demand is an antidote to a slowing economy. Yet economics has certain iron laws that the government violates at its peril. One of them has been called Say's Law, because it was first enunciated by the late 18th-century Frenchman Jean-Baptiste Say. He said "products are paid for with products." Or to rephrase the point, "a society can't consume if it doesn't produce." Hillary's assertion that her "stimulus" package shouldn't be paid for denies reality. Somebody has to pay for it. One man's consumption must be paid for by his own or someone else's production.
I note that the Journal warns the the "real problem the U.S. economy faces" is devaluation of its currency. Read also the Amity Shlaes piece on inflation to which Jason referred.
The politicians, one supposes, must make it look like they are "doing something." But it is almost certain that before anything is done any recession will have run its course (assuming we actually go into recession). Further, even if one buys into the economic benefit of government spending packages (which I do not), the amount of money being discussed is so small relative to the U.S. economy it would have minimal impact. If we really want to "stimulate" our economy, the Journal has the prescription:
If a government hampers production through heavy taxes and economic regulation -- or by inflating the currency -- production will slow down and there will be less to consume. To revive production, government must reduce the tax and regulatory burden and kill inflation -- which Reagan did to such good effect.
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