4 ms·
In Volker time, federal debt (as a fraction of the GDP) was low, he could raise rates without crippling the budget with interest payments. With today's federal
by ptero 4y ago
In Volker time, federal debt (as a fraction of the GDP) was low, he could raise rates without crippling the budget with interest payments.
With today's federal debt level the fed is screwed: it cannot raise rates even close to inflation without busting the budget and cannot lower them (to fight a recession) without spiking inflation.
My bet is on long term rates-below-inflation period to deflate debts, similar to post-war period in the 1940s. And lots ofrhetoric. But it will be a painful ride.
- solveit 4y agoThe Fed does not have the mandate to do what is convenient for the budget. That's not their problem. Obviously this is naive and I'm sure the Fed is under all kinds of pressure, but the Fed is supposed to kill inflation by raising rates to whatever it takes, as long as they don't kill jobs at the same time. The government is supposed to figure something out themselves.
- imtringued 4y agoYou could also just reduce the money supply by abolishing QE and introducing negative interest rates on liquid deposits and cash. Then everyone can run a balanced budget and watch their debt melt away. The reason why we have price controls aka the zero lower bound of interest is that we would rather become eternal debt slaves (money supply has always been growing exponentially even under a gold standard) than face nominal losses that force us to face an umcomfortable truth that from this point onwards you will never earn anything again from owning abundant physical capital and that you will have to work for your own money instead of making others work for it.