Tuesday, December 02, 2008

Will the Fed be stupid enough to lower the FFR?

Probably. (Hat tip to my friend Billy Beck.)

Tonight I don't have time to delve into the immorality of people being forced to use the government's money, so let's just play the Keynesians' own game. Even if their theories worked, and that's a big "if," look at the FFR now: go here and scroll to the bottom. What is the FFR these days? The real rate, not the intended one. (By the way, the AP writer apparently couldn't be bothered to find rates before 1990. The lazy idiot probably found this page and decided to go no further.)

So, uh, how can the Fed cut the target to 0.5% when it's already there? Does that mean we'd get an effective rate of 0%? And if it cuts it to 0%, does that mean we'd get an effective negative rate?

Anyone who understands Hayek will understand why the Fed can't even hit the target it's aiming for: there's no way such a small group, relative to the whole population, has the information necessary to control such a complex thing. Yet the Fed acts as if it can, and most people are so blind that they believe Fed officials. It's all based on Keynesians' flawed understanding of inflation, which they calculate based on prices. Milton Friedman taught us that inflation comes purely from monetary policy, so any drops in calculated CPI and PPI resulting from the recent drops in fuel prices are not in an of themselves indicative of true deflation. What we do see is that the Fed is still devaluing the dollar. The dollar hasn't "strengthened" lately because the money supply has been cut, unlike when the Fed caused the Great Depression by cutting the money supply. The dollar has been strengthening only vis-à-vis most other currencies, because other central banks are devaluing their currencies faster, and foreigners are buying dollars in massive quantities to buy U.S. Treasury securities.

The Fed is acting like a stupid doctor who worries a patient is losing too much weight, when in fact the patient is shedding obesity that resulted from the same doctor's force-feeding. The Fed has grossly inflated the dollar since 2001, and now it worries about "deflation" undoing part of it?!

Real estate collapse, a stagnant economy despite the central bank lowering rates nearer and nearer to zero...God help us if we're going to spend the next two decades like Japan's spent the last two. We're already in a "liquidity trap": interest rates are so low that monetary policy just can't provide any more economic stimulus, as artificial as it would be.

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