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Sprott Money News Ask The Expert March 2017 – Jim Rogers

from Sprott Money:

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2 comments to Sprott Money News Ask The Expert March 2017 – Jim Rogers

  • Ed_B

    I have to disagree with Rogers that 3-4 rate increases will necessarily bring on a recession. The financial world of today is vastly different from that of yesteryear. Many things that were true then are not true now and probably for all the reasons discussed in the many articles on this web site. The Fed has goofed big-time, IMO, by lowering the rates too far and then holding them there for far too long.

    If this is not a demonstration of why the Fed should not set interest rate policy, I do not know what would be. As with stock prices, money prices should be set via the competitive bidding between buyers and sellers. That would set rates where they need to be at any given time without the months long studying of the market that the Fed needs to do. This would give us a true interest rate that was set by many very small changes rather than an artificial one set by only a few changes. As with graphing, many points lead to a more accurate graph than do fewer ones. The benefit here is that the many points approach would set the rates right where the market needs them to be and not to where some academic bureaucrats think they should be. As with everything else, reality trumps academic theory every single time.

    Additionally, the Fed treats interest rates as if they are linear in their effect upon the economy. This effect is not linear, which the economic data clearly shows. The initial rate cuts always have the greatest positive effects upon the economy while the later cuts have less and less impact until no impact at all is achieved. Once the rates have been cut to about 2-2.5%, the cost of borrowing money ceases to have much of an impact in business decisions. Because of this, there is no rational reason for cutting interest rates below this figure, yet that is precisely what the Fed has done in the past and is likely to continue doing in the future. They have learned nothing from the last 8 years, so very likely will do the same thing the next time the economy falls upon hard times. That they do this because it is the way they’ve always done it does not make any economic sense at all, yet this is what they seem to want us to believe. IMO, such actions on the part of the Fed only lengthen and deepen recessions, rather than help the economy.

    The Fed should not be in charge of interest rate policies. They have no more business doing this than they have in setting the market prices of stocks or bonds. Let the free market do those things because the free market is VERY good at it and the Fed is not. Get the Fed and the government out of that business. They can and should set the basic rules of the market to establish a level playing field but having done that they should then get out of the way and let people DO business. At that point, their only purpose is oversight to make sure that the FEW rules that really are needed are being followed and to investigate and prosecute those who break the rules.

    But back to the video… whether it is 3 or 4 minuscule interest rate hikes at the current low level is pretty much irrelevant and not anything that will cause a recession. Those hikes will still only bring rates up to the last point on the interest rate curve where lowering rates matters, so getting to that point doesn’t really matter to the economy. The only business that will be harmed by these small rate changes will be business that wasn’t sufficiently profitable to be worth doing anyway. It is the doing of that kind of business that creates the need for a recession, since it is recessions that purge the economy of poorly done business and the capital that was allocated to it. In that regard, recessions are good things that are needed to curb the excesses that creep into businesses and the economy. Not a small part of which is due to Fed and US Gov financial meddling.

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