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Outer Limits
Central Bankers Break a Sweat
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  • Nevis07

    Too much overcapacity in the world. It’s basically a result of China’s state owned enterprises, which caused artificial expansion in industries and countries which aimed to feed Chinese demand. You can keep interest rates low all you want, but if there is a lack of real demand you’ll never really get solid economic growth. Even massive debt spending by Obama for the last 7 years couldn’t prime the system.

    This is a structural problem and only real reforms that get supply and demand back into equilibrium will get to the heart of the issue (ie. capitalism needs to be allowed to work itself out). Figure out how to balance the budget both in the short term and long term, reduce red tape regulations, gradually increase interest rates even if it causes a cyclical downturn, and restructure trade deals to create a more balanced trade.

    Short of doing all of this we will continue to have a dysfunctional domestic and international economy. Politicians and Central bankers above all else always look for the quick fix, which always fails, and just papers over and problems making them more difficult to fix in the long run. This is how we got to where we are today.

    • LarryD

      Jesús Huerta de Soto wrote a book, Money, Bank Credit, and Economic Cycles, which explains the dynamics of credit inflation, the resulting bubbles and busts. Inflation appears stimulative, until it doesn’t anymore. Nevis is correct, the only way to fix the economies is to give up “stimulation” and clean house. The bankers are going to hate it, because it means unwinding all the games they’ve been playing and accepting the pain of actually writing off the bad debts and seeing currencies deflate. And that means some banks will fail, and some bankers will go bust.

      BTW, de Soto’s book is available online, pdf and epub format are free. see https://mises.org/library/money-bank-credit-and-economic-cycles

      • Nevis07

        Not enough of our politicians understand, let alone abide by the Austrian school of economics. And even those that do, usually turn to the Keynesian school because it’s much easier to tell a bunch of angry voters that they’re at least trying to boost growth than to simply tell the public that a sugar rush isn’t going to improve their lives – it’s more complicated than this, of course, but that’s what it basically boils down to. Keynesianism is the quick fix but is ultimately unsustainable. The best we can do is to inform and educate the general public of this distinction. Unfortunately, it’s not an easy message to deliver.

    • rheddles

      Short of doing all of this we will continue to have a dysfunctional domestic and international economy.

      You forget the stimulative effects of a war on both supply and demand.

      • f1b0nacc1

        Broken Windows fallacy

        • rheddles

          Not sure I understand.

          • f1b0nacc1

            Wars don’t really stimulate, because they destroy….look up the fallacy of broken windows.
            https://en.wikipedia.org/wiki/parable_of_the_broken_window

          • rheddles

            Ok, that broken windows. I was thinking police. War is good for the victors. US and USSR did OK after WWII. Competition eliminated, manufacturing capacity eliminated, modern capacity created. Took decades for defeated to recover. Time to reduce competitive capacity.

          • f1b0nacc1

            World War II worked for the US, true, but at a very high cost, and largely because the economy was in such lousy shape prior to the war. You might also point to the very special conditions…total war, completely obliterated enemies, allies almost defeated first (hence no serious competition even among the winners post-war), etc…. that aren’t likely to take place ever again. As for the USSR, 20 million+ dead, and they almost lost that war…I don’t think that you would find anyone there who would think that it was a good idea or viable stimulus strategy. Britain was also a winner, and WWII was NOT good for them….

          • rheddles

            that aren’t likely to take place ever again.

            It wouldn’t be exactly the same, but similar enough.

            The USSR was, ignoring the losses mainly due to the way they chose to fight, was an economic winner.Heck, in the 1960’s everybody was concerned about when they would overtake us.

            Britain was a loser in WWII. An ally of the victors, perhaps, but not a victor in any sense other than military. The US took all their financial assets and ideologically the justification for their empire ended. They were a bombed out shell. Rationing only ended in Britain in 1954.

            I am not suggesting that we should go to war for economic reasons. But that economic reasons have led nations into war and the wars have economic consequences unrelated to the reasons.

          • f1b0nacc1

            The USSR didn’t have a ton of choices in how they chose to fight once the fighting started. Their losses where pretty much part and parcel of what happens when you fight a war of extinction and you get chosen to provide the battlefield. Take a look at what happened in Eastern Europe once the war moved there, and you can see how tis process tends to unfold. The only folks who believed that the USSR was going to ‘overtake us’ in the 1960s were economic illiterates and those whose ideology had gotten the better of them. Once the Europeans got their economies restarted, the game was over…it was just a matter of time.
            Britain survived the war, her armies and navies were on the winning side, and they got to have a voice at the table when deciding the peace. You might argue that they didn’t benefit from any of this, but their were clearly among the victors. You only make my point however, being a victor is not always a good thing, though it is better than being a loser. Look up Pyrrhus for a good example of that.

          • LarryD

            WWII also forced the Roosevelt administration to leave the economy alone, instead of changing the rules every six months. After the war, the Republican unwound most of the New Deal, getting the government mostly out of the economy. Then, in the 1960s, Kennedy cut taxes.

      • Nevis07

        Traditionally, this would be true. But I’m not sure that’s an accurate statement anymore… We’ve been fighting wars effectively constantly since 9/11 and even before our withdrawal from Afghanistan and Iraq, we didn’t see any big boost.

        If you’re instead referring to a potential war with China, there might be a boost over a period of time, but it would still knock the general economy. The thing is, we used to make a lot of stuff, but not anymore – we buy so much from other countries without much coming back into the country. Stimulus spending just leaks to foreign markets and a handful of large corporations. A big war is unlikely to be beneficial to stimulate growth, in my opinion. Keep in mind also that historically, we entered into wars with small debt loads, which is the complete opposite of what we have today. Not a good situation we’re in, I’m afraid.

        • rheddles

          Agree we aren’t in a good situation but few thought we were in 1938. And we still make a lot of goods, and export many of them. Retooling for those we don’t would be stimulative.

      • Tom

        (Shakes head) The post-WWII economic boom occurred here because we had half the world’s manufacturing capacity and the rest of the world had to acquire their goods from somewhere.

  • Jim__L

    “The question is: if interest rates are at or near zero when the next
    recession comes, what can the economic technocrats do to stimulate
    growth?”

    The answer: Nothing.

    That’s even true “if interest rates are NOT near zero when the next recession comes.”

    Economists do not stimulate growth or create prosperity. They do not even accurately describe prosperity. The sooner the rest of us can take crowbars to pry (or beat) these charlatans out of the corridors of power, the sooner we’ll actually have prosperity back.

  • seattleoutcast

    More evidence that Keynsianism is a total failure as a theory. Higher inflation hurts the poor and middle class. Gee, thanks you central bankers for making our lives miserable.

    • f1b0nacc1

      Well, Keynes *DID* provide politicians and central bankers with a convenient way to buy votes and cement their power over the economy…seen that way, it wasn’t a failure…. (sigh)…

  • Jacksonian_Libertarian

    If the Fed would just admit that they are responsible for the deflationary depression, they could then start doing something to fix things. If you don’t believe we are in a deflationary depression, answer these questions: How are the negative interest rates many banks are now charging even possible? How could the Fed print $4.5 Trillion dollars over a 5 year period with the “Quantitative Easing” program not create “Hyper-Inflation”?

    Sometimes when you have several problems, one simple solution will fix all of them.

    Have the Fed payoff all foreign holdings of US Treasuries, about $6+ Trillion and put that with the Fed’s $2+ Trillion in reserves from all the recent “Quantitative Easing”. And create individual, inheritable, and tradeable, Social Security accounts for every naturally born citizen (320 million US population – 60 million foreign born = 260 million, $9 Trillion / 260 million = $35,000)(immigrants should be required to fund their own accounts to become citizens) of about $35,000. This would have the effect of increasing everyone’s net worth by $35,000, fixing the stupid Ponzi Scheme Social Security system, and pumping about $9 Trillion in capital into the Stock and Bond markets, as well as creating $6 Trillion in foreign capital eager to invest in a booming America. It would also devalue the Dollar on world markets for the first time in 4 decades, reversing the trade deficit into a trade surplus for the first time in many people’s lives. In addition, it would have the effect of kicking the economy out of its present destructive deflation, and back into a growing economy’s inflation. 40 years of Unfavorable trade agreements which sacrificed working class interests to breakdown trade barriers like the Iron Curtain, could be renegotiated from a position of strength. And finally it would make America’s export sector boom, which would suck foreign investment into America, while at the same time dragging the rest of the economy out of the ditch, creating jobs.

    • Jim__L

      We have had hyperinflation in asset prices. The money isn’t chasing goods, it’s chasing stocks, bonds, and real estate.

      That said, I like the idea of the Fed paying off all foreign holdings of US Treasuries, although I worry about those $6 Trillion dollars simply being used to buy Cupertino, Palo Alto, San Carlos, Monterey, Carmel, San Francisco, Marin County, etc etc etc.

      First, I’d do what a lot of other countries do, and make it difficult or illegal to buy real estate in the US if you’re not a US citizen. Before we allowed Britain to borrow from us during the wars of the early 20th Century, we forced them to sell their extensive US holdings to Americans — and the result of that was Americans got to reap the benefits of those capital investments instead of sending the rents overseas.

      • LarryD

        The Fed was created to prevent deflation, it has been successful. So the inflation since the Fed’s creation in 1913 has gone uncorrected. The only reason we’ve gotten away with a century plus of inflation, is because we were the country with the only undamaged infrastructure after WWII. So our currency became the de facto international reserve currency, and foreign demand for dollars soaked up our inflation. We can’t continue. China, et al have already been trying to get a replacement for the dollar as the international reserve currency, that’s been frustrated for now, but they won’t be stalled forever. And people have been quietly moving to the old, traditional safe harbor of gold. Don’t think that a currency collapse can’t happen to the dollar.

  • Angel Martin

    Central Bankers aiming for higher inflation targets in the future is irrelevant when they can’t even achieve the lower current targets now.

    We know what the next step is already – negative interest rates.

    Markets are ahead of the bankers. There is already trillions in sovereign debt that is priced at negative yields.

    What we don’t know is how this ends. There is no historical precedent for trillions in debt with negative yields.

    We are living in interesting times. We are going to see the results of something that really is new.

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