An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Wednesday, November 19, 2008
Consumer prices drop the most in 61 years
This shows the futility of raising interest rates to address demand driven increases in commodity prices. The Fed's long march to a 5.25% fed funds rate, from 1%, was part of what caused the housing market to peak. The Fed did this because it caved in to pressure that we there was rising inflation, yet, the rise in commodity prices simply were a reflection of a global boom (and speculation--they could have addressed that, but chose not to). Moreover, there was little or no wage inflation throughout the course of the gains in commodities.
Even the ECB has reversed course.
Eventually, commodity prices would have stabilized at some higher plateau and that element of inflation would have abated. Instead, the Fed chose to fight it with higher rates, and support a weak dollar (also caving into concerns about the dollar's exchange value). That's a good part of what burst the bubble.
Ironically, the Fed has had a wonderful opportunity to allow the dollar to rise dramatically, but opted to engage in massive forex swaps that put a cap on the dollar. This selling of the buck by the Fed will turn the dollar's trend down again. It may already be starting.
Why is it that the high interest rates did not make for a strong dollar ? Usually high interest rates make for a magnetic for in flow of monies into a currency's general market and that currency's strength will increase ?
ReplyDeleteIf we had high interest rates which should have made for a strong dollar would that not have made for a weak oil price ?
Why is it that the reverse is happening ? We are lowering interest rates, the dollar has been strengthening, and the price of oils/commodities are falling.
So are you saying that raising interest rates while forcing a weak dollar to support exports ( as you mention has been a naughty compulsion of somekind for USA )
rather than allowing for a natural strong dollar with increate rates ......... is the reason for the "appearance" of inflation when in fact we should have had a strong dollar so that inflation would not have been noticeable ?
explain...
There's no "one thing" that causes a currency to be strong or weak. Many factors come into play. Japan has a strong currency but interest rates near zero. Some nations have interest rates in the hundreds of percent and that does little to support the value of their currency. Running trade deficits over the longer term probably undermines a currency to some degree, however, if a deficit in trade is due to a strong economy where there is high return on investment, that is a counterbalancing force. Exchange rates fluctuate. That's the best thing to remember. If it were better to have the dollar at one specific level, then we'd peg it there or go on a gold standard, but it is not.
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