Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

US Panic Interest Rate Cuts and the US Economic Recession

Economics / US Economy Feb 05, 2008 - 12:44 AM GMT

By: Gerard_Jackson

Economics

Harold Wilson once said that "a week in politics is a long time". Well, that goes double for economies. Last week I said " against my better judgement " that the report on US manufacturing by the Institute for Supply Management was painting a rather grim picture that showed manufacturing was contracting.


Today, however, the ISM report for January finds that manufacturing is now expanding with the Performance Manufacturing Index rising from 48.4 per cent in December to 50.7 per cent for January, an increase of 4.8 per cent. Production shot up from 48.6 to 55.2, an increase of 13.6 per cent. Exports rose to 58.5 from 52.5, an increase of 11.4 per cent. The spoiler is that prices jumped from 68 to 76, a whopping rise of 12 per cent. This is definitely not good.

As a rule central bankers are very cautious about lowing interest rates, usually making discrete cuts of 0.25 per cent or 0.5 per cent. The reason for measured approach is that the central bank never really knows by how much rates have to be reduced to get the desired economic response. (In the 1930s Roosevelt's tax, regulatory and industrial policies so crippled industry that it could not even respond to a zero rate of interest). But Bernanke has been the exception to the rule. At the end of January he cut the fed rate by 0.5 per cent, which brought it down to 3 per cent. This came about a week after he slashed the rate by 0.75 per cent. The rate is now at its lowest point since June 2005.

Bernanke's media groupies can call this 1.25 per centage point cut in less than two weeks "brave", "bold" and "necessary" - I call it panic. It's also probably unprecedented and strongly suggests to me that Bernanke and his pals don't really know what they are doing. For this we can blame their Keynesian 'education'. Writing in 1898 Knut Wicksell pointed out that

[i]t is, however, frequently the case that quite a small fall in the rate of interest would immediately bring about a much greater rise in prices. The price which can be paid for goods obtained by means of credit is higher the longer is the period during which the credit is utilised. (Knut Wickell, Interest and Prices , Sentry Press New York, 1936, pp. 106-107)

In my last article I explained how cutting the interest rate from 4 per cent to 3 per cent could increase industrial demand for loans by up to 33.3 per cent. Well, the Commerce Department recently reported that orders for durable capital goods rose by 5.2 per cent in December. Last August the fed's rate was 5.25 per cent. In September it was cut further to 4.75 per cent. It was then cut to 4.5 per cent in October and then 0.25 per cent to 4.25 per cent in December. We can see that in per centage terms the rate fell by 14.3 per cent from August to October.

All in all, from last August to last January the rate fell by a massive 43 per cent. It's possible that the earlier cuts are what fuelled the recent uplift in manufacturing. If so then it is just as likely that they are responsible for the sudden increase in manufacturing costs. So long as 'cheap' credit is made available and output prices stay head of costs then the expansion will continue. But this also means more inflation and further pressure on the dollar. Whether Bernanke's aggressive monetary expansion aggravates the current account will be determined by how it affects exchange rate. It's not the stimulus that should be scrutinised but the Fed's monkeying around with interest rates.

I've felt for sometime that the US economy had a lot more steam in it than it was given credit for. Unfortunately, Bernanke has decided to turn it into a pressure cooker. How long this can go on for is anyone's guess at this time. It bears thinking about that the Reserve Bank of Australia did the same thing in 2000 and generated a boom that only now appears to be reaching its end.

I'm forever saying that whenever there is a recession or a financial crisis the market always gets the blame. Well, here we go again. Irwin M. Stelzer states that the "sub-prime fiasco has revealed an important market failure". ( The Old Order Changeth: Fallout from the sub-prime fiasco , National Review on Line , 29 January 2008). It never occurs to the likes of Stelzer that this "fiasco" was created by Congress and the Fed, thus making it a clear case of government failure. Congress put pressure on financial intermediaries to provide mortgages for bad risks. The Fed then supplied oodles of credit to fund, among other things, these mortgages. Is this so difficult to grasp?

Unfortunately, inflation 'which is what credit expansion is about' is also a moral hazard that seems to have a corrosive effect on ethics that few appear able to resist. It is no accident, in my opinion, that inflationary periods tend to be marked by financial scandals. Once again the market is blamed, being accused of fostering selfishness and greed when in fact the real culprit is unbelievably bad economics. In addition, few moralising critics of so-called 'market failure' and 'cupidity' ever condemn political greed and corruption.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules