Odds Are Rising That the Fed Will Trigger the Next Bust
From March 17, 2022, to the end of January 2023, the US Federal Reserve (Fed) increased its federal funds rate from practically zero to 4.50–4.75 percent. The rise in lending rates came in response to skyrocketing consumer goods price inflation: US inflation rose from 2.5 percent in January 2022 to 9.1 percent in June. Notwithstanding inflation falling to 6.4 percent in January 2023, the Fed continues to signal to markets that it will continue to hike rates to bring down consumer price inflation.
This is understandable. The Fed wants to maintain its inflation-fighting credentials; it wants people to believe it is really determined to bring inflation back to 2 percent. It is presumably well aware that the US dollar’s world reserve currency status needs to be protected more than ever, as it gives the US government (and the powerful special interest groups that harness it for their purposes) tremendous power, not only nationally but internationally.
Higher nominal (and real—i.e., inflation-adjusted) interest rates are now necessary to support the US dollar. These higher rates make the greenback more attractive against other unbacked currencies such as the euro, the Chinese renminbi, the Japanese yen, the British pound, and the Swiss franc. And with other central banks worldwide unable or unwilling to catch up with the Fed’s rate hike sprint, the US dollar exchange rate is expected to remain strong, attracting capital from abroad and allowing the US to run a massive trade deficit with the rest of the world.
However, there is concern that the Fed’s tightening could trigger another bust. Why? From sound economic theory, we know that issuing fiat currency through bank loans that are not backed by real savings creates an artificial upswing (“boom”), which sooner or later must end in a recession (“bust”). This is because the initial increase in the supply of bank credit artificially suppresses the market interest rate below the level that would prevail without an increase in bank credit. This artificially suppressed market interest rate entices consumers and producers to live beyond their means, leading to overconsumption and malinvestment.
All this ends onc
Article from Mises Wire
