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New York Times, April 7, 2017: The Economy May Be Stuck in a Near-Zero World
Carlitos -- While its hard to say what the overall effect the shedding of the bonds will have on the economy, there are some economists who are suggesting that the Fed's low interest rate policy during recessions may have run its course. If we have another recession while the nominal interest rate is still relatively low, then the Federal Reserve's ability to stimulate the economy with interest rates cuts has its limits...a zero interest rate.
If monetary policy changes in interest rate cuts are ineffective, then we will be dependent on Congress to use fiscal policy to stimulate the economy. With the hard case fiscal conservatives in Congress, it is hard to see Congress acting in even a modest way like they did with the stimulus package of spending to halt the slide in the Great Recession. There is even talk of a government shutdown.
So in a sense, I suppose raising interest rates slowly now gives the Fed some room to cut the rates in a recession, whenever that occurs. But shedding bonds from the last recession at the same time as interest rate hikes are occurring could have the wrong effect on the economy.
Just thinking out loud....wondering what's going to happen in the next year with Trump, Congress and the Fed not always working in unison.
Interest rates are a small component of the decision to invest, so monetary policy is always second fiddle to fiscal policy. So effects of interest changes are ambiguous depending on other specifics. Most often higher rates correspond to higher inflation and lower rates correspond with lower inflation, which is the exact opposite of what we are taught and led to believe.
So fiscal policy is always what's most important.
The economy is like an Olympic runner that runs very fast. But if you put a bag over their head that restricts their ability to breathe, they can't run that fast, and maybe not at all.
We wouldn't call taking the bag off the runner's head 'stimulus.'
Congress has put a bag over the economy's head in the form of a macro constraint on the economy.
So we don't need 'stimulus'; we need to end overtaxation per size of government + the given credit expansion.
We need to make sure the government is the proper size doing what it should be doing and then use taxes to regulate the temperature in the economy to make sure its hot and output is booming.