The Fed and the Global Effects

There was a recent article by Charles Hugh Smith (also linked on Lew Rockwell’s site) explaining why the Fed would be insane to raise rates.

This is one of those situations that I have to criticize someone who generally seems to be on the pro-liberty side.  I have read Smith before and he often has some interesting insights.  But on this recent article, I dissent on virtually everything.

This isn’t a situation of criticizing an author on economic policy such as Paul Craig Roberts or Pat Buchanan.  I typically don’t agree with them on economic matters, but I like their writings on other issues such as foreign policy or civil liberties.

Smith typically focuses strictly on economic issues, so it is interesting that I find so many points of contention in his latest piece.

I dissent immediately just on the title.  I don’t think it would be insane for the Fed to raise rates.  I’m not sure that it matters much at all, except that the Fed will be paying a higher rate on bank reserves.

What is insane is the Fed’s policies over the last 7 years.  It approximately quintupled the adjusted monetary base over this period and has served to greatly misallocate resources, thus setting us up for another bust.

Smith says that the strong U.S. dollar is the core driver of the global recession.  But this is just ridiculous.  There may be a correlation, but the strong dollar isn’t the cause.

If there is a global recession, it is because all of the major central banks of the world have been engaging in massive monetary inflation.  This has severely misallocated resources, run up debt, and allowed governments to spend recklessly.  It also discourages saving and investment, which growth and productivity are ultimately built upon.

The only reason the U.S. dollar is strong is because it is the least bad of the major currencies right now.  All of the other major central banks are destroying their currencies at a greater pace than what the Fed is doing to the dollar.

Smith says that as the dollar gets stronger, capital will flee emerging markets and China.  But why is now any different than in the past?  If China wants to attract capital investment, then the bureaucrats there should open up the markets, stop the central bank money printing, and stop rigging the markets.

To blame China’s problems on the U.S. dollar is rather silly.  A homeless man can blame the weather for getting all wet, but someone sitting in a house isn’t going to help him by suggesting to change the weather patterns.

It is amazing how so many people will blame China for our problems and then some people will blame the U.S. for China’s problems.  I think everyone needs to take a look in the mirror here.

I blame the Fed for a lot of things, but most of China’s problems are a direct result of Chinese government and central bank policies.

People can talk about “exporting inflation” and “currency manipulation” all they want.  But the strength of a currency is a direct result of the central bank’s policy for that currency.  The supply of money and the demand for it by the people (which is largely dictated by supply expectations) determine how strong a currency is.  If a country has high price inflation, it can’t blame another central bank or another country for this problem, barring an actual war.

Smith thinks the Fed is insane to raise rates because it will deepen the global recession.  Sorry, but the insane policies were already enacted years ago.  The Fed has actually been less insane over the last year with its tighter monetary policy.  This has more to do with monetary inflation than it does interest rates.

I encourage people to read diverse opinions on different matters.  But it is important to recognize when someone’s arguments are way off base.

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