Tuesday, September 20, 2022

Keynes Would Oppose the Fed's Next Rate Hike

Click here to read the original Cautious Optimism Facebook post with comments

From the Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff).

The late British economist John Maynard Keynes (1883-1946) would almost certainly not approve of this Wednesday’s anticipated Federal Reserve interest rate hike.

Keynes hated savers, blaming them for the world's economic ills because they wanted a "moderately high rate of interest" in return for the risk of investing their hard-earned money and forgoing immediate consumption. He called for…

"…the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital" (1936) 

...and an all-powerful central bank to push interest rates down as low as possible.

Regarding raising interest rates and possibly lowering business investment and employment, Keynes wrote in “The General Theory of Employment, Interest, and Money," his famous book which has wielded enormous influence over politicians, central bankers, and academics for more than 85 years:

"Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."

So who is right? Should rates be forced down to rock bottom indefinitely to, as Keynes urged, "abolish slumps" and keep “us permanently in a quasi-boom?" 

Or should rates be hiked—or what free marketers would argue: simply allowed to rise on their own without being suppressed by central banks—to slow down the highest price inflation in 40 years, even at the risk of precipitating a more severe recession than we've seen in the two most recent quarters?

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