Mish Shedlock is a regular founding contributor to Talkmarkets. His insights are very interesting and his column here is always worth the read. I agree with him on most issues.
But he advocates similar ideas to the Fed line of raising interest rates. I think that advocacy is wrong. I believe that there are other ways of cooling the financial system, according to economist Thomas Palley, without across the board raising of interest rates.Â
Before discussing that, here is a look at issues that concern Mish. There are at least two reasons Mish thinks the way he does on the need to raising interest rates:
1. Mish does not believe that the Fed should commit to future booms to offset large financial busts because we already have too much asset inflation, and inflating assets more will be more deflationary in the future. That is very likely true. Janet Yellen, while following the Fed line while chairman, now advocates the Fed attempt more symmetry. Mish responded to Yellen’s idea:
Â
Former Fed Chair Yellen promotes “Lower for Longer”, a policy in which the Fed knowingly keeps interest rates too low.
Here’s the asinine policy proposal of the day:Â Fed Should Commit to Future “Booms” to Make Up for Major Busts.
Â
This is a pretty radical idea for the Fed, and is unlikely to be implemented. It is, after all, Nominal GDP Targeting, similar to the idea espoused by Scott Sumner. But, the Fed has generally opted for an asymmetrical approach as we can see from a finding by Matthew Yglesias that I quoted in my article about Mr Kashkari:
Â
The labor share declines during recessions and rises during booms. And the problem of the Federal Reserve is that over the past 30 years, it has a perfect track record of never allowing inflation (which is to say a sustained period in which wages rise faster than productivity), but it doesn’t have a perfect track record of never allowing recessions. The inevitable consequence of this asymmetrical success is for the labor share to steadily decline.
