The Fed is on the easy money trip

Caroline Baum was asking in her column today: “How can a 2 percent funds rate be appropriately calibrated to promote moderating inflation when inflation is currently rising at almost 4 percent?” The answer: it can’t. The Fed is all about easy money.

Look, we have a huge debt problem in this country. Have you seen the debt to GDP stats? I mean people are up to their eyeballs in debt. You can’t pay debt down when interest rates are high and inflation is low. You can only pay down debt easily when inflation is high and interest rates are low. It’s called easy money.

The problem with easy money is it leads to all sorts of bad side effects like a plunging currency or high oil prices, high milk prices, you name it. Personally, I think the Fed is doing this on purpose in order to inflate its way out of a debt pickle in the US. You remember Greenspan’s comments back when we had the whole tech bubble crash. He said that he feared deflation much more than inflation. That’s because deflation makes debts more burdensome, more costly and leads to a liquidity trap.

So, Helicopter Ben wants to avoid this scenario at all costs. That’s where we are. High and rising costs and ultra low, negative real interest rates. And it’s going to be like this until we cry uncle. So it is in a post-bubble world. It’s not a lovely outcome, but it’s a lot better than deflation — at least so far.

For Caroline Baum’s column, see my blogroll.

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News Round-Up: 05 May 2008