Why “The Fed Can’t Save Us”: The Simple Explanation From Austrian Business Cycle Theory

By Robert P. Murphy of Mises Institute The Fed Can’t Save Us In December, the Fed hiked its target for the federal funds rate, which is the interest rate banks charge each other for overnight loans of reserves. Since 2008 the Fed’s target for the Fed Funds Rate had been a range of 0 percent – 0.25 percent (or what is referred to as zero to 25 “basis points”). But last month they moved that target range up to 0.25 – 0.50 percent. Ending a seven-year period of effectively zero percent interest rates. From our vantage point, we already see carnage in the financial markets, with the worst opening week in US history. This of course lines up neatly with standard Austrian business cycle theory, which says that the central bank can give an appearance of prosperity for a while with cheap credit, but that this only sets the […] Read More

The Definition Of An Unfree Market

Commentary by Guy Haselmann of Scotiabank Unfree A market economy is one based on supply and demand with little or no government control.   Dictionary site ‘Investopedia’ states that “a completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.”  Toto, I don’t think we are in Kansas anymore. After the 2008 financial crisis, regulatory banking rules (i.e. macroprudential policies) conspired with zero (or negative) interest rates and asset purchases to exterminate the markets’ ability to freely calibrate clearing market prices based on supply and demand factors.   It is impossible for central banks to sustain controlling influence on market sentiment, investor behavior, correlations, and valuations, simply because effectiveness wanes over time.  As time passes, central bank stimulus stretches financial asset […] Read More

The Experiment that Will Blow Up the World

Submitted by Pater Tenebrarum via Acting-Man blog, The BoJ Goes Even Crazier It has been clear for a while now that the lunatics are running the asylum in Japan, so perhaps one shouldn’t be too surprised by what happened overnight. Bloomberg informs us that “Kuroda Jolts Markets With Assault on Deflation Mindset”. The policy hasn’t worked so far, in fact, it demonstrably hasn’t worked in Japan in a quarter of a century. Therefore, according to the Keynesian mindset, we need more of it. Mr. Kuroda therefore delivered a surprise spiking of the punchbowl that immediately impoverished Japan’s consumers further by causing a sharp decline in the yen: “Today’s decision to expand Japan’s monetary stimulus may be regarded as shock treatment in the central bank’s effort to affect confidence levels. Bank of Japan Governor Haruhiko Kuroda’s remedy to reflate the world’s third-largest economy through influencing expectations saw the yen sliding and […] Read More