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Discussion: (2 comments)

  1. “normalization of US interest rates”

    I’m not sure what would constitute “normal” US interest rates; I presume you mean “if the Fed weren’t holding interest rates at almost zero.” So let’s try a thought experiment: imagine the Fed didn’t exist, but the crash of 2008 and the political winds since had been exactly as they actually were. What would have happened?

    The big story in the aftermath of 2008 was deleveraging: everybody, from individual to corporation to (since 2010) all levels of government, decided to pull in their horns, pay down their debts, and put money in safe places. What happens in a free market when everybody wants a savings account, and nobody wants a loan? Interest rates plummet — that’s Econ 101 stuff. In other words, if the Fed didn’t exist, interest rates would have dropped precipitously to near the zero lower bound, just as they actually did, and they would have stayed there, just as they have actually done, until there was demand for credit again — i.e. until the economy recovered enough that businesses wanted to invest in expansion.

    You can blame the Fed for lots of things, but don’t blame the Fed for interest rates being too low in the past five years; blame the economy. If anything, people complaining of interest rates being too low are asking the Fed to artificially distort the market.

  2. “any sign that Europe is again moving towards recession or towards deflation might bring home to markets how unsustainable is the European periphery’s debt level. Similarly a major political reversal in any of the peripheral countries could raise questions anew in the markets about the political willingness of the highly indebted European countries to persevere with fiscal austerity and structural economic reform.”

    Nor are these independent events. A turn back towards recession and/or deflation is the most likely thing to CAUSE a political reversal — you have to admit, it’s hard for Joe Public to see why it’s a good idea to lay off thousands of government workers in the middle of a recession, cut spending in the face of deflation, and cut borrowing in a time of record low interest rates.

    Come to think of it, why ARE those good ideas? Those are the opposite of what any rational business owner would do — hire when labor costs are low, spend when materials costs are low, and borrow when borrowing costs are low.

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