San Francisco President John Williams spoke last Sunday, reiterating his position that the Fed would hike 3 times this year. Looking only at the inflation rate (as measured by the PCE) and the unemployment levels, the Fed considers its dual mandate as having been met. On the surface this justifies a rate hike, according to mainstream economic orthodoxy.
However, Williams also expressed concern about the long-term prospects of slowing economic growth. CNBC quotes Williams:
“I personally view that the biggest challenges the U.S. faces are really longer run challenges, not about next month, next year. They’re about the fact that productivity growth is very slow, we have a shortfall of infrastructure in the U.S.,” he said.
“We have a lot of longer term challenges that really revolve around needing more investments in education, job training, infrastructure, research and development, all the things that propel an economy over the longer term.”
The fact of the matter is the last 3 decades have seen a central bank-induced false prosperity in which the true capital stock of the United States (and the global economy) has been depleted. By artificially lowering interest rates and expanding the money supply worldwide, the central planners have brought consumption spending forward, neglecting the necessary savings required for long term economic growth.
Williams mentions several areas requiring increased investment, which allegedly propel an economy over the long term. The problem is that the world has far less capital to actually invest in the long term-- and the central bankers falsely believe that the creation of more money and the suppression of interest rates will suffice. But money is not the same as savings, as capital. Frank Shostak:
Money can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples, the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.
The only way that the economy can be prepared for investment in various areas for the long term is by first accumulating a large capital stock. But the Fed’s entire academic framework rests on the opposite of this; namely, to keep interest rates basically at all time lows and to encourage spending and consumption. With this the goal in mind, growth rates simply can’t recover.
It seems that this theme of “rate hikes immediately but concern about the long term” could be a sign that the Fed is hiking now so that it has room to slash them in a future recession. Watch for this theme to become more prominent toward the end of the year.
