F.A. Hayek 1970
04-08-2008
, 12:41 PM
This passage is from "The Austrian Theory of the Trade Cycle and other essays"
Crude chart of fed reserve fund rate since 1980 (chart only marks changes and not how long we stayed at each rate)
We see exactly what Hayek was talking about in 1970, each monetary contraction (raising of the funds rate) is cut short and turned back into an expansion due to recession fears before it reaches any previous high. If we look at the last 40 years or so of fed funds rates we see how low our current levels really are
The fed may be able to push us out of this recession by continuing to lower rates, hold auctions and take on liabilities, but we can be sure that we are near an end of their ability to do so as the fund rate approaches 0 and the fed uses tactics it has never used before.
Quote:
All I am contending is that if we wanted to perpetuate the peculiar prosperity -and-job-creating effects of inflation we would have progressively to step it up and must never stop increasing its rate....What we are experiencing is still only what in Britain is known as the "stop-go" policy in which from time to time the authorities get alarmed and try to brake, but only with the result that even before the rise of prices has been brought to a stop, unemployment begins to assume threatening proportions and the authorities feel forced to resume expansion. This sort of thing may go on for quite some time, but I am not sure that the effectiveness of relatively minor doses of inflation in rekindling the boom is not rapidly decreasing. The one thing which, I will admit, has surprised me about the boom of the last twenty years is how long the effectiveness of resumed expansion in restarting the boom has lasted. My expectation was that this power of getting investment under way by a little more credit expansion would much sooner exhaust itself- and it may well be that we have now reached that point. But I am not sure. We may well have another ten years of stop-go policy ahead of us, probably with decreasing effectiveness of the ordinary measures of monetary policy and longer intervals of recessions.
We see exactly what Hayek was talking about in 1970, each monetary contraction (raising of the funds rate) is cut short and turned back into an expansion due to recession fears before it reaches any previous high. If we look at the last 40 years or so of fed funds rates we see how low our current levels really are
The fed may be able to push us out of this recession by continuing to lower rates, hold auctions and take on liabilities, but we can be sure that we are near an end of their ability to do so as the fund rate approaches 0 and the fed uses tactics it has never used before.
