The commenter sonepatchworth, who (hee, hee) doesn't think the Fed will raise rates at their December monetary policy meeting, left the following comment at my post, "211,000 New U.S. Jobs All But Guarantees a Fed Hike":
If RW thinks higher rates will not traumatize an economy with a labor structure, capital structure, and cash flows adjusted to and dependent on the embedded subsidy and distorted signals of artificially low rates, and RW thinks higher rates will not start to rupture artificially levered-up asset price bubbles, then RW implicitly endorses the effectiveness of artificially lowered interest rates at creating real and lasting improvements in jobs, productivity, and asset prices.
In other words, if RW's prediction is correct that the Fed can allow rates to rise and the economy will not turn for the worse, then Keynesianism is correct!
Generally, I would consider such a troll attack infra dignitatem to respond to. However, commenter Hollow Daze followed up with this comment:
Very well said. I would like to hear RW's response to that...So based on the possibility that there are some EPJ readers genuinely confused, I will slice the sonepatchworth's comment to bits.
First, sonepatchworth creates something of a straw man when he writes, " RW thinks higher rates will not start to rupture artificially levered-up asset price bubbles,"
I do not hold the view that all Fed rate hikes will not start a crash of the Fed manipulated economy, merely, as I have pointed out here at EPJ and emphasised in the EPJ Daily Alert. a 25 basis point hike in the target rate is minuscule. In my book, it is not much different than a Fed rate hike of 0.000000001%, That is, this will result in no slowdown in Fed money supply growth because it is a very small matter, especially if we start to see an acceleration in price inflation of the type that I am expecting.
More significant, however, is that sonepatchworth and most of the financial community have their eye on the wrong interest rate. The most important interest rate (and, again, this is something I have pointed out in the EPJ Daily Alert) is the effective funds rate. This rate, as can be seen in the chart below, has been climbing for some time:
Despite this climb in the effective Fed Funds rate, money supply growth has generally been growing,
This can occur if the natural rate, by which I mean the rate that would exist if the Fed didn't interfere in the rate market, is climbing faster than the effective rate. It is this growth in the money supply, caused by the natural rate-effective funds rate differential that is fueling the current Fed manipulated boom. There is a level at which the Fed could raise rates and it would stop the manipulated boom, but we are just far from that point.
I hasten to add that I do expect some climb in the effective Fed funds rate, once the Fed raises the "target rate," and I will have a more detailed discussion in the ALERT about this, so I won't go into it here. It's suffice to understand here that a minuscule hike in the target rate is unlikely to mean a slowdown in money growth, Thus, far from being a Keynesian who " implicitly endorses the effectiveness of artificially lowered interest rates at creating real and lasting improvements in jobs, productivity, and asset prices," I just have a sharper, deeper and more sophisticated understanding of interest rates, money supply growth and Austrian Scool Business Cycle Theory than does sonepatchworth.
Rates below market levels create the distorted boom, which we are experiencing now. There is nothing "lasting" about this manipulation, since it requires greater and greater amounts of new money to be added to the system to keep the manipulated boom going on. It is a boom that will eventually end, if for no other reason than because it will ultimately lead to serious accelerating price inflation that will cause the Fed to seriously raise rates significantly enough to stop money supply growth (Alternatively, a price inflation crack up boom is theoretically possible that could destroy the currency.).
Thus, I see nothing "effective" about such Fed manipulations.