In my estimation Fed can not risk rising rates in such critical times and therefore it won't. A rising rate at current market conditions one month before October,
that historically is associated with a stock market correction, could be the psychological
trigger that would disturb the current fragile local equilibrium, pushing the
US and the whole global system along a path towards instability and a
full-fledged financial crisis exhibiting a collapse of investment, debt
deflation, and thus leading to insolvent debtors and a weaker banking system – that would be 1937 all over again!
I am not of
course a fan of current zero interest rate policies, and I believe these
policies have distorted not only the US and European economies, but also the
global economy. The Fed indeed has created a catch 22
situation; as higher rates are needed badly, but any action towards raising rates would
be extremely destabilizing. This is why I have been calling for an emergency
global finance conference similar to the Brussels conference that took
place between the 24th of September and the 8th of
October 1920. That international conference was called
“with a view to studying the financial crisis and looking for
the means of remedying it and mitigating the dangerous consequences arising from it.”
Such a sharp
focus on financial crisis is needed for any new conference that would be dealing
with the current situation in order to find a sustainable long-term solution. In other words, none of the unrelated
questions such as geopolitical crisis, human rights or environmental concerns need
to be discussed in this conference, and its sole purpose should be a search for
restructuring of global finance. To arrive
to an accurate assessment the Brussels conference secretariat asked the
participant countries, and their financial institutions to submit latest data
on currency, public finance, international trade, inflation and so on, which is
an obvious prerequisite.
Like the
current crisis, as Gustav Cassel, the great Swedish economist, argued the main
responsibility for the 1920s financial crisis was the policy actions by various
countries, which could only be remedied by an internationally coordinated
return to stable currencies. It is of
note that, such a return in Cassel’s framework was not predicated on a return
to the gold standards. He also strongly dismissed the possibility of arbitrarily
fixing exchange rates and instead advocated a global exchange rate regime based
on the theory of Purchasing Power Parity PPP, which would have linked fluctuating
exchange rates to the prices paid for a common basket of goods and services in the
regions that participated in international trade, such that the same price level
would have been maintained for that common basket in every region.
Although Cassel
correctly diagnosed the dangers of deflationary policies for the future
prospects of economic growth and social stability, he warned that:
“As the internal value of a currency exclusively depends upon
its purchasing power over commodities, a stabilization of this value can
clearly only be attained by an adequate restriction of the supply of means of
payment. The character of this restriction depends, of course, on the character
of the means of payment used in the country. If they are supplied by the State
as a paper money issued by the Government directly or indirectly for covering
their expenses, the stabilization of the monetary standard clearly requires the
stopping of further arbitrary creation of such money. This is so obvious that
it is not necessary to waste many words on it”.
Unfortunately under today’s “currency wars” conditions,
with the slowdown in China, and Europe’s debt crisis, as well huge debt build
up by consumers and states the normalization of monetary supply in any single
country, as an isolated and uncoordinated action, would be a recipe for
disaster.
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