These Huge Deficits Wouldn’t Be Possible without the Fed’s Inflation

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Mises Institute: With the Federal Reserve’s annual Jackson Hole symposium there’s been much talk about when the central bank might allow interest rates to rise, presumably through the process of “tapering.” Tapering would mean easing monthly bond purchases, which would “effectively increase interest rates.“

“For the Lord thy God blesseth thee as He promised thee; and thou shalt lend unto many nations, but thou shalt not borrow; and thou shalt reign over many nations, but they shall not reign over thee.” Deut. 15:6 KJV

Much of the discussion over the Fed’s policies on interest rates tends to focus on how interest rate policy fits within the Fed’s so-called dual mandate. That is, it is assumed that the Fed’s policy on interest rates is guided by concerns over either “stable prices” or “maximizing sustainable employment.”

This naïve view of Fed policy tends to ignore the political realities of interest rates as a key factor in the federal government’s rapidly growing deficit spending.

While it is no doubt very neat and tidy to think the Fed makes its policies based primarily on economic science, it’s more likely that what actually concerns the Fed in 2021 is facilitating deficit spending for Congress and the White House.

The politics of the situation—not to be confused with the economics of the situation—dictate that interest rates be kept low, and this suggests that the Fed will work to keep interest rates low even as price inflation rises and even if it looks like the economy is “overheating. Read More

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