Many believe that the Fed may cut its target funds rate in an attempt to stoke inflation and drive the PCE deflator closer to or beyond 2%. This, and any “insurance cut”, as ways to stimulate inflation, are untenable.
When you have structural factors causing deflation or disinflation, low interest rates won’t change the deflationary pressures. How has it worked so far? Sure, rates have been rising … but they’re low.
I’m a believer that, unfortunately, because of the Internet, “scale” is the future, and only 1-3 large companies will exist in any industry, such as how Lowe’s and Home Depot are running local hardware stores out of Dodge (which is why I never buy small-cap stocks). This will cause labor to have fewer employment options and less bargaining power. It’s already happening. This has and will continue to result in stagnant wages for longer than in the past, and low price inflation, as scale allows for input cost and price controls, in addition to wage suppression power. It’s all already happening.
Low rates can, actually, contribute to or even cause “de”-flation.
Cheap capital allows unprofitable companies to “scale”, as investors remain tolerant of the time it takes to corner a market (a la Amazon’s rise), creating the wage and price structures to depress inflation; this is includes the growth of start-up companies that are funded to achieve top line growth- margins be damned.
The Internet encourages size and scale, in B2C and in B2B, as the best search results and largest presences attracts the most customers. Attracting the most customers, in turn, allows for the lowest prices and the goal of volume over margin- and cornering an industry’s market (a la Amazon).
How would lower interest rates change these situations to enhance inflation? How would creating more demand- from businesses or from consumers- change the low inflation caused by a structural evolution through the combinations of technology and “scale” (a result of technology), and a global work force, to boot?
I’m not suggesting that low interest rates can’t stimulate growth and demand; it just can’t stimulate inflation that is suppressed by a particular economic structure, especially if it’s the cheap money that is allowing for scale and the resulting lower prices and lower wages. I’m also not suggesting that the Fed would not attempt to do create inflation with lower rates- lots of Central Banks are attempting to do so.
Only legislation and policy related to an economic structure, and not monetary policy, can affect consumer price inflation caused by structural deflation or disinflation- and, even still, technology and globalization are the primary factors. Legislative policy would have to prohibit or suppress these economic forces.
Trying to offset structural deflation or disinflation with cheap money, rather than with policy, or rather than accepting the reality of it, would be a grave mistake.
The Fed, after stoking asset and credit bubbles with low interest rates, would have to then raise rates to slow or deflate any bubbles it caused, killing-off slow growing economies (i.e. the situation we are now finding ourselves in- credit risk is growing, but the underlying economy, sans cheap money, is too weak to handle higher rates to help control credit risks).
Cheap money hasn’t been the inflation answer … it could be just the opposite … but unregulated cheap money has fueled shadow banking activities and credit expansion in ways that we will all live to regret later … or sooner.
Neil S. Siskind, Esq., President
The Siskind Law Firm
Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Learn more at: http://www.neil-siskind-the-fatherhood-assignment.org/
Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.
Neil Siskind, Founder, “National Fatherhood Day” – March 29th
Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
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You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.
Neil Siskind’s Volunteer Work:
– Memorial Sloan Kettering Cancer Center, Volunteer
– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal
– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm
– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving
– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/
Neil Siskind’s Pro Bono Work:
– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com
– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/
– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/
– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.
Neil Siskind’s Government Work:
– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern
Neil Siskind’s Community Assistance:
Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.
Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/
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