“The Lawrence Welk Show,” which ran from 1951 to 1982, was known for its schmaltzy “champagne music” and a TV screen full of bubbles to open most shows. The interest-rate-slashing Federal Reserve has been running the bubble machine ever since. Now, with inflation feeling like it’s rolling over as the economy slows, it’s time to shut the machine down.
Since the fall of 2008, with a brief respite in 2019, the real federal-funds rate has been negative, meaning interest rates have been below inflation (and still are) and the Fed has been accommodative. Accommodating what? Well, in the false hope of boosting aggregate demand and fighting deflation, they’ve accommodated bubbles, bubbles everywhere.
Deflation is only a ghost, often mistaken for prices dropping naturally and to our benefit. Productivity, doing more with less, lowers prices. Think of chips, iPhones and $538 for a 75-inch 4K smart TV at Walmart. Why fight it?
Ask the Fed. Faced with this productive trend, it keeps trying to stimulate aggregate demand by dropping interest rates or buying bonds. Instead the central bank ends up inflating prices for various assets and unproductive things that don’t naturally drop in price, like housing, healthcare and education. This sets up the next bubble and downturn and bank bailouts which the Fed fights with even more interest rate cuts, churning the crank on the Welkian machine. Stop doing this!
Don’t worry, central bankers would reassure, they keep a sharp eye on consumer inflation indexes. But even former Fed Chairman Alan Greenspan admitted they’re flawed, noting in 2019, “We have a problem with measuring inflation.” Even through mid-2021, inflation numbers looked subdued, but didn’t the Fed notice the asset inflation that rate cuts were causing elsewhere?
Stocks were flying. Even the junkiest bonds had low yields.
