[jmherbener]

Metrics for investment can be found here:

https://fred.stlouisfed.org/categories/112

The BLS link does not work for me. So here’s the unemployment data from another source:

https://fred.stlouisfed.org/series/UNRATE

The unemployment rate has fallen steadily from its peak in Oct. 2009 of 10% to current rate of 3.9%. The reason for this is that the Fed under Obama kept monetary inflation going straight through the bust and so the economy went into another boom without experiencing a significant period of normalcy (i.e., a genuine recovery). You can see that this has been the general pattern of Fed behavior since the collapse of Bretton-Woods in 1971. Before then, there were plateaus for the unemployment rates at normal levels after recessions. For example, after 1955 unemployment stays steady for several years at 4% and again in the late 1960s. But since 1971, there are no significant period of steady, normal unemployment rates. (The plateaus in the 1970s and 1980s are short and at historically high rates around 7%.) And since the mid-1980s, unemployment is either steadily rising or steadily sinking. The Fed is the cause of this pattern.

[johnwinters91]

Professor,

I’m posting more data as a continuation of my last question.

https://data.bls.gov/timeseries/LNS14000000

https://www.google.com/amp/s/www.marketwatch.com/amp/story/guid/5EA30E24-B13F-11E8-8817-22AA63F9C3A8

Is this economy due to Trump’s tax cuts and regulatory rollbacks?

If so why did we see a recovering labor market under Obama as well?

Are we just witnessing another inflationary boom? If so, how can that happen with the rate increases we’ve seen coming from the Fed?

Thank you as always

[johnwinters91]

Just saw that you had replied to me already. Thank you as always.

Is it too early to tell if Trump’s policies are working? Also, how can the Fed be causing an inflationary boom if rates have been going up? Isn’t the cause of the boom the low rates?

[johnwinters91]

Also, is it fair to say that “normal” interest rates and investment levels haven’t been present since before the dot-com boom?

[jmherbener]

Yes, I think it is fair to say that interest rates have not been left to the market since before the dot-com boom.

Here is the commercial paper rate:

https://fred.stlouisfed.org/series/CPN3M

Here is the corporate bond rate:

https://fred.stlouisfed.org/series/AAA

Fed monetary inflation and credit expansion makes interest rates lower than they otherwise would be. So even if interest rates are moving up, asset price inflation may be taking place. This is likely in our current situation where the Fed has suppressed interest rates for so long below the market rates.

Also, interest rates are rising mainly on the short end of the yield curve as the Fed reduces expansionary policy.

Here is the interest rate spread between long and short:

https://fred.stlouisfed.org/series/T10Y3M

I haven’t made a careful study of the impact of Trump’s policies. It’s likely that they are having their effects, but that these effects are intertwined in complex ways that are difficult to disentangle. For example, the impact of tax cuts and tariff increases on farm incomes and production.

On tariffs:

The Impact of Trade and Tariffs on the United States

Update: The Impact of Enacting President Trump’s Tariffs

On taxes:

Details and Analysis of Donald Trump’s Tax Plan, September 2016

[johnwinters91]

Thank you again!

[johnwinters91]

I’m very grateful for all of the time and effort you put into writing such substantive answers. I’ve learned a lot from this conversation.

One thing that I’m still wondering, however, is this: If the Fed always determines rates, how are we to ever know 1. What the actual market rate is; 2. Whether rates are rising slower than they should?

This seems interesting to me, especially in light of the fact that we shouldn’t be using the Taylor Rule.

Thank you as always

[jmherbener]

First, the Fed only influences interest rates. It only determines the discount rate. And it’s influence is strongest on the federal funds rate. When the Fed buys securities from banks it pays by crediting the banks’ checking accounts which they have at the Fed. Since the balances in these accounts are bank reserves, the Fed increases bank reserves with expansionary monetary policy. The federal funds rate is the interest rate for banks when they borrow reserves over-night from other banks. The effect expansionary monetary policy has on other interest rates depends on what banks do with the greater reserves.

Here is the spread between 10 year T-bonds and 3 month T-bills:

https://fred.stlouisfed.org/series/T10Y3M

There are tendencies, but not a uniform effect on interest rates across the yield curve from a given expansionary policy of the Fed.

Second, entrepreneurs adapt as best they can to government intervention. They economize as fully as possible given the interference of Fed policy. Of course, entrepreneurs would economize more fully if there was no Fed, but they do the best they can in the face of the additional difficulties the Fed generates.

The Taylor rule proposes a feedback mechanism which requires assessing the rate of price inflation against an ideal rate and the rate of growth against an ideal rate in order to set the target fed funds rate.

[johnwinters91]

Professor,

Is it true that the losses as a percentage of GDP were greater in most cases after the we got the Fed than they were before in the prior panics/recessions?

Did we ever see instances where bank runs happened for no reason and it caused severe recessions?

Are there any places in the world currently or in world history where we can observe a country without a central bank which doesn’t have business cycles caused by credit expansion?

Are there instances when we can observe credit expansions that were in fact based on market functions in which we didn’t see a boom followed by a bust?

Thanks you as always for your efforts!

[jmherbener]

1. I’m not sure about the overall losses, but the volatility of cycles has not been lower under the Fed than before the Fed:

https://www.cato.org/policy-report/novemberdecember-2012/has-fed-been-failure

2. This seems unlikely because for bank runs to occur the banks must have extended fiduciary media. But extending fiduciary media through credit expansion is what causes the boom-bust cycle.

If banks were 100% reserve, then customers cashing out their checking deposits would affect neither the supply or money nor the supply of credit. It would be trading one form of the medium of exchange (checking deposits) dollar-for-dollar with another form (cash). Banks would only be intermediating credit, borrowing from savers in savings accounts and lending those funds to investors.

3. The Amsterdam banks of the 1600s were 100% reserve for over century. The problem with isolating the consequent Dutch production processes from credit expansion is the existence of world credit market which have fiduciary media.

https://wiki.mises.org/wiki/Full_reserve_banking

4. Like no. 2 above, this seems unlikely. There can be no credit expansion without fiduciary issue. Even if money proper increases (say the 1849 gold rush in California), without fiduciary issue there is no credit expansion and therefore, no inter-temporal malinvestments.

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