The Federal Reserve on Wednesday slashed overnight interest rates and left the door open for more cuts — all part of an effort to return confidence to investors so that a weak economy doesn't crater. In its statement, the Federal Open Market Committee said it had unanimously decided to cut its benchmark target interest rate by a half of one percentage point to 1% and clearly signaled it was considering further cuts. This signal came in a statement saying that the main risk facing the economy was weak growth. Any more rate cuts would bring the funds rate to its lowest level since July 1958. – Market Watch
Dominant Social Theme: The Fed is ahead of the curve.
Free-Market Analysis: It is fairly obvious to anyone who reads a lick that central banks and fiat money are the most responsible for the endless blowups that afflict Western, and now world, economies. And the blow ups constantly seem to get worse. In America the first real blow up came about 15 years after the Federal Reserve, America's central bank, came into being.
It is a story that is retold endlessly in America, and yet never with any great accuracy. The Federal Reserve did inflate terribly in the 1920s, but it was not unplanned. The Bank of England and the Federal Reserve worked out a monetary policy that would degrade the dollar while simultaneously raising the pound back to its place in the sun, relative to the dollar, that it had enjoyed before the First World War.
By printing many dollars, the Fed cheapened the dollar throughout the 1920s, and the pound rose. What this actually accomplished for England is questionable; but perhaps it provided a psychological lift. In any event, the great inflation of the 1920s, the Roaring Twenties, came to an abrupt halt in 1929. So terrible was the credit crunch that America and other Western countries really didn't dig themselves out until the Second World War, if then.
The tale unfortunately does not conclude with the Crash of '29. In America anyway, it evidently emerged at the highest levels that the Fed had printed far more dollars than it was allowed. This was because at the time the Fed was linked to a specific dollar-gold ratio. Once people started turning in their worthless dollars for gold, the imbalance would doubtless be revealed. Enter "bank holidays." And after bank holidays, the confiscation of gold due to "hoarding." Thus the imbalance was cured and the argument continues to this day as to the effects of central banking – positive or negative. (We think we've made it clear where we stand.)
Sure it would be great if we could believe in central banking. It's a little like religion, we guess. There are things we shall never know, but to feel better about our economic reality, we might as well take the plunge and … believe. Only we can't. The Fed is a large inflation machine, responsible for the very disasters that its officials then seek to cure by offering more of the same. Yes, the money and credit that is being offered now may indeed help economies avoid the worst of a credit crunch. On the other hand, the amount of inflation being generated by this kind of easy credit is bound, eventually, to kick-start the business cycle all over again, with the same results. How is any of this really helpful? The Fed should do what it needs to do to mop up this latest mess and then shut down, along with the Bank of England, etc. Is that too much to ask?
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