Friday, April 22, 2011

The Fed, Inflation, and the Interest Rate

Gonzalo Lira wrote a great piece recently concerning the Fed and interest rates.  It is very long, but a good read. The essence of his argument is that the Fed cannot afford to fight inflation.  To fight inflation would require the Fed to raise interest rates.  But raising the interest rate would drive up the cost of funding our national debt.  He states that roughly a quarter of government spending is already required to pay the interest.  But raising each 1 point rise in the interest rate would require an additional $100 billion in interest expense.  This is exactly what Austrian-economically minded people have been warning about since the first round of quantitative easing was begun.  Ben Bernanke has painted himself into a corner, and getting out of this mess is going to be horrific.

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