The Fed has done an
excellent job of preparing the world for this rate hike so it was already built
into market prices. Don’t expect much to happen.
Some economists expect
rising interest rates to kill the “recovery” and plunge the US economy into a
recession. And of course the standard Austrian business-cycle theory teaches
that rises rates will cut short an expansion. But as I have written before, recessions can happen without rising rates because of the Ricardo
Effect.
But the idea that tight
money is the only cause of recessions, as monetarists claim, is an example of
the post hoc fallacy: because recessions happen after several rate
increases by central banks, people think the event that happened first caused
the one that happened later. It’s similar to attributing the rising of the sun
every morning to roosters crowing.
The looming recession will
happen because insanely low interest rates after 2008 caused excessive
investment in commodities, especially oil, natural gas, iron, copper, and even cotton production. That investment was not
excessive in the sense that overall investment in the economy was too much, as
Marxists have often insisted. It was excessive in the sense that it should have
been invested in the production of more consumer goods instead of capital
goods, or in different capital goods.
Monetary policy launches
unsustainable expansions, but the real economy ends them. Mises put it in
terms of a house builder who lays a foundation for a 20,000 square foot house.
Afterwards, he discovers he has enough material for only a 1,200 square foot
cabin. Hayek describes it as the rising costs of production for capital goods
producers (due to competition for resources from consumer goods producers)
meeting falling demand for their capital goods (because consumer goods
producers use more labor and less equipment) resulting in collapsing profits.
Lachmann portrayed the
turning point for some recessions as hitting a “ceiling,” or shortage of a
commodity used for the production of capital goods. That may have happened in
2007 but is not likely this time around with the vast quantities of commodities
on the market driving prices to historical lows. Lachmann’s version applies
more to recessions that happen at the top of commodity super cycles.
According to the media,
the Fed thinks that the economy is doing well because inflation has picked up
and unemployment is low. However, Fed economists know that employment is a
lagging indicator that peaks after the recession has begun, so I’m suspicious
that the media have that wrong. My guess is that the Fed doesn’t want to get
caught with its pants down when the next recession hits.
For investors wanting to
ride out the storm, I’ve put some of my funds into closed end bond funds.
Closed end funds are like exchange traded funds (ETFs) in that they buy a fixed
quantity of bonds. Investors trade the fund as if it were a share of stock. The
current advantage to closed end funds is that many are selling at discounts to
the value of the bonds in the fund, so it’s a typical value play, but with
bonds in a market where there are no good value plays in the stock market.
Closed end funds pay
interest, plus, once things calm down, the investor should get a boost in the
value of his principle, much like the price of a stock appreciating, when
investors bid up the price of the fund to the value of the bonds in it. The
discount on the funds is proportional to the riskiness of the bonds inside so
investors can get a huge discount on junk funds these days. I don’t have that
kind of courage. I have my money in a fund that buys medium term government
debt, the kind that don’t respond much to recessions or interest rate
increases.
http://affluentinvestor.com/2015/12/the-real-economy-will-end-the-expansion-not-the-fed/
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