by James Rickards
Today’s environment is drastically different than it was in the late ‘70’s and early ‘80s when inflation was nearly out of control. Today, disinflation is the primary challenge central banks face, not inflation.
It’s impossible to imagine another Volcker today. Today’s markets depend on the artificially low interest rates that the Fed’s been generating since 2009. Raising interest rates would devastatingly pop the asset bubbles in stocks and elsewhere.
Remember how markets revolted against the possibility of further rate increases last December, when rates were still under 3%? Imagine 20% interest rates.
But the problems in the economy today are structural, not liquidity-related. Federal Reserve officials have of course misperceived the problem. The Fed is trying to solve structural problems with liquidity solutions. That will never work, but it might destroy confidence in the dollar in the process.