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Basis for sound money

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I feel the basis for sound monetary policy is an interest rate above the rate of inflation. I don’t really understand why I feel this way, but if you don’t have interest rates above inflation, it would seem to encourage people to search for alternatives like gold or bitcoin. It also would seem to drive asset bubbles, as holding cash is poison, so buy stocks or something. Am I wrong?

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Posted by (Questions: 45, Responses: 4)
Posted on 11/30/2017 8:01 PM
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In past, it seems that Fed always creates real FFR rate spike just before US recessions (grey color bars in the chart). Real FFR rate hike = nominal FFR – core CPI > 0. Fed can hike a nominal FFR rate, but cannot make sure if it will spike real FFR rate hike to trigger a recession afterwards since Fed does not know inflation dynamics very well.

A detailed explanation on 1980 – 1982 Volcker recessions is in Paul Romer’s article “The Trouble in Macroeconomics” here https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf.

Also, attached is an annotated chart with time periods of real FFR rate spikes by Fed.
In chart, blue line = FFR – Core CPI and red line= 3M10Y Treasury Yield Curve. As you can see, blue line is much better way to express real FFR spikes for possible a recession.

https://fred.stlouisfed.org/graph/?g=g1Hi

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Posted by (Questions: 18, Responses: 156)
Answered on 11/30/2017 11:53 PM
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This has always been a topic of debate. It kind of depends on what you mean by “sound monetary policy”. The main role of the Fed is to make sure the interbank clearing market works. That means setting an interest rate that is accommodating to banks. So, monetary policy is really about making sure banks can earn a positive net interest margin and offer loans and other services to the private sector so that the economy operates at optimal capacity.

IMO, the govt doesn’t owe anyone a real return on the currency. The govt offers a safe risk free asset and offers to settle that instrument at par on demand. If you want to earn a real return on your money you should need to take some risk in my opinion. Offering a risk free real return to everyone is a free lunch too far for me. You can get real return investing in AAA rated bonds and other relatively low risk assets. Why does the govt owe anyone a real return on their money?

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Cullen Roche Posted by (Questions: 10, Responses: 1800)
Answered on 12/05/2017 10:34 PM