Imagine you’re in a position where you have two options: 

1. Your actions are the catalyst which crashes the economy immediately. Many people will lose their jobs, houses, vehicles, and much of their savings. However, this crash is necessary and will lead to significant economic growth in the future. Nearly everyone will blame you for this crash; you’ll get fired, and your career likely ruined. You know this is the right thing to do. 

2. Your actions lead to the eventual collapse of your country’s currency, which is the most economically harmful outcome possible. The pain from this currency collapse will be far worse than pain experienced in option one. Most won’t blame you for the currency collapse, and your career will continue. 

The problem is centered around interest rates.

The dot-com bubble burst in the early 2000s. Then headed by Alan Greenspan, the Federal Reserve (Fed) gradually lowered interest rates down to an unheard of 1%. They stayed there about a year and a half before slowly raising them again. Interest rates were far too low for much too long, which was a major factor in the creation of the housing bubble that we saw pop in 2008.

They certainly wouldn’t make that mistake again, right? Au contraire. 

After making the fatal error of lowering interest rates too much and keeping them there too long, these Einsteins at the Fed decided to take the man’s overused definition of insanity and apply it to their work. I imagine their meeting went something like this: 

Mr. Chairman: “Last time around, we lowered interest rates to 1% and kept them there for a year and a half, resulting in disaster. I know all of us here have heard the wise words of Albert Einstein. The definition of insanity is doing the same thing over and over again and expecting different results. I propose we lower interest rates to 0% and keep them there for eight years. Let’s hear the Yays and Nays.” 

The most productive eight minutes of your day will be spent watching Tom Woods explain the major role interest rates play in the economy and what happens when the Fed messes with them: 

  

Today, interest rates have been right around zero for about eight years, causing enormous misallocations of resources that must be corrected with a painful recession. Herein lies the conundrum. 

The Fed’s Options

Raise interest rates in a meaningful way and face and immediate collapse of the economy. 

This may sound like a terrible option, but I strongly believe it is the best option. It will cause significant short-term pain as the economy goes through a major restructuring. Many people will lose their jobs, houses, cars, and likely much of their savings. However, when the pain is over, the economy will grow in a meaningful way. The sooner this is done, the less painful it will be. It's the right thing to do, and a likely career suicide for whoever does so.

Keep interest rates low and face an eventual collapse of the US Dollar.  

This option is more likely to allow Fed officials to save face as well as their career. Keeping interest rates suppressed allows the Fed to prolong the inevitable pain. However, it comes at a an enormous expense - the eventual collapse of the US Dollar. Hyperinflation is the most painful scenario, but I'm afraid it won't be avoided because it is the most politically expedient. It allows the Fed to deflect responsibility as citizens will likely blame whomever the media tells them to blame. Perhaps foreigners? The rich? Capitalism? Boaty Mcboatface? Time will tell.

I think the first option is unlikely in the foreseeable future because it is not politically expedient. I believe it will become more likely as price inflation increases and they are forced into raising interest rates to save the dollar. If you were in this position, would you do the right thing and destroy your career in the process? Or would you kick the can down the road and pass the blame to someone else?

Thoughts? Questions? Criticisms? I'd love to hear them!

p.s. I'm happy to see this new option since I would have powered up regardless!