Odds Are Rising That the Fed Will Trigger the Next Bust

Source: Ludwig von Mises Institute
by Thorsten Polleit

“Higher nominal (and real — i.e., inflation-adjusted) interest rates are now necessary to support the US dollar. These higher rates make the greenback more attractive against other unbacked currencies such as the euro, the Chinese renminbi, the Japanese yen, the British pound, and the Swiss franc. And with other central banks worldwide unable or unwilling to catch up with the Fed’s rate hike sprint, the US dollar exchange rate is expected to remain strong, attracting capital from abroad and allowing the US to run a massive trade deficit with the rest of the world. However, there is concern that the Fed’s tightening could trigger another bust. Why? From sound economic theory, we know that issuing fiat currency through bank loans that are not backed by real savings creates an artificial upswing (‘boom’), which sooner or later must end in a recession (‘bust’).” (03/08/23)