Are We Headed For Another Bust?
by Frank Shostak via The Mises Institute,
ZeroHedge.com
01/05/2016
Consequently the loose interest rate stance is reversed. This begins to undermine the survival of various bubble activities — an economic bust ensues.
The magnitude of the bust is influenced by the extent of the previous loose monetary stance and by the state of the pool of real wealth. (Note that what permits economic growth is the pool of real wealth which funds economic activities.)
Now, if the pool of real wealth is stagnating or shrinking, then regardless of the Fed’s policy, the economy can’t show a general economic growth.
A tighter interest rate stance coupled with a shrinking pool of real wealth will not only undermine bubble activities but also good activities, which couldn’t be introduced on account of the lack of real funding.
As time goes by though a tighter stance will eliminate bubble activities and will leave more real wealth at the disposal of wealth generators and will permit the introduction of various wealth generating activities.
The prolonged low interest rate policy of the Fed, on top of the Fed’s previous loose monetary policies (during Greenspan’s era), has severely weakened the pool of real wealth, which is currently in a dire state.
This raises the likelihood that the elimination of bubbles as a result of a tighter stance while good in the long-term for wealth generators is likely to trigger a severe economic slump in the near to medium term.
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