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Interest Rates Must Rise   June 27th, 2011
Low interest rates don't always help, and we've reache that point       

 
QUICK OBSERVATIONS

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The artificially low interest rates caused in large part by central banks printing money with "quantitative easing" plans is starting to generate negative reviews.

The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.

The BIS warned low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies--

Emerging economies, especially in Asia, have had to deal with rising prices for food and other essential commodities. This has pushed up the cost of living and has threatened to derail growth in many developing nations. The BIS warned that the central banks needed to change their policies in order to deal with the situation.


Indeed, one of the many problems with government intervention in the economy--including interventions by the Federal Reserve--is that they do distort the market. Artificially low interest rates in the early 2000's in response to a previous recession led to distortions and misallocations of resources which, combined with other government interference, significantly contributed to the housing bubble which ultimately triggered our current crisis.

Unfortunately, it seems unlikely Federal Reserve Chairman Ben Bernanke will be very concerned about growth or inflation in developing nations. In December 2009, Bernanke had the following to say:

It is really not the United States responsibility to make sure there are no misalignments in every economy in the world when those countries have their own tools to address them.


While the chairman is technically correct, it was easy to predict that the bubbles he was creating worldwide would come back to haunt us. And they have. Rising food prices, increases in the price of petroleum, and a general increase in commodities have put the brakes on economic growth in the U.S. And they've contributed to 'Arab Spring' revolutions that have dragged us into yet another military conflict in Libya.

Regardless of the impact on security around the globe, hopefully the Federal Reserve will heed the advice of the BIS to stop intervening and allow interest rates to be set by the market.

Only by letting the market work freely is there any chance of an eventual real recovery.

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