I heard on National Public Radio yesterday that the head of the Federal Reserve was going over to the European central bank and effectively beg them not to raise interest rates. If the Europeans raise interest rates, the American dollar will go into a free fall against the Euro and inflation will start to really take off in the United States.
So what should be done? Frankly, when the current genius at the Federal Reserve responded to the credit crunch by lowering interest rates I thought he was a bit daft. If the goal is get people to move their money away from stocks and into banks where others can borrow money to buy homes then instead of lowering interest rates, they should be raising interest rates.
If the bank is paying poor interest on passbook savings, why would anybody in their right mind leave the money in the banks?
So lowering interest rates is the wrong response to the credit crunch and of course it is also the wrong approach to inflation. At the same time that the credit crunch was going on, we started getting the first hints that inflation was going to raise its ugly head. Again, instead of lowering rates, the Feds should have been raising them.
Now here we are, inflation is starting to take off like there is no tomorrow – gas and food prices are going up by leaps and bounds and all of us too young to remember the inflationary period of the 70s are going to be in for a rude awakening.
Instead of going to Europe and beg them to not raise interest rates, the Fed Chairman should come home and raise our interest rates.