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Shaken, rattled and rolled

December 16, 2016

You do have to wonder how much our financial advisors understand about anything when you can read a headline like this at the AFR:

YELLEN RATE HIKES RATTLE MARKETS

Could they have thought a quarter percent was too low? No, they are rattled because there may be three increases in 2017 and not just two. So let me quote from this morning’s press to point out that this should not be seen as a bolt from the blue:

Steve Kates, Associate Professor of Economics at RMIT, said it was good news for the US and could be for Australia if it followed suit by raising rates. “Low rates will kill you,” he wrote.

“[It’s] all part of economic resurrection. It may cost more to get your hands on money going forward, but it is also more likely that the higher cost of borrowing will help channel our savings into more productive projects.

“The belief that low interest rates are good for growth may be the worst delusion of all, causing one economy after another to fall into a low-productivity trap from which it is almost impossible to find a way out.”

What he had also said, and been saying for quite some time, was this:

That rates would go up at the first opportunity after the election was as certain as anything in economic policy can ever be. It was just as certain as knowing that with a Democrat President, that they would not be raised until after the election was over.

I did meet Yellen many years ago and we discussed fiscal policy of all things, so when I say to you that she has no idea how things actually work, it is from direct personal experience. These Keynesians are a hardy lot, never influenced by anything that actually happens in the world. Let me therefore take you to the very first para of this AFR article:

The Fed’s forecast of three interest rate rises in 2017 has rattled markets, raising fears that rising rates and bond yields could take the air out of high asset prices, including shares, that have been inflated by almost a decade of easy money from central banks around the world.

Are these people really that detached from how things work?

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