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December 16, 2008

No Viagra after Fed shoots last wad

The psychological bluff and gamble that is the baseline of capitalist economics (hear that, pseudskeptic Michael Shermer?) has its denoument today when the financial warlock of the world’s largest economy throws pretty much his last major thunderbolt and drops the funds rate to one-half percent. Since all economists have Japan’s recent past history in mind, one-half percent is, essentially, the new zero on interest rates.

So, now, more than ever, economic recovery rests in part on the believeability factor of Ben Bernanke, including people believing him that cutting interest rates will significantly help restore economic liquidity.

Note to Ben: It won’t.

Now, rate-cut supporters will argue Big Ben also has to worry about deflation, reflected by a record 1.7 percent drop in consumer prices. But, first, monetarism is not the best guaranteed deflation-fighter. Second, everybody knows that oil prices caused much of the drop. (So why, as opposed to inflation, is Big Ben not now just focusing on core CPI?)

Update, 6:20 p.m. So Big Ben went even lower than expected and dropped the funds rate to zero to one-quarter percent.

First, by having a range, Big Ben is trying to avoid putting himself in the Japanese zero percent box. Too late.

Second, you really have shot your wad, even with a bit of rate range. There is nowhere else to go with interest rates. Money supply? If credit stays locked up, that will not make a big difference either.

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