April 4, 2012 Reading Time: 2 minutes

…and the government way.

The expectations of modest growth in January by the Fed deflated to moderate growth in mid-March. The monetary policy that the Fed and the Treasury have followed have failed to have the desired effects. But that doesn’t stop policy makers from trying the same medicine – even if the name for it changes. As reported by Reuters:

“As widely expected, the Fed reiterated its expectation that overnight interest rates would remain near zero until at least through late 2014 and that it would continue its program to reweight its portfolio toward longer-term securities. That program, known as “Operation Twist,” expires at the end of June.”

Policy makers still fail to attack the underlying problem: Uncertainty and fiscal deficits (with high levels of government debts). Since the interest rate set by the central banks affects the cost of the Treasury’s debt, central bankers are cornered between keeping interest rates low, or increasing interest rates to lower uncertainty on future inflation but at the cost of increasing the debt outlays of the Treasury. It shouldn’t be the role of the central bank to assist the Treasury, and it shouldn’t be the strategy of the Treasury to increase government debt beyond reasonable limits. In addition, it is the role of the representatives in the Congress and Parliaments to put a limit to the spending and issuance of debt to the executive power.

Interest rates affect with different magnitude different industries and projects that are more or less forward looking. Therefore, a monetary policy that drives the interest rates below the market equilibrium produce real distortions on the economy. The QE policy only achieves to postpone the correction of underlying imbalances. But the economy cannot be fixed with interest rates when the fiscal and future regime structure is so uncertain. Will countries default? Will the Euro survive? Will the USD lose market share in the international markets as the reserve currency? etc…

“While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high.”

Policy makers need to look somewhere else to solve the economic problems affecting Europe and the United States.


Nicolas Cachanosky is a doctoral student in economics at Suffolk University, as well as a previous Sound Money Essay Contest winner.

image: flickr.com/tonyjcase

Nicolás Cachanosky

Dr. Cachanosky is Associate Professor of Economics and Director of the Center for Free Enterprise at The University of Texas at El Paso Woody L. Hunt College of Business. He is also Fellow of the UCEMA Friedman-Hayek Center for the Study of a Free Society. He served as President of the Association of Private Enterprise Education (APEE, 2021-2022) and in the Board of Directors at the Mont Pelerin Society (MPS, 2018-2022).

He earned a Licentiate in Economics from the Pontificia Universidad Católica Argentina, a M.A. in Economics and Political Sciences from the Escuela Superior de Economía y Administración de Empresas (ESEADE), and his Ph.D. in Economics from Suffolk University, Boston, MA.

Dr. Cachanosky is author of Reflexiones Sobre la Economía Argentina (Instituto Acton Argentina, 2017), Monetary Equilibrium and Nominal Income Targeting (Routledge, 2019), and co-author of Austrian Capital Theory: A Modern Survey of the Essentials (Cambridge University Press, 2019), Capital and Finance: Theory and History (Routledge, 2020), and Dolarización: Una Solución para la Argentina (Editorial Claridad, 2022).

Dr. Cachanosky’s research has been published in outlets such as Journal of Economic Behavior & Organization, Public Choice, Journal of Institutional Economics, Quarterly Review of Economics and Finance, and Journal of the History of Economic Thought among other outlets.

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