Year: 2010

Why the Fed Raised the Interest Rate

Contractionary Fed policy in a recession?

What does it mean when the Fed raises the interest rate? It helps to first understand how the Fed raises the rate, which may surprise some people.  The Fed does not “set” the interest rate as it might, for example, by declaration or edict or by fixing prices.  No, it targets a higher interest rate by contracting the money supply until that money supply intersects the market demand for money at a higher market-clearing rate of interest.

Ben Bernanke, recently reconfirmed Fed Chairman

How does the Fed reduce the money supply? Typically by conducting open market operations, which is the purchase or sale of government securities by the Fed.  To raise the money supply, it purchases new government securities, paying for them by creating — out of thin air — reserves for the commercial banking system. To reduce the money supply, it sells securities which shrinks the amount of deposits in circulation in the economy. In other words, it reduces the liquidity or amount of credit in the system.  This is equivalent to reducing aggregate demand for the goods and services in the economy. (Yes, you heard right — a reduction in the money supply decreases the aggregate demand for goods and services by businesses and consumers.)

Raising interest rates is a contractionary policy decision.  It is designed to “slow down” the economy, reducing output and employment, and raising the equilibrium prices of goods and services in the economy.  Why would the Fed choose to contract an already anemic economy?  To head off inflation, which has it own set of insidious costs and distortions that significantly hurt the economy.

The Fed has always had to tread a very fine line between increasing the money supply enough in the short run to pump up demand and minimize the depth and length of a recession, but not increasing the money supply so much that the increase in demand outstrips the ability of the economy to produce, which creates inflation in the longer run.   Excessive money growth is what causes inflation.  And over the last two years, the U.S. has witnessed a record-shattering increase in the money supply as policymakers struggled to deal with an unprecedented financial crisis.

I have been saying for months that this behemoth money supply would inevitably lead to significant inflation unless steps were taken to shrink it.  I believe the Fed has now begun to take those steps.

By Sherry Jarrell

Collecting bridges!

Maybe not the strangest thing to collect, but close!

I doubt if very many people have heard of an American by the name of Eric Sakowski and, to be honest, neither had I until I opened a copy of The Arizona Republic newspaper on a recent visit to Payson, Az.  There on the front page was an article about Eric and his passion for bridges!  Yes, bridges.  As the article starts:

Eric Sakowski’s fixation with bridges began as it has for many.

As a kid, he bought the “Guinness Book of World Records” every year and read it cover to cover. He began to ponder: What is the world’s second-highest bridge? Or the 100th.

In 2004, Sakowski took his interest to the next level. He embarked on a five-year quest that would take him halfway around the world three times and cost him thousands of dollars. He became an amateur sleuth, digging out what he says are the real heights of mammoth bridges and snapping pictures.

Sakowski’s endeavor culminated last month in a tidy room of his parents’ home in Sun City West, where at age 44, he completed his project by launching a Web site, highestbridges.com, that catalogs the 500-highest bridges in the world. His findings challenge some long-held claims.

In fact, the website is really quite interesting and some of the photos are stunning.  Here’s one of the Hegigio Gorge Pipeline Bridge in Papua New Guinea.

Hegigio Gorge Pipeline Bridge

It’s 1,289 feet high (393 m) and until 2009 was the world’s highest bridge.

Sakowski has also found some interesting errors in the statistics concerning some bridges.

Using a laser range-finder, he has measured about 100 bridges in the U.S. and about a dozen in China. He found some interesting discrepancies. For example, he determined that the highest bridge in the United States, the Royal Gorge Bridge in Colorado, is 98 feet lower than officially reported. In western China, he said, he first identified the latest bridge to become the world’s highest. He is trying to get “Guinness World Records” to publish the claim next year.

Eric is a professional film-maker but I sense that the day may not be too far off when someone is going to make a film about Eric the Bridge Man!

By Paul Handover