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Dear Jack,

First the Fed underestimated the risk of inflation. US Treasury Secretary, Janet Yellen, admitted recently that she had misjudged the threat that rising prices posed.

Now it seems that they overestimated how fast inflation would fall. Figures out this week show that the consumer price index rose 8.3 percent over the past year – higher than expected even if the trend is down.
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Why is the economy underperforming? Edward Chancellor offers intriguing insights
The prospect of the Fed now having to go even further in raising interest rates has increased - and with it the risk of recession.

The Fed seems to have a misplaced confidence in its ability to use monetary policy to engineer economic growth, perhaps because it has been doing so for so long.

Ever since the era of the ‘Greenspan put’, the Fed has lowered rates to encourage growth. The problem is that cheap credit comes at a price.

In his magnificent new book, The Price of Time, Edward Chancellor shows how low interest rates cause all kinds of collateral harm to the economy and society itself. I had the opportunity to interview him recently, from our Jackson studio, and you can watch our conversation in the video above.

From poor productivity to stagnating real wages to inequality, low interest rates seem to be the source of a lot of America’s economic ills.

Interest rates in America are going to have to rise, although even that might not tame inflation quite as effectively as some assume. There is, Chancellor suggests, lots of malinvestment out there, with oodles of dollars invested in ventures that will never prove profitable. So-called ‘zombie’ companies are able to service their debts when interest rates are low, but will find it far harder when rates rise.

Cheap credit brought forward tomorrow’s consumption to today. But what happens when tomorrow comes?

The economic outlook might look challenging for America, but things are far worse elsewhere.

Europe has even higher inflation, a potentially existential energy crisis and a mountain of debt piled on the shoulders of a rapidly ageing population. Oh, and they also have a currency union, the Euro, that allows some states to spend, in effect, at everyone else’s expense.

For decades, progressive politicians in America have advocated making the US more like Europe, with higher taxes and spending, socialized healthcare and welfare.

This winter not even Europe is going to want to be like Europe anymore. The European model is a perfect demonstration of how not to run a modern Western society.

China’s debt and demographic problems are even worse. The average Chinese citizen is now older than the average American, they produce less and owe vast debts on a per capita basis. The section in Chancellor’s book about China is an eye opener.

Higher interest rates in America may at least unleash a bout of creative destruction. After reading Chancellor’s book, I don’t think that in Europe and China there will be anything creative about the destruction.

America remains, despite the best efforts of the current administration, a relatively low tax, lightly regulated economy. No matter how gloomy the immediate economic outlook, that means America will bounce back.

If only there was an administration that believed in free markets and liberty - the two secret ingredients of America's success.

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Warm regards,
Douglas Carswell
President & CEO

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