An economic slump or recession is considered a bad thing by economists. They point to Sweden and blame Sweden for raising its interest and causing a recession. “Bad Sweden, Bad Sweden”. But those economists are being short-sighted. They do not mention that Sweden is now doing much better than the rest of Europe. They have surpassed the rest of Europe. Is it possible that there was a good side to the recession? God forbid…
There is a sense that there is waste in the economy, but it is difficult to know exactly where. An economic slump tends to clean out inefficiencies in the economy and ultimately increase productivity. But which companies will be affected as inefficiencies get washed out is hard to predict.
Good economic medicine seeks to clean out the waste in a safe and measured way. The key would be to not rapidly hike the Fed rate. The key would be to tighten in a measured way. In the end, the economy will respond better… The Fed seems determined to raise the Fed rate just a little and they are receiving lots of criticism. But if the Fed wants to clean out some inefficiencies by lifting the Fed rate a little, would they just come out and say it? Probably not…
Yet look at Sweden after their apparent mistake of raising the interest rate. They are doing better than the rest… I look at the healthier growth afterward and I recognize the medicine of the slump to heal socially inefficient units in the economy.
If people think that the US economy is so fragile that a measured rise in the interest rate would trigger a big socially catastrophic recession, then economists are being too afraid of taking a good and measured medicine. It reminds me of a child who doesn’t want to take the medicine because of the taste. Yet many medicines are effective because of the bad taste. One example is bitters to improve digestion.
Economic slumps are a healthy part of the business cycle. They occur best in a measured way through policy. And realize, that economic sicknesses can develop if policy goes to extraordinary lengths to avoid a slump.
Inhaling gives you oxygen. Oxygen is good. OK… so just keep inhaling. Don’t ever exhale. Try inhaling without exhaling. It is foolish in the long run. Exhaling allows us to expel unneeded substances and create space for another healthy inhale. That is how a recession works in the business cycle.
If monetary policy acts in a measured way to control an economic slump, the economy will grow much better through time… like inhaling and exhaling.
So the next time you hear an economist point to Sweden and criticize their raising of the interest rate which caused an economic slump, remember that Sweden bounced back healthier than the rest of Europe. Think about the good medicine that a measured tightening of monetary policy can have. Realize that the economist is being short-sighted or disingenuous. Then don’t be afraid if the Fed raises the interest rate in a carefully measured way. It is good medicine. The economy will be better off in the long run.
Some day China will have to take its medicine too… They have massive social inefficiencies in their economy that keep piling up.