Discussion of most economic issues usually come from one of the three primary schools of economics, i.e. Classical or Austrian, Keynesian, or Supply-side.  But, the divide changes when discussing whether the Fed should be raising interest rates.  Austrian economists would want the budget balanced every year and would see an increase in interest expense as a threat.  Keynesian economists want the budget balanced over an entire business cycle instead of every year (even though the debt is never decreased during the “good” years).  Keynesians see an interest rate increase as causing an increase in the unemployment rate, because the increased interest expense of businesses will discourage new hires.  Supply-side economists are generally more of a one-trick pony, advocating tax cuts to solve all economic problems.  But, hidden among the Supply-siders, you will find Libertarians, who hate the notion of the government “interfering” with the economy.

Discussion of whether the Fed should increase interest rates is between hawks and doves.  The hawks want to increase rates, while the doves want interest rates to fall.  The doves are Keynesian, while the hawks are generally Libertarians, who think the low rates for so long has caused a misallocation of capital.  They are correct!

Because debt-capital, as compared with equity-capital, has been so cheap for so long, it is not surprising that the world has binged on debt,  The IMF estimates total worldwide debt, including governments, at $150 TRILLION today.  This is an increase from the 2007 estimate of $112 TRILLION and far more than the 2002 estimate of a “mere” $67 TRILLION.   Capital has been misallocated!

The hawks are not crazy.  They know rapid “normalization” or increases in interest rates will cause enormous harm to the world.  They also know it is time to stop digging the hole any deeper.  A quarter-point increase in December is a good step, albeit a small step, in the right direction.

Bring it on!