The US Federal Reserve is stuck between a seemingly booming economy and a financial crisis that may be just around the corner.
It is therefore the decision to reduce the interest rate by another quarter on October 30 – the third reduction in the same number of months – seems so strange. It is virtually unheard of to lower interest rates when the economy is as strong as the numbers turn out to be. And according to textbook economics, lowering interest rates during a boom is a sure recipe for disaster.
The problem is, as someone who studies financial booms and busts, I know it can't be even worse to lower interest rates. This is because the corporate sector is dangerous for the indebted and creates a financial bubble.
An increase in borrowing costs could start a cascade of bankruptcies in an economic contagion that would derail the US economy.
Troubles Under the surface
On the surface, the US economy seems to be buzzing just fine.
Unemployment is low for half a century. Inflation is close to the target of 2%. And in about 125 months, the United States is charting its longest economic expansion since at least the 1850s.
However, look under the hood, and things look very troublesome.
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