What’s Really Behind the Fed Rate Policy
Posted on May 2, 2008
Filed Under Economics, Fed Policy
The supposed rationale behind the Federal Reserve’s low interest rate policy is to get extra cash into consumer’s pockets enabling them to buy buy buy and keep that economy humming along. So why is there nothing in my pocket save for a linted Werthers wrapper, a guitar pick, and a crumpled gas receipt?
One needs look no further than the Bush administration’s reckless fiscal policy to understand why the US is teetering on the precipice of economic collapse. Dubya inherited a $5.6 trillion dollar surplus, a product in part of Poppy going back on his “read my lips” pledge and signing the Omnibus Budget Reconciliation Act of 1990. The ensuing hike in the top income tax rate to 31% ultimately cost Daddy a 2nd term. Rather than continue with the government’s suddenly sound fiscal policy by using the surplus to shore up the country’s sickly entitlement programs and pay down the the debt, Junior came into office and pissed it all away through a series of ill-advised tax cuts. The tax cuts were not grounded in sound economic theory, but were a political gimmick to help defend Bush’s right flank against Steve Forbes in the 1999 Republican Primaries.
Professor Ling, my macro economics professor in college, had a rather shaky command of the english language and as such few of us ever understood a thing he said. The concept that did lodge itself in my brain was one he repeated with mantra like regularity: Guns or Butter. “Government must make choice,” would say Ling. It seems Mr. Bush never did take economics, for once he impaled the budget with those nasty tax cuts he proceeded to fight a pair of wars, increase farm subsidies, gift wrap a $ 1/2 trillion new entitlement to seniors in the form of a brobdingnagian prescription drug benefit. Wait a minute - that’s guns AND butter. What about Dr. Ling? The good Dr. failed to brief us on the Amex card theory or buy now pay… never.
With the surplus far off in the rear view mirror, Bush has been charging up the national credit card at a rate that would earn every citizen enough frequent flier miles for a first class trip to the sun. What does this have to do with lower interest rates you ask? Just hang with me as I tie this all together. So we are in serious debt, primarily to the Chinese, but also Japan, Brazil, Great Britain, and on and on. So out of hand is our debt situation that repayment could come only with painful, politically lethal cuts in programs that would affect us all. Our nation’s finances are such that the credit rating agency Moody’s has threatened the nation’s AAA rating unless vast changes are made to our finances. Wow. US Treasuries as junk bonds. Who would have thought that back in the days of the hanging chad?
All of which has sent the US dollar to plummetting resulting in record food and energy prices as it takes more dollars to purchase the same amount of commodities in foreign markets. Oil prices move inversely to the US dollar. As our dollar trades lower the price of oil - and by extension food, gas, coco puffs and everything else - goes higher.
And here, friends, is my point: When the Fed lowers interest rates it causes the dollar to fall further (securities paying lower rates have less appeal on the open market). From this you can see that the current Fed policy is counter intuitive. If the Fed wanted to put more money into the consumer till they would be adhering to a strong dollar policy. This would cause oil prices to drop precipitously, placing far more cash in consumer’s pockets than would any cut in interest rates.
So if this is the case, then what is the Fed up to? Sit down now because the answer is rather frightening. The operative word my friends is monetization.
Let’s say that one slowly…Â M O N E T I Z A T I O N.
Without getting to deep into arcane economic policy, monetization is the process by which a government essentially cranks up the printing press and floods the market with dollars (or rubbles, shekels, marks, etc.). The excessive liquidity devalues the currency and those devalued dollars are used to pay off the nation’s debts. This reason this appeals to the morally bankrupt pol is because nobody realizes you have done it until you’ve long packed the white house china in your duffle and jetted back to the ranch. In your wake those on fixed incomes are poverty striken, a nation’s savings has been wiped out, and the setting sun of an empires goes dark. It’s quite a price to pay to bookend our troops on the Ayotollas’ borders. Let’s add proliferation of nukes in the the most unstable region in the history of the galaxy to the bill.
If you don’t believe this is what is going on, go grab a shopping cart at your supermarket and see how much a hundred dollar bill fills it with when Bush first came to office. We are nipple deep into the process of monetization and devaluation. Maybe it’s time to put flag pins and roosting chickens aside and examine some of real issues that the next president will be grappling with.
Comments
One Response to “What’s Really Behind the Fed Rate Policy”
Leave a Reply
[...] Read the rest of this great post here [...]