Sleepycatz

It’s Raining Money

The Fed today decided to drop the target rate for Federal funds by 50 base points, to 4.75 percent. The board felt as though this was necessary to help stabilize investments in the mortgage and stock markets after the recent unpleasantness related to default rates and MSO devaluations. Of course, this sent the stock markets into a buying frenzy — putting the DOW at +300, as I write this. Wall Street loves cheap money that can be bandied about and thrown into risky investments. But at the same time stock trading surged, the global ramifications also became apparent: the dollar dropped to a record low and gold is approaching a record high — two signs that overall confidence in the American economy are waining. As borkafatty succinctly stated on Calculated Risk:

Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. . . According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6% in the most recent quarter.” (WSJ). That’s 18.4% per year—and yet, Bernanke is cutting interest rates and further fueling inflation?!?

With this cut, it appears the Fed is propping up a failing economic model. For the past several years, the American economy has been built on consumer spending and financial shenanigans. 70 percent of US economic activity is related to this consumer spending which has been fed by low interest rates resulting in ever rising consumer debt. As real world wages have remained stagnant, and food and transportation costs continue to rise, this system becomes unsustainable. At some point creditors will have to be paid and consumer spending will have to decline significantly. Without artificially high consumer spending a large portion of service jobs will disappear causing further recession. Our present economic situation is built on an illusion of free markets and a never ending, never inflating, money supply. This is the Bush policy of neo-reality applied to economics — “If I say everything is good, then by nature it is good”. This administration has tried to force their reality on the American people for years whether is was with regards to Iraq, Afghanistan, the War on Terror, Global Warming, or the economy.

This entry was posted by steve on Tuesday, September 18th, 2007 at 3:30 pm and is filed under Signs of the End, Misc. Ramblings, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.