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Tag: federal reserve

Raise Interest Rates!

Here’s some lateral thinking for you: Since late 2008, the central banks of the world have been pumping hundreds of billions of dollars into the world’s banking and financial institutions in order to stimulate economic activity and head off a recession / depression. This is the right thing to do in a fiat money system when faced with this economic situation. (I’m not going to discuss my views on fiat money, but a fiat money system is what we have so that’s what we’ve got to work with.)

However the worldwide money situation is bizarre right now, upside-down. The stimulus money, which is now some trillions of dollars, has not been stimulating like it ought to. Why? Because banks are not lending the money but are hoarding it. The banks of the world are sitting on well over a trillion dollars and are not lending it out. Why? Because interest rates are extremely low, near zero, and have been low for a long time. The banks are waiting for interest rates to go up which will raise the effective value of the cash they are hoarding and they will start lending again.

I propose that the Federal Reserve should raise interest rates and that this will stimulate lending and thus stimulate the economy. This sounds bizarre but given the upside-down state that the world’s money systems are in, I think it would work.

What do you think?

Slow Motion Train Wreck

Inflation has been underway for quite a while already. Anyone who shops for food over the past two years can see it. Finally, it has become bad enough that the official government agencies that calculate inflation can no longer “alter the basket” and fudge the numbers to cover it up. With prices skyrocketing all around us, everyone can see it.

So what now? I expect that we are seeing just the tip of the iceberg and it’s going to get a lot worse. The magnitude of the problem is enormous. The U.S. has spent way beyond its means on borrowed money. We have lost most of our export industries to other countries. The hole that the U.S. has dug for itself is very deep and it will be a long time before we can dig back out. We no longer have the ultra-high powered economy we had coming out of WW II, capable of manufacturing anything and everything in any quantity almost immediately. I remember a quote from a British physicist who worked on the Manhattan Project when they asked him what was the main difference between working in England and working at Los Alamos. He said, in England I could order a box of pencils and it would take three months to arrive; here I can order a cyclotron and it arrives in three days. This is the economic and industrial muscle that powered us through the 50’s and 60’s. The world had never seen anything like the United States. But times have changed.

Fed Chairman Bernanke is discovering that his position no longer has the power it used to have. Years ago, back when the United States was the 800 pound gorilla of world economics, the fed chairman could make a slight adjustment and all the economies of the world would respond. Today, you can see this is no longer true. The fed can make radical changes in interest rates and nothing happens, even in the United States, much less the world. The president wants to stimulate the economy with a $100 billion in tax rebates–well, over Christmas Week, the feds and other world banks flushed $550 billion into the capital markets and, you guessed it, nothing happened! $100 billion will do basically nothing in this situation. The U.S. economic system is maxed out and we can no longer manipulate the world’s economies to our advantage because we are no longer the 800 pound gorilla. China and India have trillions of dollars of capital to spend and invest as they please. They have been investing it in the U.S., but when the U.S. ceases to be a good place to invest, all that cash we’ve been spending will dry up. We don’t have trillions in cash to spend, we are in debt. For years, and especially during the Bush administration, the U.S. has been behaving like a rich teenager with his parent’s credit card. Those days are coming to an abrupt end. For years I’ve been wondering just how long the U.S. could keep up the drunken party spending spree. I think I shall soon know the answer.

What we are witnessing is what people have warned about for 30 years. Spending beyond our means on borrowed money and based on the good will and strength of the almighty dollar eventually must come to an end. The crash will be long and deep for the following reasons: It will be deep because we are so vastly overstretched and overextended. It will be of long duration because we no longer export much, we don’t make steel, we don’t make vehicles, almost no heavy industry, we have nothing much to export, we have a “service economy”, so we can’t earn the cash to dig ourselves out of the hole. We are witnessing a slow-motion train wreck and there’s nothing that can stop it. Unemployment is skyrocketing, the recession is accelerating, Bernanke is making radical interest rate cuts and all that’s happening is he’s debasing the currency, but the economy is not responding.

What can individuals do? Not much. Those who have not prepared starting three or four years ago to get out of dollars and into hard assets are pretty much out of luck. If hyper-inflation sets in then $900 gold will seem cheap, but who’s to say exactly what will happen? A lot of it depends on how the other economies of the world treat the U.S. once we fall over the edge and into the hole. The fact that a lot of countries don’t like us and don’t trust us is not going to help when our economy becomes a charity case. If someone has a crystal ball maybe they can leave a comment to this post and let us know whats going to happen. This will likely play out over a long period of time. What do you think? Anyone out there have a crystal ball?

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