Saturday, July 17, 2010

No! To The Fed "Easing" Monetary Policy

I confess that I had to read the report ('Dovish Fed Sends Dollar Into Decline') in today's Financial Times (p.18) twice, because I couldn't believe it the first time. Couldn't believe that with barely a quarter of a percent of an interest rate, they'd remotely consider further "easing" and actually take it down to zero!

But according to the article:

"The minutes of the Fed's June policy meeting revealed a shift in emphasis from the central bank, showing increasing cnocerns over the sustainabilit of U.S. economic activity. The Fed lowered its 2010 growth forecast and reduced its inflation projection. This raised speculation that the central bank might consider further monetary easing".

Of course, in the wake of this message, the dollar immediately came a cropper, dropping 1.3% to a 2-month low of $1.29 against the euro. As we know, and I indicated in earlier blogs on this issue, the dollar's value decreases in inverse proportion to the rise in risk hunger(as exemplified by movements of money into hedge funds, commodities, EFTs etc). The increased propensity to take on market risk is pushing it lower, and the propensity itself is fed and fueled by the maintenance of abominably low interest rates.

Simply put, dollars get removed from real (productive) markets and injected into speculative or phantom money markets via the stock market when the Fed floods the system with more cheap money. This will happen when the Fed either makes more money (increases the M1 supply with no proportionate increase in concomitant supporting wealth) or they lower interest rates. In either case markets act like crack addicts and the addiction is reinforced.

At the same time, more people are tempted to partake in an increasing asset bubble, because they are unable to make money in safe assets. (Interestingly, in the same Financial Times there appeared a lengthy 'Insight" (by Michael Story) piece into the dearth of safe assets globally.) Seniors, already being threatened by cuts to their Medicare benefits (via Obama's Deficit commission) are in particularly bad straights, as many depend on interest income to tide them over and help them get by. With the prospect of another Fed rate cut, I fear many will be turning to Alpo next.

Now, of course, U.S. economic activity is not sustainable, as I've stated over and over. The reason is that the demand side is still in a coma and the private sector remains on the sidelines, hand in pockets. No jobs anytime soon, and one big reason is also that credit is hard to come by - meanwhile inventories are overflowing as consumer demand retreats.

The solution is simple, but alas, not one that any Federal Reserve can incept! It inheres with our Senate to pass the jobless benefits package and stop worrying about adding to the deficits! What was it Cheney said some years ago, when people pestered him about the costs of the Iraq war? Oh yeah! 'Deficits no longer matter!'

Well, they don't in a tottering economy where the private sector can't meet demand either!

What Ben Bernanke needs to do, if he's serious, is lay off the monetary easing talk, and go instead to Capitol Hill and ream out those backpedaling, good for nothing (mainly Republican) Senators - and tell them to vote for the damned jobless benefits package. Don't worry about "paying for it" - just as they aren't worried about paying for the next big Afghanistan "defense" spending package!

Enough is enough, and certainly- enough with the monetary "easing"!

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