Bankers, who benefit from the American fractional reserve banking system, never criticize the Fed, especially since it is the lender of last resort that bails out financial institutions when crises arise.
This year the Fed even extended its bailout provisions to Wall Street brokerage firms, like Bear Sterns, but the Fed's aggressive actions in trying to avoid a recession may well make matters only worse. The mismanagement of the spend, spend, spend federal government and the unofficial US policy over many years of letting the US Dollar lose value has unleashed inflationary forces that Ben Bernanke is going to find exceedingly difficult to control.
Unleashing a flood of additional liquidity when excessive debt is already a major part of the problem will surely backfire on the Fed chairman and tragically on the American people.
It is true that special interests and bankers do benefit from the Fed, and may well get bailed out, just as we saw with the Long Term Capital Management fund crisis a few years ago. Bankers own the earth; take it away from them but leave them with the power to create credit, and, with a flick of the pen, they will create enough money to buy it all back again. Take this power away from them and most great fortunes would soon disappear.
The present economic analysis is grim. Until very recently it appeared that the leaders of the world's major central banks, Fed, ECB, Bank of Japan, all seemed comfortable with a further decline in the dollar. Unlike previous dollar decline periods, the Bank of Japan shows little interest in propping up the dollar, and the ECB, despite signs of moderating growth in Europe, is not sending monetary easing signals. In fact the ECB is more likely to tighten up money supply in Europe as they seem more determined to seriously fight inflation.
The problem now is that inflation is surging worldwide as the Dollar's fall and the Fed's efforts to prop up the US economy by allowing even more Dollars to be created is feeding inflation in commodity prices. The years of US policies that have lead to a weak US Dollar have lead to the creation of a very dangerous bubble in commodity prices, including food, that is destabilizing the world's economy.
Even the Chinese, at the most recent WTO meeting, openly criticized the US for pursuing unwise policies that have helped to increase the cost of oil and all energy prices, which in turn are adding to the input costs of producing food and many other items. The Chinese hold some 1.5 Billion in US treasuries so the US government had better learn to listen and to take some action on their concerns. It is not wise at all to disregard your banker's warnings.
Economist Kenneth Rogoff suggests that the US deficit will see a sudden reduction as US imports slow and that the US will experience a major fall in the value of the dollar. Growth in the US economy is slowing down and employment rates are falling. Economically speaking, in order for an empire to initiate and conduct a war, the benefits must outweigh its military and social costs.
The benefits to America from Iraqi oil fields are never going to be worth the long-term, multi-year military cost as insurgent activity will prevent much of the oil from reaching the US market. When you factor the cost of the war effort into Iraqi oil prices the true cost is probably over $1000 a barrel.
Under the Bush administration America is now viewed as unfriendly to foreign investors. Certain provisions of the Patriot Act and the Sarbanes-Oxley Act produce excessive and costly paperwork and unnecessary privacy intrusions. With the passage of these acts America became less strong and less competitive. America is not taking care of its own best interests and may come to regret it.
Private sector expectations evolve in part according to the outlook for future policy itself and the implications of that policy for the path of the economy. This view, once considered radical, is now widely accepted in academia and by monetary policymakers around the world.
What that means is that once underway economic trends can take on a life of their own and the direction of the economy can accelerate as expectations evolve. That may be manageable and even welcome when the direction is positive but it can make a turn around difficult when an economy is deteriorating.
Housing is an example of this. Private single-family housing starts peaked in January 2006 at an annual rate of 1.823 million units. Since that time, housing starts have continued to fall; in April 2008, they were only at an annual rate of 692 thousand units, roughly 38 percent of the previous peak value.
The unemployment rate is on the wrong path as well. Private nonfarm payrolls were little changed in January, and the unemployment rate moved up to 4.9 percent, on average, during December and January, after remaining around 4-1/2 percent from late 2006 through most of 2007. Then the unemployment rate surged to 5.5% in May , 2008. Probably worse reports will be released as 2008 grinds on. The economy seems to have reached a point where unfavorable expectations for the future are indeed fueling a negative feedback loop.
In the US private businesses make and sell most goods and services. These markets work by bringing together buyers and sellers who establish market prices and output levels for thousands of different goods and services. Unfortunately high energy prices are now adding to input costs for almost all goods. The Fed has an impossible task in attempting to fight inflation by increasing interest rates without tanking an already stressed out economy with excessive debt to equity ratios at every level of public and private institutions and enterprises.
America now is viewed as unfriendly to foreign investors. Certain provisions of the Patriot Act and the Sarbanes-Oxley Act produce excessive and costly paperwork and unnecessary privacy intrusions. Out of 9/11 induced fear America became less strong and less competitive. America is not taking care of business and governing in a smart competitive way in an increasingly competitive world. No doubt America will regret it.
The mismanaged American economy is now at risk. The Fed has to make some hard decisions. The better course of action is to start fighting inflation now. This means increasing interest rates, supporting the Dollar, and probably taking a lot of flack as the economy enters a deep recession. Will the Fed have the guts to take this action?
That question will soon be answered. The most likely action for the Fed to take at this months meeting is to hold the Fed funds rate at the unchanged 2% level. If that is what happens that will not be good enough to bring down inflationary expectations. The Fed must realize how dangerous a high rate of inflation is to the American economy and culture. With the American middle class already under financial stress a few years of double digit inflation will destroy them and the American way of life.
It may already be too late to save America as we know it. A far different country may emerge from the seeds that eight years of mismanagement have sown.
Gerald "Taipan" Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. He now writes for a number of financial, political, and Internet business related blogs. One of them is at Article Discovery Articles and Analysis