Image courtesy of Leo Newball, Jr. under CC BY 2.0.
The magical hat, so carefully guarded by the Federal Reserve, seems to be running out of rabbits. For decades, the Fed Chairman, guided by the financial magicians of the Federal Reserve Banks have managed to always pull another rabbit out of the hat and fix economic problems. If the economic disease was inflation, interest rates were pushed up, the cost of lending was raised, and “presto”, the economy cooled off. The higher the rates went; the more savings became attractive, thereby causing a diversion from spending to saving. Prices, in theory, would then fall. Investors, from around the world would hold dollars because the incentive to save became sufficient enough to encourage savings. The interest from savings also created significant tax revenue.
The most recent economic situation is quite the opposite, the economy has cooled dramatically, and since 2000 the Fed has dropped interest rates time and time again to trigger growth in the economic sector. The Fed pulled one rabbit after another out of the hat, dropping interest rates so many times, that the trick has become old, and no longer provides the applause, and reaction, that it did the first time it was done. The current situation, with rates at near record lows leaves the Fed little room to drop rates without reaching the “zero” mark. Zero interest would expose the folly of our banking system, clearly revealing that the money the bank creates out of thin air is not worth a premium to borrow.
If the low interest trick can’t stop the recession/depression spiral, deflation would be the natural event that would follow. This would be especially dangerous to the banking system, because if revenues fall drastically, those who borrowed money in the past will not be able to pay off their debts, causing massive foreclosures, and dumping of assets that would only cause prices to fall further. The deflationary spiral is even more dangerous than that of inflation because it is pessimistic in nature, and causes buyers to wait for prices to fall, a situation that only yields less revenues and further collapse.
The federal tax cut, combined with massive deficit spending, may be the last rabbit the Fed has to pull out of its hat. Congress, acting as agents of the banking cartels that manage the Fed’s magical fiat currency money machine, are laying the groundwork to trigger massive inflation; in an effort to stabilize the credit market and breakout of the current economic crisis. It may work, but the risks are quite high, and indications of that risk are becoming apparent.
The dollar doesn’t operate in a vacuum, it is pressured by other currencies, and the exchange rates indicate how others from around the world view our currency as a store of their wealth. The news isn’t good. Our U.S. dollar has fallen significantly in value when compared to other currencies such as the Euro and the Canadian Dollar, and dramatic increases in the price of gold indicate that many are choosing to move from currencies entirely, choosing the tangible security of a precious metal.
Many predictions seem to indicate that we still have a difficult path ahead. Imported goods will become more expensive, but conversely our goods for export, and domestic consumption will become more competitive as the value of our dollar falls on international exchanges. This should create jobs, and enhance prospects for capital projects in our country; both are good for the economy.
Danger still lurks inside the magic hat though. The demon, “inflation” still waits to jump back into action, and if the magicians are not very careful, they may let loose a dose of inflation that we have only seen in some third world countries. I would guess that is the reason our dollar has fallen so dramatically in recent months, because the smart money managers recognize that the genie that hides in the bottle next to the rabbits in the hat can give us short term fixes with very damaging long-term repercussions.
I suggest that we all pray that the monetary wizards act wisely.
“Published originally at EtherZone.com : republication allowed with this notice and hyperlink intact.”