More Fun At The Fed (December 11, 2007)

On September 18, the Fed reduced the FFR (Federal Funds Rate) by .5 percent; on October 31, the Fed reduced the FFR by .25 percent.  The pundits claim that the Fed will reduce the FFR by another .25 or .50 percent tomorrow.

Reducing the FFR results in the injection of even more paper money into the economy.  There are already too many dollars chasing too few goods and services even if those dollars are being hoarded by some skeptical lenders at this time.  The additional money is not going to spur the production of additional goods and services; the production of goods in China and the provision of services by India are responsive to other factors.  The additional money in circulation will only drive up the cost of the available goods and services which means we suffer. . . inflation.  “Price stability” (holding down inflation) was one of Ben Bernanke’s primary concerns in his previous academic writings.  He also studied the relationship between a lack of liquidity and the Great Depression and is aware of the precarious national predicament.

The Economy is threatened.  The decline in the dollar (in relation to the Canadian “Looney” and the Euro and beaver pelts) is having and will have deleterious impacts even though some American exporters benefit.  The gradual transition from the Petrodollar to the PetroEuro is more than symbolic.  The United States government is paying less interest for Treasury bills and bonds, but that may soon spawn less interest among potential investors in the bills and bonds.  Then the United States will need to pay more interest to attract interest.  The low interest rates also discourage what little savings there is in the United States today.  Reducing the FFR is appearing to be a bailout for Wall Street at the expense of other individuals and policy concerns and objectives.

Bumper sticker of the week:

Stagflation Again?

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