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It was interesting watching the stock market go into a steep sell-off today after the Fed meeting minutes were released.  For some reason, most people are still underestimating the severity of the problems in the economy, and they’re stunned when they see something that doesn’t fit into the Goldilocks scenario they’re anticipating.

Here’s how CNN phrased the dilemma facing the Fed: The Fed lowered its economic growth forecast for the year. At the same time, it raised its projections for inflation and unemployment. The combination of slowing growth and rising prices [emphasis mine] created a difficult situation that made the Fed’s latest decision to cut rates on April 30 a “close call.”

Webster defines “stagflation” as persistent inflation combined with stagnant consumer demand and relatively high unemployment

Notice the similarity between the two preceding paragraphs?  Everyone remembers the stagflation we had in the Carter years.  Carter was a disaster for this country, and it took Reagan to turn things around, but Carter was an economic genius compared to Bush!

At least Carter took steps in the right direction by deregulating the oil and natural gas industries - Bush ain’t done squat except to print more money to try to inflate his way out of the mess he caused by creating cheap credit after 9/11.  

The problem wasn’t so much the easy money policy, it was that they kept the easy money policy in place for far too long.  This created the housing bubble, which led to our current credit crunch as all the mortgage backed security instruments lose value as home owners can’t make payments on houses that are worth less than the mortgage balance.

The “close call” CNN refers to is that the Fed is stuck now.  They want to lower rates to stimulate the economy, but that will just exacerbate the inflation problem which is caused by too many dollars in circulation.   That’s what happens when the Fed tries to manipulate the economy instead of following their mandate to ensure a stable monetary system.

From the website of the Federal Reserve: The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.

The Fed has become too political to do its’ job - which is to provide for a stable currency.  The same easy money policy (which leads to inflation) has caused the value of the dollar to drop by about 50% since Bush took office.  Like it or not, a dollar today will only purchase about half of the “stuff” that it would 7 years ago.  Thanks GW…  NOT!

When you see the price of commodities such as oil, wheat, soybeans, corn, etc. (the “stuff” we use) double and you wonder why, that’s why.  Global demand plays a part, but the major reason is that we are paying for the “stuff” in a global marketplace with inflated dollars that people don’t want.

That concludes your economics lesson for today.  Any questions?

gk

Tags: Bush is an idiot, dollar, Federal Reserve, Inflation, stagflation

This entry was posted on Wednesday, May 21st, 2008 at 7:32 pm and is filed under Economy, Political. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.