Great Depression Online Archive Issue:

Economic Nausea

Great Depression Online
Long Beach, CA
February 01, 2008

Inside This Issue You Will Discover…

*** Big Ben Double’s Down
*** What The Fed Can And Can’t Control
*** Economic Nausea
*** And More

Big Ben Double’s Down

Big Ben doubled down Wednesday, following up last weeks emergency 75-basis point rate cut, with an additional rate cut of 50-basis points.

“To help bolster the economy, the Federal Reserve on Wednesday sliced a key interest rate by a bold half-percentage point, its second reduction in eight days,” reported Jeannine Aversa, AP Economics Writer, on January 30, 2008.

The amateurs on Wall Street were ecstatic and sent stock prices parabolic…then the professionals stepped in to call Bernanke’s bluff…

“Wall Street rallied but then pulled back, still wary.  The Dow Jones industrials jumped more than 200 points after the Fed announcement but finished the day down 37.47.”

We say bluff because Bernanke’s playing with the deck stacked against him, as the real news of the day came earlier…

“The economy nearly stalled in the fourth quarter with a growth rate of just 0.6 percent, capping its worst year since 2002.

“Wednesday’s Commerce Department report showed that the economy deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending.  Fears of a recession have grown, even as inflation remained elevated.”

We’ll add that Bernanke wants inflation, rather than deflation.  He wants it so bad that, with his recent rate cuts, he’s rigged the price of money below the rate of inflation.  In other words, the cost to borrow money is now less than free.

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So with the economy waning and the housing market in the midst of a meltdown, the Fed’s putting all chips in…betting that some ginned up credit will get things flowing again. 

What the Fed Can And Can’t Control

The problem, however, is that while the Fed can add more credit based money to the financial system, they can’t control where the money flows.

After the dotcom bust, when Alan Greenspan cut rates in an effort to soften the stock market’s fall, money flowed into housing…inflating values.  And then, the new found equity was extracted to buy all sorts of doodads from Asia.

From China alone the U.S. trade deficit ballooned from $103-billion in 2002 to over $250-billion in 2007…in what must be the largest transfer of wealth in human history.

Economic Nausea

Where will the money go this time?

We presume it won’t flow entirely back into the housing market like the Fed would like.  In fact, it may inflate food, energy, and essential living items…inflicting misery on all who live paycheck to paycheck.

Or, as can happen to over indebted economies with dwindling asset values, the money could get sucked into the vortex of deflation.  And we could be in for a long nauseating economic slog…

For example, in 1992, following Japan’s protracted credit induced asset bubble, President George H.W. Bush, while visiting in Japan, leaned over to Prime Minister Kiichi Miyazawa, perhaps to whisper some ancient Yankee secrets for orchestrating a financial bailout.  Then, in an ominous and profound symbol of things to come, he barfed on his lap.

Japan’s economy has yet to recover.

Sincerely,

M.N. Gordon
Great Depression Online

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