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Thursday, June 28, 2007

THE FEDS JUST DON'T GET IT

THE FEDS JUST DON’T GET IT

The Feds just don’t get it as they haven’t for some years. They are so worried about inflation that they see nothing else. They are unable to correct anything in the economy before it happens, but rather react to what has already gone on. They are and have been backwards looking for many years. They have reacted to correct a recession after the recession was already here. They have not been able to anticipate this past recession, even though many economists were able to do so, but, not the Feds.

Currently, we have a serious problem in the housing sector brought on by the Feds increasing interest rates too rapidly. Of course, they created the so-called housing bubble by reducing rates so rapidly in the years before, but after a recession already occurred. They had little opportunity to do otherwise since Greenspan increased rates so frequently prior to that which resulted in his pricking the .com bubble prematurely. If he stopped increasing rates so rapidly, he might have either postponed or eliminated the subsequent disaster of the serious recession which followed. Afterwards, the Fed should have increased the interest rates more slowly to allow the housing sector to adjust and react more slowly. When interest rates are increased or decreased rapidly in any direction and noone is looking at how the market is reacting, disaster results. We are now experiencing the effects of increasing interest rates so rapidly that trying to gauge the markets reaction is impossible.

Why cannot the Feds try to be more proactive and try to solve a problem rather than reactive after the problem exists? If they do not solve the current housing sector problem, the sub-prime market will collapse. The ensuing collapse of some rather large hedge funds will topple with it. Then, we will experience a “rational depression” as opposed to “irrational exuberance.”

I am suggesting that the Fed start slowly lowering the interest rate to stimulate the housing market. So what if we experience a bit of inflation? Inflation is not caused by decreasing interest rates. Inflation is caused by the Feds printing too much paper money without assets to back it up. But, they just don’t get it. The printing of too much worthless paper money to pay the US debt is also causing the dollar to tank and it will continue to tank if we continue to print more worthless paper money. The entire world is getting it. Why doesn’t the Fed.

This reminds me of the story of the scorpion and the frog. The scorpion tried to elicit the frog to take him to the other side of the pond. But, initially the frog said no because as he told the scorpion “you sting and kill others.” The scorpion responded that, if the frog would take him across, he promissed not sting him. As the frog was finally depositing the scorpion on the opposite bank of the pond, he stung the frog. As the frog was lying there dying he looked at the scorpion and said “but you promised not to sting me.” The scorpion responded “Ah, that is true, my dear frog, but you must understand that it is my nature to sting others.”

For the same reason, it is the nature and habit of the Feds to print more paper money. Habits – good or bad – are hard to change. (Read “How to Benefit from Stress,” by Tauraso and Batzler). Watch as the entire world will eventually denominate oil in EUROS rather than DOLLARS. Many nations have already begun to do so. As more nations see the benefits of this, they will also change. The dollar is soon losing its stature as the world’s currency. The reason more countries do not change immediately is because they hold so much US treasury notes and as the dollar goes down, so do the value of these notes. But, there will be a gradual change, the nations of the world will “suck in their guts” and dump the dollar for more valuable currencies. They will not remain slaves to the dollar forever.

I am not a trained economist. But, I have been educated in logic and philosophy. The feds would do well to return to school and study philosophy so that they can modulate their decisions so the common good will be better served.

nicola michael c. Tauraso, M.D.

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