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Friday, August 10, 2007

INTEREST RATES: WHAT THE FEDS SHOULD DO BUT WILL NOT

INTEREST RATES: WHAT THE FEDS SHOULD DO BUT WILL NOT

I have been saying it for months and I know it is counter to what every one else is saying that the Feds should not even consider raising interest rates: they should DECREASE rates.

Let us examine what has transpired over the past 18 months. The Feds systematically decreased rates every month from the lowest point rates had seen in many years to the 5.25 % rate we now have. These rate increases occurred too rapidly and the rate increases continued before any one had a chance to examine how the market would eventually respond. The first sector to be affected was the housing market which was one of the largest markets in the US. So here we are in the middle of a meltdown and the Feds are worrying about inflation. To me it is like an individual who is worrying about a pimple on the skin when he is dying of cancer.

If increasing interest rates too rapidly is causing the meltdown, decreasing the rates may well correct the situation. It may be too late, however, because the world is expecting a rate hike and if a rate decrease is to occur, the world market may be spooked. But the bold thing to do is to decrease rates immediately.

The Feds know only one way to increase liquidity in the market and this is to print more worthless paper money. This is our Country’s major problem. We need to stop printing more money and begin slowly to back up our currency with gold. I am sorry, if there is any more gold in our depositories! Ron Paul, if you know that guy – the man who probably should be president but never will – has it correct when he suggests this very thing.

If I had $100.00 in my bank account and were able to print money which the government will not let me do, then I will have $200.00, twice what I had before I printed the additional $100.00. But, I did nothing to earn the additional money and the additional money has no value. I think I have $200.00 but the rest of the world recognizes only the original $100.00 because it represents the assets from a real earning. After all, what is money? Money represents energy and that is all it represents. I work for someone who pays me for my work (i.e. energy) by giving me money, which represents the energy (my work) for the performance of a service. The someone could have given me something else to pay for my services, perhaps a widget which he had. But I did not want his widget. I wanted money instead. By the way the widget is not really a widget. It looks like a widget, but it is the physical manifestation of the energy of its creator.

In the old days of the barter system, individuals got paid for their services by trading objects. But money has replaced the objects. But all the objects really represent energy. The formula goes like this: E(money) = SERVICES (objects or M). Both are transferable under the conditions agreed upon by the transferees. But to make this work we need to catapult the Fed people out to space, perhaps at the speed of light squared – you know the C2 in Einstein’s formula.

Money which is not backed up by services rendered or an object of value is worthless – like the US paper money. And, by the way, as the US goes, there goes the rest of the world. Other Central Bankers are also printing money – more money not backed up by anything. Well, if McDonald’s – a true American entity -- can go all over the world, why not other aspects of our culture, like printing worthless money?

If the Feds were to decrease interest rates, individuals can get back into the game, and all those people who hold all that worthless debt will not lose it all. They may take a hit but, perhaps, to a degree from which they can recover. Presently, the world does not think highly of the dollar because it is inflated because we have printed too much. Hear me here: worthless paper money is the culprit of inflation. Things are costing more because the dollar cannot buy what it could a year ago. To reverse inflation, we need to pay less for an object, whether this be a washer, dryer or some factory machine. We can only pay less if our money was worth more.

I am recommending that the Feds decrease interest rates, not increase them. They will not listen to me. After all, who am I? I am like St. John the Baptist – you know that “voice crying in the wilderness.”

Did you like the Dow’s 383 drop in the market yesterday?

nicola michael c. Tauraso, M.D.

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