Tuesday brought news from the Fed that interest rates will
stay near zero until mid-2013, due to "considerably slower" growth than expected. Accepting that growth will not come quickly
now, the Fed also commented: "[t]he committee now expects a somewhat slower
pace of recovery over the coming quarters," and "[t]he unemployment rate will
decline only gradually." The Fed did not
act unanimously, as it usually does, however, and these comments, eagerly read
by the financial community like one would read tea leaves or the entrails of a
chicken, in times past, were the product of a 7-3 vote. The three dissenters are concerned about
inflation rearing its head once again.
We
are running out of the usual tricks which have been employed in past recessions
and depressions to jump start a sick economy like applying those electrical
paddles to a patient whose heart has stopped it’s steady beating. The Fed has decided to keep federal funds at
zero to one quarter percent, which is practically free money for those who
receive money directly from the Fed.
The
hope, among other things, is to stem the tide of a US stock market in near
free-fall, having so recently lost well over a thousand points on the Dow,
meaning trillions of dollars lost from pensions, 401k’s and all others who have
made market-dependent investments.
Wealth has again vanished without a trace – not so much as leaving ashes
or skid marks in its wake.
Keeping
interest rates at near zero (not zero to you and me, mind you) for the next two
years, and announcing that now, is a nearly unprecedented acknowledgement that
the economy has truly hit the fan, punked out, and has nearly been given up for
dead as collective breaths are being held over whether or not we will be
entering a W-shaped, Double-Dip Recession.
"Flattening," "weakening," and ‘housing is depressed’ are
the kinds of descriptions the Fed used.
Brazil is slowing down; Europe is having banking problems; even China,
who must keep buying our Treasury paper (like an addict needs their drugs) in
order to keep their own Yuan from inflating wildly and to continue their
tsunami of exported goods, is showing signs of overheating. The EuroZone, which has a greater GDP
combined than the US, is being dragged down by the woes of the PIGS countries –
EuroZone countries of southern Europe: Portugal, Italy, Greece and Spain. Our Summer of Economic Discontent seems like
it will last forever.
We can cut, cut and cut some more, but the kind of growth
that we need will not occur without real, purposeful job creation on a massive
scale. We have not made the serious and
creative efforts, of which we are quite capable, to think our way out of the
job creation Catch 22 which resulted from outsourcing and the decline of US
manufacturing – how about job sharing, job re-training, internships for mature
workers and some really creative thinking put to work here? This is a bi-partisan issue; it must be –
unseating the current President cannot be the only goal of the party out of
power in the face of this three-plus year economic storm which affects every
single one of us now. Our infrastructure
is truly crumbling and millions are out of work – a WPA-type project to
re-build our infrastructure would employ many, and is long overdue. Also, it is high time for a Manhattan
Project-style project to create new energy sources for our future – put 5,000
top scientists somewhere and give them what they need so that they can
concentrate on creating the 21stC energy technologies that will free us from
our dependence on foreign oil obtained at increasingly higher prices from
countries who won the geographic lottery and who truly hate us. We suffer neither a debt crisis nor a lack of
money – the former could be paid with a healthy GDP by a nation with as strong
fundamentals as we enjoy; the latter is about money sitting on the sidelines
because the owners of that money are seriously troubled about where we are
heading, and with good reason.
Historically, interest rates over the last couple of hundred
years have been set either by national governments or central banks. Since the Eisenhower Presidency, the US Fed’s
federal funds rate has fluctuated between roughly 0.25% to 19%, from 1954 to 2008. Some may remember the high 19% end back in
the early 1980’s, when conventional financing rates for real estate painfully exceeded
20%, for a time – some may even have purchased their first real estate back
then, cobbed together with seller-financing and wrap-around mortgages. Today, if you can qualify for the loan (and,
that’s a big ‘if’), real estate loans have not been offered at lower interest
rates since Ike promised to bring the troops home from Korea. Setting and overseeing interest rates is
serious business. When control is lost,
the result can be the kind of out-of-control hyperinflation that we saw in
2007, when the Central Bank of Zimbabwe increased their interest rates to
800%! Or, even worse, what the Weimar Republic experienced after WWI in
Germany, where, at it’s worst hyperinflation, 1 million mark notes were used as
scratch paper and the 50 million mark banknote, issued in 1923, was worth about
$1 US when printed, but this 50 million mark amount only nine years before
would have been worth some $12 million – unimaginable.
But, while we have a healthy fear of hyperinflation,
and well we should, our problem is not that – we are facing the prospect of real
deflation, a Lost Decade (like Japan in the 90’s), and almost no growth, in an
economy which must grow yearly just to keep up with population growth. Economies don’t grow if people don’t spend;
people who are out of work don’t spend, and those who have jobs are afraid to
let the money go during times like these.
Businesses are afraid to expand and invest. Putting America back to work is absolutely
critical right now. Cutting spending
does not revive a swooning economy; jobs do.