The fed chops interest rates...and that almost immediately chops the value of the dollar vs the euro. It was in part the cheap interest that lured the US to run its economy on borrowed money, consumers often borrowed more than they could repay and that helps push us into recession...the lead balloon that Greenspan gave the Bush administration just won't float. So now Bernanke is going to try the same thing and its going to work? Put another way, it strikes me as a race to the bottom. The response to the oncoming recession is to "put money in people's hands" to spend our way out of the impending period of slumping sales and any snowballing secondary effects of the slump. But if you put more dollars in our pockets in a way that devalues those dollars, are we really coming out ahead? The proposals to print 145 billion or free up a real 145 billion is considered an adequate sum to inject into the supply of available cash. And it will be available at 3.5% interest to the best borrowers but no so for you and little ol' me. The Chinese, unlike holders of Euros, have been unwilling to let they yuan float against the US dollar but how far down do they want ride our sinking container ship? If you increase our available cash [and ignore the fact that your children will have to repay whomever we took it from] by 145 billion but dilute the buying power of all purchases made with US dollars? There is a US agency that tracks that buying power with monthly updates. Disposable personal income (DPI) increased $32.9 billion, or 0.3 percent, in November, according to the Bureau of Economic Analysis.
Dividing that increase by the percentage it represents produces an estimate of 11 trillion [11 with 12 naughts!] as our DPI as of last November. 145 billion is about 1.3 percent of the DPI. Now to my mind, that means that if you do something that causes the value of the dollar to decline by more than 1.3 %, you had better buy strictly local because your 145 billion of extra spending power just vanished vis a vis all foreign purchases.
And how close to that 1.3% damage are we:
That chart is updated at this link. I read that chart as showing an 11% devaluation against the euro since September . And Bloomberg reports a 1.1% drop in a single day on the news of the fed going back on the "free money" path to recovery. This wild slewing of exchange rates is good for arbitragers but its killing me. By the time it gets so bad that I no longer have to worry about my job going to India, I will be living as well as a typical Indian. I certainly don't mind the Indian, or the Mexicans for that matter, getting rich. In fact that would have been a lot better than me getting poor...but that is not how economics works it would seem.
If one added up the price of all the timber and minerals on federal lands[1], all the bank accounts and the US stocks and property holdings of US citizens, (those that actually own more than they owe,) it would be a number representing what it would cost the Saudis to buy us out, to buy the land out from under our feet as it were. I have no idea what that number is but I am certain it is staggering figure and far larger than the DPI. That means our dollar-valued assets devalue by far more than the 145 billion that is to be handed out...unless you can raise your prices or get your holdings revalued in, say, euros and quit thinking or earning or spending in dollars altogether. Did I say "raise your prices"? Your gas, sure..oh you don't own the gas. Well then try raising the price of your house. How's that working for us?
That is my back-of-the envelope calculation. It may show better than any other means, just how little I understand of economics...or it may show how screwed we are, likely some of both. Why, oh why, as Brad DeLong would say, did we not impeach and impale this idiot administration back when all they had done was start an illegal war via a tissue of lies? Now they have gone and done real damage [that many saw coming] its too late.
Think that is just the ranting of a liberal blow hard? Consider what Martin Hutchinson, respected and cheerfully misanthropic conservative financial pundit thought of the Federal Reserve's predicament back on Dec. 17th of last year:
Overall, 2008 looks to be a good year for bears. The Fed has been walking a tightrope since August between the precipices of a collapsing financial system and resurgent inflation. With a 3.2% November Producer Price Index rise (7.2% over the previous year) announced on Thursday and a 0.8% Consumer Price Index rise (4.3% over the previous year) announced on Friday, it can now be officially confirmed that the tightrope has vanished into thin air. The United States over the next 12 months will experience both a collapse in its financial sector and a violent resurgence in inflation, and there's nothing whatever the Fed can do about it, no interest rate trajectory that will not worsen one problem more than it alleviates the other.
So gold is up 100% and more in the last few years. Would have been smart to buy it two years ago but now it is just a case in point about how our crafty statesmen and puppet masters have run us onto the financial rocks. Meantime stocks of huge investment banks are priced like ties and watches on a push cart in SoHo. The buying spree by foreign governments that some idiots actually welcome as a life line to our tapped out markets has not impressed Warren buffet. It is, in the opinion of Felix Rohatyn, a spree of politically motivated accessions to influence as much as an "investment". Who made the US so damn cheap? [I am not for sale, though I might wind up looking for a job...I went to all cash two years ago because the suckage was looming ]
"They have different objectives," Mr. Rohatyn said. It may be easy to herald these investments as gutsy, brilliant bets during a turbulent market or dismiss them as foolish — look at how far the value of China's stake in the Blackstone Group has fallen. But according to Mr. Rohatyn, who is now a special adviser at Lehman Brothers, that's the wrong way to look at them.So now its June, we have a choice, a real choice between whether we will go down the republican spiral of economic decline or whether we will possibly set a new course. We are in a bad place. We, and I mean all of the nation by WE, have been spending ourselves into this mess since Reagan napped in the oval office. Yes we had poor leadership that believed it could get away without making us pay for all the promises made. But we as a country wanted to believe these lies [generally labeled "supply side economics"] that we could get something for nothing...or at least for terms like you hear in furniture ads: "Get your Empire today! No money down, no interest until 2009!". The choice then is between a certainty that things will keep going to hell and a chance, a hope, that we can arrest the deterioration of our fortunes. I hope that Obama does not kid himself and I hope that enough of us have stopped watching Fox news that Obama won't have to try to kid us either: the repair to our economy is going to be hard work, hard negotiation with those who now sit on obscene piles of money made during the republican give-away-to-the-rich period and just generally no fun. We will have to cut back sharply in Offense spending [call it what it is, I say] and find some way to invest in more sustainable domestic sources of energy, more intellectual [colleges] and physical [roads, hospitals, housing, ports] infrastructure upon which to found employment. It will require a tax rate such as grown up countries levy on their citizens. I just hope we the people are grown up enough to say yes when called upon to make sacrifices...and I hope Obama is grown up enough to ask us.
"The big difference is the political element," he said. Mr. Buffett is seeking the best return when he invests; that's his only goal, Mr. Rohatyn said. For Dubai and China, whether the investment returns 10 percent or 20 percent — or perhaps much less — is almost beside the point, he suggests. What they really want is influence on the world stage, despite their insistence otherwise.
He's right. While government-controlled funds swear up and down that their investments are purely financially motivated, they just can't be.
If we don't step up to address our past irresponsible ways, then I suppose we will go on receiving a steady flow of bad tidings followed by worse tidings. That sort of reportage should not surprise and it is a bit late for it to alarm. I cannot call it news because it is too predictable. It is more like our nation's economic policies have been tried, found guilty of short sightedness and corruption and now at the end of the process, it is left to the reporters to read the sentence to the accused.
NOTE:
Tax payers and citizens, US, are the owners via our government, of the lands and resources in federal control. Is it fair to simply give, at no charge whatsoever, the minerals on those lands to one particular party or industry? It certainly is not. But that is certainly what the oil companies wanted and what they got. The value of the foregone royalties on gas and oil in the gulf and elsewhere MUST be returned to the people.
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