10.01.2008 0

The Creature Multiplies

  • On: 10/23/2008 16:52:00
  • In: Monetary Policy
  • The Creature from Jekyll Island is back again, and this time it’s multiplying.

    Normally, when the Federal Reserve Board of Governors meets to cut interest rates, it will be a decision independent of what the world’s other central banks are up to. Not so with Wednesday’s reduction of the federal funds rate from 2 percent to 1.5 percent. This was a coordinated, global interest rate reduction:

    “Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

    “Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

    “Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

    “Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions…

    “The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.”

    Basically, the Fed—and the rest of the world’s central banks—have figured out how they’re going to pay for the latest round of bailouts: by debasing currencies worldwide. Yesterday’s market results are instructive: the market continued to tank, and gold rallied.

    While it is near impossible to predict long term trends based on a single day’s numbers, there is an growing body of evidence that monetary easing eventually is felt with surging commodities prices. In other words, the federal government’s market interventions have not stopped the slide, and its actions to throw more than $1.5 trillion at the problem may already be creating a new round of inflation. It may take some time for its full effects to be felt, but they will be.

    The lesson is instructive, and the implications are destructive. This system was created by government, implemented by government, and now that system is collapsing under its own weight. It was only a matter of time.

    The decisions made this year—$29 billion to bailout Bear Sterns, $150 billion economic “stimulus,” $200 billion to nationalize Fannie and Freddie, $300 billion for foreclosure “prevention,” $123 billion in loans to AIG, acquiring $9 billion in risk from Indy Mac, and finally the most recent $800+ billion bailout—were not economically sound. But at the time—and for decades—they were politically attractive.

    And slowly but surely, the taxpayer is being enslaved to the national debt. With the latest bailout the debt ceiling was raised to over $11 trillion. The result?

    These bailouts will be paid for one way or another. And when it comes to the Creature, you can be sure it will eventually come in the form of higher prices.

    The current market correction was going to eventually happen with or without government intervention. It was not preventable, and the efforts of the Fed, Treasury, and Congress to try to prevent it were foolish and wasteful.

    In truth, this correction would have happened already if the bailouts had not begun in March, and the economy would already be on the road to recovery. Instead the bailouts have prolonged the market contraction. And now they are distorting the current correction. This is far worse than it needed to be.

    But it’s really worse than that. The central banks of the world believe that the solution to the global debt crisis is to, you guessed it, borrow more! This fits well with Einstein’s definition of insanity.

    Governments want to encourage lending and credit in the short term because the current economic system cannot function without extraordinary debt. However, too much credit was how this crisis occurred in the first place. And yet more credit will not solve the root cause: the fiat currencies of the world’s central banks.

    So, the nation has wasted some $1.5 trillion just this year to prevent a recession that was going to happen anyway. And the only solutions offered thus far have consisted of further debasing currencies all over the world.

    We were all warned of this Creature long ago, and now the madness is multiplying.


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