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While Americans were largely focused on the debacle that the Obama administration’s Middle East foreign policy has become, Federal Reserve Chairman Ben Bernanke was quietly reinforcing the Obama administration’s Keynesian-inspired economic policy that is every bit as dangerous. Last Thursday, the Fed announced it will pursue its third round of Quantitative Easing (QE3), and begin buying $40 billion of mortgage-backed securities every month–ad infinitum. Simultaneously, the Federal Open Market Committee (FOMC) announced it would keep its federal funds interest rate near zero though at least mid-2015. Both moves are ostensibly aimed at improving an economy dangerously close to a double-dip recession, yet the political implications are far more transparent: the Fed is playing its part in attempting to get Barack Obama re-elected.
Both moves are indicative of one over-riding reality: the economy remains a shambles. And it remains that way despite earlier massive infusions of cash into the system, in the form of two previous QE packages (QE1 and QE2) totaling $2 trillion, the $700 billion TARP program, and the $865 billion stimulus package enacted in 2009. It remains that way despite near-zero interest rates, that haven’t induced anyone to borrow money. That the Fed would re-visit such ideas, despite their previous failures is also indicative of another over-riding reality: the Fed is in an ideological strait-jacket of its own making, and even if that ideology keeps the nation on a path towards economic disaster, it will be pursued with dogged determination.
It is an ideology centered around the idea that stimulating the demand side of economy, by injecting massive amounts of cash into the system — dollars the Fed creates out of thin air — will result in lower interest rates and encourage Americans to start buying houses again, spur banks to lend money to businesses, and spur businesses themselves to borrow money for expansion leading to more jobs. In turn, such activity would then pull the economy out of it current malaise.
Yet Americans aren’t borrowing money, or buying houses, banks aren’t lending, and businesses aren’t expanding or hiring new employees. The reasons for that are simple: this administration has produced a level of fear and uncertainty that doesn’t allow for anything resembling responsible planning for the future. In short, the Obama administration remains a runaway freight train generating trillions of dollars of deficit spending in the public sector, even as it maintains contempt for the wealth-producers in the private sector who are critical to getting the nation back on its economic feet.
Politically speaking however, QE3 does stimulate a stock market addicted to such easy money policies. The stock market component is critical. It is the one bright spot on an otherwise dismal economic landscape, and when Bernanke announced his latest move, the Dow rose over 200 points, reaching its highest close since December 2007, the first month of the recession. Yet such brightness is illusory at best: while the value of the market goes up, the value of our currency goes down. This currency debasement is the principle reason Americans are paying far more for gas at the pump and food at the supermarket. In fact, gas prices have more than doubled since Obama became president, rising from $1.84 per gallon to $3.85 per gallon. And wholesale prices rose 1.7 percent in August as well, the most in three years.
Ironically, boosting Wall Street at the expense of Main Street is supposed to be completely anathema to the Obama administration’s oft-stated determination to help the “little guy.” Yet it is Wall Street that continues to party while ordinary Americans, especially those who have been financially responsible, are being squeezed on both sides of the fiscal equation. Rising prices are lowering Americans’ buying power, and the Fed’s zero interest rate policy is crushing peoples’ ability to get a decent rate of return on what they have already saved.
The resultant message is as subtle as a sledgehammer: either invest in the Wall Street “casino,” where economic fundamentals have become little more than quaint anachronisms, or remain on the outside looking in. In short, the Fed’s twin policies represent the epitome of catering to both the fiscally irresponsible and the “one-percenters” (a redundancy in many cases), this administration ostensibly considers the root of America’s economic problems.
Unfortunately, reality intrudes. A day after the Fed announced its new program–the most frightening aspect of which is that it is open-ended, meaning the Fed will continue buying up mortgage-backed securities indefinitely–it was revealed that industrial production in the U.S. “unexpectedly” fell in August by the most since March 2009. Another ratings firm, Egan-Jones, cut its credit rating of the federal government from AA to AA-minus, citing the debasement of the dollar that they contend increases the cost of commodities, thereby reducing business profitability and raising consumer costs, exactly as mentioned above. Weekly claims for unemployment benefits also rose “unexpectedly” last week, hitting 382,000 compared to a forecast of 370,000. “Initial claims and the four-week moving average are higher, as are revisions,” said Joe Trevisani Chief Market Strategist for Worldwide Markets. “The negative implications of the rising claims numbers over the past two months were realized in the August payroll data. Expect another poor job report in September.”
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