Sunday, October 28, 2007

The Fed's Conundrum

In the US we have a slowing economy, however prices are rising for commodities like food and energy, and this just doesn’t make any sense. It doesn’t make sense having low interest rates while mortgage debt defaults are hitting all-time highs. Rising equity prices don’t make sense with all of this going on, as well as the US Dollar hitting new all-time lows. And contrary to what the financial media proclaims, the liquidity the world is awash in, is not the result of high productivity and wealth accumulation. So are the answers to these economic conundrums a result of the new global economy?

Back when the US Dollar was much higher, the US was able to import goods cheaply since we paid fewer dollars than today, so part of the reason we’re paying higher prices is a direct result of a dollar that’s lower in value. But the main reason for rising prices is global competition for commodities. Developing countries like China are growing as much as 15% a year, and demand raises prices. However in answer to these demands we’re not seeing a corresponding increase in business investment to create the additional supply needed to meet rising demand. And the reason is because both asset prices and debt levels are too high to justify the low return on investment relative to risk. This ‘stagflation’ is the direct result of interest rates which have been set at too low levels to bring down asset prices and increase returns that business and investors demand for taking on risk. So we see US energy companies preferring to buy back stock in their companies rather than increase business investment since it appears their return for gambling in the stock market has returned a higher reward than building their business to meet the increasing global demand for energy.

Across the economy, we see a simple and consistent theme. Capacity is full, costs are rising, asset prices are high, government, corporate and consumer debt is at staggering heights, and perceived returns on new projects is low. Is it possible the US Fed is the cause of this global mess? After-all, they were the jackals who kept rates suppressed at 1% back in 2003 and 2004. And that's what caused the housing ‘boom’ turned bust that resulted in debt defaults, which ignited the current global credit crisis responsible for massive foreclosures on a global basis. So why have they returned to their old tricks of lowering rates again below the real rate of inflation?

The truth is the US Fed is backed into a corner, they need to continue lowering interest rates in order to cover-up the real estate and financial Ponzi scheme they created to remedy the 2k Nasdaq crash they created. Sure, free markets would cause real estate prices to collapse and a recession to bring down consumer spending. That would cause supply and demand to fall into line. But, that would also reveal the incompetence of the Fed and the major banks, which would simply be unacceptable, so free markets must be subverted. Look for liquidity and some fancy academic justifications in the face of oil over $100. The Fed and market watchers may wonder at the theoretical cause of stagflation, but it’s real obvious who the culprits are here.

So the next time you hear a US Fed official wondering about economic conundrums, the only ones to blame are the master manipulators themselves. There would be no irrational booms and busts were it not for the direct actions of this entity. We are in a crisis so deep now with over $300 trillion in derivatives at risk, the downside of this story may finally reveal the destructive capacity of the Federal Reserve system, but not without the dearest consequences in the history of our society. And I suppose that’s what it will take to finally rid ourselves of these economic Demons of Disaster.

Below is a fantastic video explaining how our monetary system works and the US Fed's part in what amounts to the most hideous financial scam ever perpetrated.

Money, Banking and the Federal Reserve..

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