Interest Rate Mumbo Jumbo
The Fed again cut interest rates today. Apparently, people are starting to figure out that the only weapon the Fed has against economic downturn is fiddling with interest rates, because the market plummeted upon learning the news. Unfortunately for us, the Fed has not found a way to conjure asset-backed currency when our economy needs it the most.
Via MSN:
The Federal Reserve cut interest rates today, but stocks plunged after Wall Street jeered the cuts as too little and possibly too late to keep the economy from sliding into a recession.
Ron Paul had this to say in response:
America ’s economic difficulties, especially the problems in the housing market, are the direct result of the Federal Reserve’s inflationary policies. While prices for gold, oil, and commodities continue to rise, the purchasing power of the dollar for all Americans continues to fall. Inflationary monetary policies created the problems in the economy we are seeing, and these problems will be made worse, not better, by more inflation. And today’s action by the Fed is very bad news for American workers and retirees who are about to get hit with yet another jump in prices. Make no mistake, the problems faced by the American people are not caused by unscrupulous mortgage brokers or the rising price of oil. These are symptoms of an economic disease caused by a spendthrift Congress enabled by loose monetary policy. Too many pundits praise the weak dollar as benefiting exporters, but they fail to see the harm done to thrifty, hard-working Americans. Rather than continuing to pursue a policy of easy credit and increasing debt, we need to return to a sound monetary system.
And his point can’t be understated. Consider the following graph of the consumer price index, an index based on the average cost of consumer goods. The graph shows the index from the year 1800 to 2005. Note that in 1976, the U.S. walked away from the Bretton Woods agreement, whereby the dollar was still exchangeable for gold on international markets, though not so domestically. This was the last time the dollar was backed by gold.
Source: Federal Reserve Bank of Minneapolis (note that 2006 and 2007 have data points of 603.5 and 617.7 respectively)
It’s worth pointing out that the three minor spikes on the above graph are: (1) the War of 1812, (2) the Civil War, and (3) the Great Depression. On a related note, here’s the historical price of gold from 1833 to 1998, followed by the 5-year chart from 2000-2007 (present).
The charts largely speak for themselves. The Fed’s dropping of interest rates, and the overall strategy of infusing the market with dollars when things get dicey, are going to keep trending these graphs in a particular direction. Up. It will also trend the value of your savings and the strength of the markets in a particular direction. Down.
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Great post.
It’s sad to see what the Fed does.
I hope RP wins.