I’ll keep that one quote in my back pocket

But in this case, I think it’s selective vision and the hammer/nail problem (when all you have is a hammer, every problem looks like a nail).

The government is relying on the Fed to “manage the economy”, but the Fed has only one tool: interest rates. The Fed is supposed to “manage inflation”, but again, one tool, “big hammer”, and this isn’t a “nail” problem.

Right now, interest rates are not driving inflation. Inflation is being driven by globalization (1) and the dropping value of the USD (2). (1) is going to happen and the biggest economy is going to suffer, not much the Fed can do here, 20% government bills are not going to stop people in China from opening new factories.

(2) is the result of US government policy. Low interest rates will cause a slow-down of foreign investments, but won’t stop the impending inflationary recession. Really high interest rates would likely garner some foreign investment (despite poor trust in the USD), but it would immediately devalue existing currency, drive inflation and destroy growth as all of the money moved to the high-interest “guaranteed” payouts.

I can’t argue with Bernanke’s move, but the Fed is really the wrong tool here. The US government needs to provide international investors with a higher level of trust in the value of the USD and interest rates aren’t the solution (b/c they aren’t the problem). “Inventing” money via the stimulus check is also a bad idea. International investors will see right through the BS and it will serve to do nothing but devalue existing currency even more.

The Financial Blogging community have all patted themselves on the back by saying that they’re going to “save & invest their stimulus check”, but they’re really missing the point. Investing the stimulus check is the least that they can do to protect their existing financial assets. If you have money, what you really want to do is ask the government to stop printing money so that your assets aren’t “inflated away”.

The fact is with macro-economics is that nobody knows how they work. Even today, it’s not certain what caused the depression or if it could have been reduced at all.
As you say, the coming recession might not be in anyone’s control.

Mike

I’ve heard others posit that the way out of the recession is actually the inverse and that the Fed should be raising the rate! Personally, I believe that the outcome is going to be the same either way.

The US has so many deficits, so many debts to repay, that changing interest rates won’t make any difference. Interest rates and debt spending are not going to solve the problem that the US fundamentally consumes more than it produces.

Bernanke can do whatever he wants, the US economy is headed for a recession. It doesn’t matter if interest rates are 1% or 10%, forces of globalization will cause the world’s largest economy to shrink. Money has to flow from the big pile to the little pile.

There’s still a ton of power-grabbing and holding on to the last vestiges of American wealth, but it’s really all hit a plateau out here. The commodity prices are up and wages aren’t. Inflation is going to “kick it up another notch” over the summer when gas prices go up and everything gets even more expensive.

Right now, Bernanke is setting up for an inflationary recession. Heck at 2.25% Fed Rate we’re basically already there. Inflation has been around 3% for the last decade and a quick look around indicates that it’s going to be higher this year. Honestly, I figure that the Fed and Gvmnt can get by for a couple of years with low interest-rates and high inflation before enough people step up and take notice.

But short of some form of territory / commodity acquisition (say a war), I don’t really see any way out of this that doesn’t involve a significantly reduced quality of life for the average North American.

Also, regarding any stimulus effect…there won’t be one, at least not a recognizable positive impact. Spending a few bucks here and there won’t do anything for the economy. Businesses are wise enough to recognize the difference between a one-time chance (stimulus checks) and the possibility at repeat business (lower tax rates).

“In theory it shouldn’t matter whether the government spends money on infrastructure projects or gives it to the voters to spend on big screen tvs, either way the money gets into the economy.”

There is a huge difference between the government spending money and the public spending our money. When the government puts money into the economy, the government furthers the government’s interests. When we spend our money, we spend our money on things that enrich our lives. Businesses observe where we spend our money and then they invest time, money, and energy to win our business.

The same is also true when the government spends our money. Businesses spend their time, money, and energy courting the government’s business.