They Did WHAT?!?

WOW. Again.

I had written up a long follow-up post on this Federal Reserve intervention that I had planned to post yesterday, but I got hung up in meetings and couldn’t get to it.

I wrote long (and eloquently, I might add) about how there was NO possible way that after their dump-and-run “liquidity injection” they could even THINK about lowering interest rates for AT LEAST the next two to three months. About how the economy has been experiencing pretty significant inflationary pressure in the food and fuel sectors over the last 12 months. And about how all of this pointed to the rational decision for them to retreat back to their 30 year old policy of targeting inflation as Public Enemy #1. Boy was I wrong.

Not only have they and their colleagues dumped nearly $350 billion dollars into the economy, just in the last few days, but they lowered interest rates a half percent as well.

This is bad news for the economy. Really bad news. Because these acts together pretty much guarantee an onslaught of inflation.

You see, inflation is a bad thing. In the most simplest terms, it’s an oversupply of money in the economy, and anything that is in oversupply decreases in value. The same goes with money. So what inflation does is decrease the value of your paycheck faster than you can make it up with raises. In short, it silently lowers the standard of living for just about everyone that works for a paycheck, and it particularly impacts retirees and others on fixed incomes, because their payments are rarely set to adjust anywhere near the true rate of inflation.

So you end up working more and making less. And if that’s not bad enough, the cure for inflation is worse than the disease.

How do you cure an oversupply of money? You raise interest rates! And raise them, and raise them, and raise them. It’s a bitter pill to swallow for everyone.

The problem is, we’ve gone so long without any real appreciable inflation that everyone has forgotten what it’s like. Remember 20% mortgage rates in the late 70’s and early 80’s? They actually peaked in June 1981, and these staggeringly high rates in turn had a crippling impact on business, because nobody could afford to invest in new business or new equipment. This caused a massive recession to start in July of 1981, which lead to the economic double-whammy – staggeringly high unemployment rates that peaked at almost 11% in 1982.

The interest rates alone were enough to cripple the housing market. The high unemployment only exacerbated it and caused the greatest number of foreclosures in history. Wait – that sounds kind of familiar, doesn’t it?

So enjoy your rally today in the stock market. You paid a high price for it but don’t know it yet.

It’s kind of like everything else we do in this country – we put it on a credit card and figure we’ll worry about it later.