There is much written and said about the Fed and it's monetary 'dilemma'. Many believe the Fed must continue to cut interest rates to avoid a recession, while others believe the Fed should hold/raise rates to protect the dollar. Both sides are wrong, but not because the economic theory/arguments are wrong, rather each side has it's rationale based on the same outdated and useless assumption - that the Fed can affect power/influence at any level. I would argue that the Fed is absolutely powerless regardless of whether interest rates are lowered or raised. The Fed could cut a full point (or two) and the US would still experience a full recession (my opinion: we're already in recession). Conversely, raising rates would do precious little - esp. in the short term - to stabilize the dollar and stunt inflation. In short, the Fed is powerless.
Markets will still react and momentum will gather/swing based on Fed 'action', but these are purely psychological market reflexes triggered by decades of status quo economic theory and bad habits (which the Fed has only encouraged). The cold hard truth is that the effect of Fed monetary policy has diminished to the point of failure.
The Fed no longer controls the fate of the dollar. The Fed no longer has control of liquidity or credit. Their toolbox is well-stocked with 20th century notions of money supply, inflation, liquidity, etc., all of which have been eclipsed by globalization (and fraud) as the difficult months and years ahead will prove.
And this fact is the true root cause of America's economic troubles... our fiat currency and service-based economy are now simply a small part of the machinery of global economics. The USA produces less and less... we increasingly specialize in intangible services while "outsourcing" production of food and goods. We like to think that we remain in control of our economy - but we aren't. And herein lies the irony... Wall St. has driven us toward an unsustainable series of capitalist bubbles all resting on the assumption that resources are endless and globalization will 'raise all boats'. This is nonsense, of course. Commodities are ever more scarce, and globalization is working in BOTH directions, sending a few boats into the stratosphere while condemning most to a life of dependence and servitude. Developing countries have indeed enjoyed economic expansion and wealth creation, but the laws of thermodynamics are becoming more tangible every day. Our planet, a closed system, is demonstrating it's limits. Scarce commodities are strangling growth. All boats are NOT rising. The standard-of-living in developed economies is falling, meeting the rest of the world not at the top of the mountain, but rather at the lowest flood plain. Yes, you read that correctly - the USA is sinking and destined to fall below our eager off-shore partners on the way down... and the Fed is powerless to stop this global dynamic. Moreover, one could rightfully accuse the Fed of consciously encouraging the collapse of american earning power and living standards - the facts certainly support such an accusation.
Some would argue that global economic dynamics will eventually self-correct - the US will import profits and export inflation and eventually the dollar will reflect this rebound. This my well be true. But even in this best-case scenario, the process will be protracted and painful - more painful than most care to imagine here and now.
-- MP
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