[n-tres-ted]

Gary Dorsch has informative charts and quotes of central banking figures, but he errs in a fundamental respect. He accepts the Keynesian-based theory of the Fed that raising the funds rate target strengthens the dollar, while lowering the rate target weakens the dollar. The reverse is the case.

Raising the funds rate target weakens the economy by reducing demand, reducing production and reducing employment with the objective of reducing labor's leverage for higher wages. This is to no avail because, as Milton Friedman informed us, "inflation is always and everywhere a monetary event." When inflation occurs, it is in the dollar's loss of value, not in the worker's loss of earning power or in the producer's loss of pricing power when costs rise.

Raising the funds rate target reduces the willingness of producers to invest in production, because the margin of profit will be less due to the increased cost of capital. That means dollars already in the economy will be less in demand, so some dollars will become excess liquidity. This excess liquidity is inflation, because the Fed does not drain it from the economy. In fact, the Fed has been injecting more liquidity by buying T-bonds, even while raising the funds rate target since June, 2004.

The dollar crisis is serious, but it can be fixed. The requires policy change at the Fed, which will be hard to achieve, short of a run on the dollar. There is no assurance that the Fed would respond as it should.

[arthurus]

Raising and lowering the funds rate is ultimately futile and deleterious to the economy as is all government tinkering. Tinkerers are essentially politicians or working for politicians who have an extremely short horizon. It is like turning the helm on a great oil tanker over to a novice because he knows how to drive a car. He is ordered to change course 10 degrees to the right so he puts the helm over and nothing happens. So he puts it over a little farther and still there is no apparent response, so he does it again. Then the ship begins to turn. He waits for it to come to the proper course and centers the helm. The ship keeps turning to the right. The pilot becomes concerned and puts the helm over to the left. The ship keeps turning right. Finally it stơps turning. The pilot turns the helm left some more to bring it back on course and the process begins anew as the great ship embarks on a series of ever wilder S-turns until it hits the bar.
Economic changes induced by fiddling can take several quarters to a couple of years to manifest in the economy. The politicians directing the changes need them to happen far enough ahead of the next election to save Congressional seats. Such gyrations are typical of Keynesian meddling. Bush is a "conservative" Keynesian by his own declaration which means he is economically ignorant as politicians tend to be. Keynesianism is not economics. It is an academic rationale for government control of the economy; it is basically socialist. A "conservative" Keynesian is one who desires outcomes that would enhance the market.etc. but John Maynard's system is a totally inappropriate set of tools for that.

Politicians are activists, doers, people who think nothing works unless they direct it properly. Such people have not patience for Economics in school. It is the dullest subject one can study. Only two presidents in the last century have actually understood how the market actually works, Coolidge and Reagan. Only Reagan had a degree in Economics. Kennedy was lucky in his choice of advisors. The only proper role of the Federal government is to keep prices stable, no inflation or deflation. Read John Maynard Keynes sometime, not as one looking for enlightenment but as an old time English professor(the kind who still teach English as a rational communication code). You see many logical fallacies and self contradictions. Paragraphs do not make logical sense in themselves. Conclusions do not follow from premises. But he tells politicians that only they can safeguard the economy and that the tools with which to do that are fiscal, creative and prolific taxing and spending and politicians love it. It speaks to their conceit. Bush calls himself a Keynesian but it is the monetarists who prescribe tinkering with the money supply. They are sort of a complement to the Keynesians. The greatest of the Monetarists, Milton Friedman, in his writings stressed stability and cutting regulation. In practice he did not promote tinkering even though the monetarists generally like to fiddle as much as the Keynesians do but with a slightly different set of knobs and dials. Presidents and kings have always resorted to inflation to welsh on the national or royal debt by steadily reducing the value of the currency so that the debt is repaid in cheaper money, i.e. only actually partially repaid. Bush is no different. When that process starts, the inflation rate must increase faster and faster for the government to stay ahead because interest rates rise to compensate for the inflation. Eventually rates go up faster than the inflation and the economy hits the wall of recession/depression.

[Alia]

Milton Friedman proved, conclusively, that the Phillips Model is not the way to run an economy -- into chaos through reactionary "fixes", such, as it appears you may be suggesting SHOULD be done.

Fed Chairman Bernanke made clear months back that this move FOR US exports would be occurring. For this to "occur", the dollar must drop, making our produced goods more attractive to the buyer.

I've been reading, regularly, Mr. Bernanke's speeches and clips regarding the economy since he's been in office, and has made clear to me that the Feds have a very clear plan about the economy -- including temp "inflationary" measures, which of course, is in contrast to your: "There is no assurance that the Fed would respond as it should."

With the fed budget drastically reduced, with this amazing economy with low unemployment, increased incentives for improving human resources, investment in resources -- suggests to me, strongly, that while the value of the dollar will dip, the real value of the dollar remains strong based upon the points in first part of my sentence. This then readies the stage for the next run.

The Democrats are strung out on mandating minimum wage increases, thereby attempting to ensure that whatever anti-inflationary measures are in place will be more difficult to implement. Which means, those parts of the country implementing higher minimum wages will assuredly be the sooner at experiencing businesses leaving those districts.

We can then expect those districts to scream about the deleterious effects of the Bush economy; but these effects will not be observable to the average consumer until a year or so after the 2008 Presidential elections. In this regard, nonetheless, minimum wage mandatory "sentencing" can be a help or a hindrence.