Posted on 02/18/2009 6:42:32 AM PST by marshmallow
Bad U.S. monetary policy had global consequences.
The world has gone from the greatest synchronized global economic boom in history to the first synchronized global bust since the Great Depression. How we got here is not a cautionary tale of free markets gone wild. Rather, it's the story of what can happen when governments ignore market signals and central bankers believe in endless booms.
Following the March 2000 Nasdaq bust, the Federal Reserve began to slash the fed-funds rate from 6.5% in January 2001 to 1.75% by year-end and then to 1% in 2003. (This despite the fact that officially the U.S. economy had begun to recover in November 2001). Almost three years into the economic expansion, the Fed began to increase the fed-funds rate in baby steps beginning June 2004 from 1% to 5.25% in August 2006.
But because interest rates during this time continuously lagged behind nominal GDP growth as well as cost of living increases, the Fed never truly implemented tight monetary policies. Indeed, total credit increased in the U.S. from an annual growth rate of 7% in the June 2004 quarter to over 16% in early 2007. It grew five-times faster than nominal GDP between 2001 and 2007.
The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages. A consumption boom followed, which was not accompanied by equal industrial production and capital spending increases. Consequently the U.S. trade and current-account deficit expanded -- the latter from 2% of GDP in 1998 to 7% in 2006, thus feeding the world with approximately $800 billion in excess liquidity that year.
(Excerpt) Read more at online.wsj.com ...
ping
“Fed never truly implemented tight monetary policies”
Code for stop printing more money.
The only people who profit from cheap money are the ones getting the money at the beginning.
Interest rates got so low that ‘cash’ investors sought other venues.
Thus, there was much less cash going into the interest bank/savings accounts.
Thus, there was less money available to banks to loan.
==
Retirees who rely on fixed income interest vehicles are being hurt severely. A few years ago, they were using interest to help pay their living expenses. Now, many of those accounts are paying such low interest that retirees are hurting, financially.
Yet, hidden in the statistics, living costs (food, utilities, etc) are increasing substantially.
Exactly my take on this article as well. And, I think the author is spot on. I recall many, many editorials from the editors of the WSJ warning Greenspan of major economic problems unless he closed the spigot - and fast. Those problems are upon us. Combined with federal pressure on Fannie and Freddie by Democrats to lend to those who could not repay, it was, to use a well-worn phrase, the perfect storm.
"The best policy response would be to do nothing and let the free market correct the excesses brought about by unforgivable policy errors. Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump -- possibly an inflationary depression with dire social consequences."
And remember that we were led to our current predicament while Bush was supposed to be watching the hen house. He ran a very good war but his domestic policies will sink him as a great president. Spending as a function of GDP rose dramatically during his two terms and the Fed/Treasury policies during those eight years led us to the mess that we are in that the Socialists are "capitalizing" on to promote their collectivist policies.
We are in trouble. Obama is, as we all at least suspected, a Socialist with a capital S.
So let’s see here, the US runs budget and trade deficits, who benefits from inflating the money supply? If you said the US Treasury - bingo! We have a winner. So there’s the motivation. Meanwhile, out here in flyover country, we got cheap houses out of the deal - hey, there’s another winner! Bad news, the bill comes due at some point, huh? And sometime is now.
Worst Is Yet to Come:” Americans’ Standard of Living Permanently Changed
Posted Feb 17, 2009 12:53pm EST by Aaron Task in Investing, Recession
There’s no question the American consumer is hurting in the face of a burst housing bubble, financial market meltdown and rising unemployment.
But “the worst is yet to come,” according to Howard Davidowitz, chairman of Davidowitz & Associates, who believes American’s standard of living is undergoing a “permanent change” - and not for the better as a result of:
An $8 trillion negative wealth effect from declining home values.
A $10 trillion negative wealth effect from weakened capital markets.
A $14 trillion consumer debt load amid “exploding unemployment”, leading to “exploding bankruptcies.”
“The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car,” Davidowitz says. “A lot of that is gone.”
Going forward, the veteran retail industry consultant foresees higher savings rate and people trading down in both the goods and services they buy - as well as their aspirations.
The end of rampant consumerism is ultimately a good thing, he says, but the unraveling of an economy built on debt-fueled spending will be painful for years to come
Also, you missed the following hyper-inflation that hasn’t hit us yet, but mark my words it is on the way.
marking
Bullets, beans and band-aids. In that order.
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