Making Cents Out Of Confusion
Yesterday (September 18, 2007), the Federal Reserve Bank ("Fed") decided to lower interest rates.
Fed action begs the question, "Should they do anything at all, or should the economy suffer or benefit from business and consumer choices?" These questions are too debate laden to pursue (although, the subject entices me).
In case you didn't hear, the "Fed" lowered the benchmark rate and the discount rate 1/2% (50 basis points; 100 basis points = 1%).
"I don't make jokes.
I just watch the government and report the facts.
" - Will Rogers All "Fed" action matters to the dollar, interest rates, and inflation.
The dollar: When interest rates decrease; the dollar weakens.
Ever have an EKG? If your's looked like the dollar's, your cardiologist would send you to intensive care.
The dollar is bouncing off a 17 year technical "flat-line".
Breaking below the "flat-line" sends the $ into "uncharted territory".
A weak dollar reflects a weakening economy, and perhaps, a lack of trust in the dollar as the predominant currency standard for the world.
Since 1986, exchange rates between the $ and other currencies have decreased.
Dollar strength gives the advantage to U.
S.
consumers.
Foreign producers have an advantage in the U.
S.
market (Toyota vs.
GM).
In tennis terms, we're about to have "match point".
Interest rates: "Lower interest rates hurts savers", says Bill Ford, former Governor of the Federal Reserve.
Borrowers do not save (so, where do banks get all the money to loan? Check your local banks annual report.
Notice the investment account?).
Parents of baby-boomers prefer bank savings accounts or certificates of deposit.
After a Chamber of Commerce meeting this morning, an 84 year old man told me, "Older folks who keep their money in the bank get hurt when rates go down.
" My wife's 93 year old grandmother says, "Jimmy Carter...
those were the good ole days.
" Inflation: Dale Jorgensen, Harvard Professor (who taught Ben Bernanke at Harvard) said, the Federal Reserve's commitment is to "monitor growth and inflation".
Further, the Fed must "maintain orderly conditions in the financial markets".
Alexander Hamilton ( first Secretary of the Treasury), founder of "First Bank" (today known as the Federal Reserve Bank) agrees.
Hamilton, consistent with his personality empowered the federal government.
He lost the election for three reasons.
1.
The Iran hostage crisis.
2.
The liberal caucus within the Democrat party.
3.
The rate of inflation lofted Carter back to Plains, Georgia.
Remember Ronald Reagan during presidential debates? "Are you better-off today than you were four years ago?" "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it.
If it keeps moving, regulate it.
And if it s tops moving, subsidize it.
" - Ronald Reagan "Nana" (great grandmother to my children) likes Jimmy Carter because her bank paid her 22% on her money.
She did not know (I tried explaining) her real-rate of return was 2-4%.
During January and February of 1980, Charles Schultz reported an inflation rate of 18-20%.
That had not happened since the 1950's.
Inflation's insidious economic damage affects everyone.
At the same time, budget deficits jumped 50% reflecting the effects of unparalleled government spending.
Sound familiar? Economic shifts sneak-up and surprise markets, economists, and policy-makers.
All viewpoints have two sides, but only one viewpoint prevails.
Knowing which side will be validated challenges everyone.
In 1980, the editor of the Economist "quoted a partner in Solomon Brothers as saying, 'nobody knows where we are going, because we've never been here before.
'" The United States economy may venture where "no man has gone before", but not "boldly".
" - Thomas Jefferson
Fed action begs the question, "Should they do anything at all, or should the economy suffer or benefit from business and consumer choices?" These questions are too debate laden to pursue (although, the subject entices me).
In case you didn't hear, the "Fed" lowered the benchmark rate and the discount rate 1/2% (50 basis points; 100 basis points = 1%).
"I don't make jokes.
I just watch the government and report the facts.
" - Will Rogers All "Fed" action matters to the dollar, interest rates, and inflation.
The dollar: When interest rates decrease; the dollar weakens.
Ever have an EKG? If your's looked like the dollar's, your cardiologist would send you to intensive care.
The dollar is bouncing off a 17 year technical "flat-line".
Breaking below the "flat-line" sends the $ into "uncharted territory".
A weak dollar reflects a weakening economy, and perhaps, a lack of trust in the dollar as the predominant currency standard for the world.
Since 1986, exchange rates between the $ and other currencies have decreased.
Dollar strength gives the advantage to U.
S.
consumers.
Foreign producers have an advantage in the U.
S.
market (Toyota vs.
GM).
In tennis terms, we're about to have "match point".
Interest rates: "Lower interest rates hurts savers", says Bill Ford, former Governor of the Federal Reserve.
Borrowers do not save (so, where do banks get all the money to loan? Check your local banks annual report.
Notice the investment account?).
Parents of baby-boomers prefer bank savings accounts or certificates of deposit.
After a Chamber of Commerce meeting this morning, an 84 year old man told me, "Older folks who keep their money in the bank get hurt when rates go down.
" My wife's 93 year old grandmother says, "Jimmy Carter...
those were the good ole days.
" Inflation: Dale Jorgensen, Harvard Professor (who taught Ben Bernanke at Harvard) said, the Federal Reserve's commitment is to "monitor growth and inflation".
Further, the Fed must "maintain orderly conditions in the financial markets".
Alexander Hamilton ( first Secretary of the Treasury), founder of "First Bank" (today known as the Federal Reserve Bank) agrees.
Hamilton, consistent with his personality empowered the federal government.
- Hamilton, consistent with his personality, encouraged federal control of:
- national debt
- state debt accrued during the revolution
- a national bank (quite favorable to northern business)
- imposing taxes on imports and whiskey
He lost the election for three reasons.
1.
The Iran hostage crisis.
2.
The liberal caucus within the Democrat party.
3.
The rate of inflation lofted Carter back to Plains, Georgia.
Remember Ronald Reagan during presidential debates? "Are you better-off today than you were four years ago?" "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it.
If it keeps moving, regulate it.
And if it s tops moving, subsidize it.
" - Ronald Reagan "Nana" (great grandmother to my children) likes Jimmy Carter because her bank paid her 22% on her money.
She did not know (I tried explaining) her real-rate of return was 2-4%.
During January and February of 1980, Charles Schultz reported an inflation rate of 18-20%.
That had not happened since the 1950's.
Inflation's insidious economic damage affects everyone.
- Inflation: helps and hinders:
- Debtors pay debt with inflated dollars.
The Good. - Wealthy assets get adjusted downward.
The Bad. - The cost to finance business reaches the absurd.
The Ugly
At the same time, budget deficits jumped 50% reflecting the effects of unparalleled government spending.
Sound familiar? Economic shifts sneak-up and surprise markets, economists, and policy-makers.
All viewpoints have two sides, but only one viewpoint prevails.
Knowing which side will be validated challenges everyone.
In 1980, the editor of the Economist "quoted a partner in Solomon Brothers as saying, 'nobody knows where we are going, because we've never been here before.
'" The United States economy may venture where "no man has gone before", but not "boldly".
- What to Watch:
- Long-term bonds
- Gold
- Agricultural commodities
- Oil prices
- Metals
- What to Do:
- Maintain Asset allocation across and within a wide-range of cross-correlated(don't let them dance in-step) asset classes
" - Thomas Jefferson