Today's Downsizer Dispatch
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Quote of the Day:
"Practically all governments of history have used their exclusive power to issue money to defraud and plunder the people."
-- Friedrich von Hayek (Nobel Prize Winner in Economics)
Subject: Stagflation evidence
Here's the latest economic report from the Commerce Department . . .
The economy grew only 6 tenths of one percent in Quarter-4 of 2007, compared to 4.9 percent the prior quarterMeanwhile . . .
- Total 2007 growth was only 2.2%, the lowest in five years
- Home builders have cut operations 25.2%, the largest decrease in 26 years
- Consumer spending rose just 1.9% in Quarter-4, down from 2.8% in Quarter-3
- Business investment in equipment and software grew only 3.3% in Quarter-4, compared to 6.2% in Quarter-3
- The Labor Department says unemployment applications rose to 373,000 two weeks ago, an increase of 19,000
- The National Association for Business Economics predicts even slower growth for this quarter
Clearly, the economy is sputtering. Normally, if we had a stable money supply, you would expect such economic conditions to result in price cuts to attract consumers. In fact, we wouldn't be in this mess to begin with if we had stable money. But instead of price cuts we find that, thanks to the Fed Inflation Machine . . .
- Core price inflation, which excludes food and energy, was 2.7% in Quarter-4, up from 2% in Quarter-3
- Food and energy prices are also rising (you don't need a government report to know this)
- The dollar has reached a record low against the Euro
- Gold is still climbing toward $1,000 an ounce, needing only $15 to $20 more to reach that mark
The Fed thinks it can reverse the economic downturn by creating more money. It started cutting interest rates for this purpose in September, and has gone wild recently, slashing the rate by 1.25% in just eight days in January, the biggest one-month cut in nearly 25 years. Still more cuts are probable at the Fed's next meeting.
Will it work?
Not in the housing market. Mortgage lenders don't know what houses are really worth anymore, so they're reluctant to make loans, even when the Fed is offering them cheap money.
The Fed-created housing bubble has to completely clear, meaning housing prices need to drop to a realistic level, before the housing market can start moving forward again. Sadly, the Fed is actively trying to prevent this. It won't work, because reality always wins, but the Fed's policy may delay the recovery. Meanwhile . . .
The new Fed money will find its way into the economy somehow, as banks and other businesses try to guess which loans and investments will prove profitable in these uncertain conditions. This influx of new money will simply mean more price inflation, further retarding recovery, because price decreases are what we need, not price increases. The fact is . . .
The Fed has always been adept at creating investment bubbles, but has never shown any power to spur stable, sustainable economic growth. The reason for this is simple -- Federal Reserve counterfeiting doesn't create real wealth. All it does is raise prices and distort economic decision making. But the Fed will still try to make the market defy gravity.
This could bring us back to where we were in the 1970s, stagflation -- low or negative economic growth combined with rising prices. That's what the evidence listed above indicates. It could also follow the same pattern as the 1970s . . .
Bond prices will start to anticipate the inflation, making it harder for the government to borrow, even though the Fed will be trying to make it easier to borrow. It will be a classic train wreck. If the Fed persists in its policy, in spite of the stagflation, other problems will begin to intersect . . .
For instance, the ongoing occupations in Iraq and Afghanistan, combined with the growing entitlement expenses for Social Security and Medicare (remember those unfunded liabilities), will combine with lower tax revenues from a stagnant economy to produce growing government deficits as far as the eye can see. Mix that with . . .
A demand that government bonds pay higher interest rates, to compensate for inflation, and things will look very bleak for the government. This is why Bill Clinton once lamented that the bond market was so much more powerful than the President of the United States (or the Fed, for that matter).
In spite of these looming realities the politicians continue to promise still more government involvement in the health care market. You and I may wonder how the politicians will pay for this, but they apparently do not.
Fundamental changes are needed. In the long term we need to curtail the Fed's ability to create inflationary bubbles. The best way to do this is to pass Ron Paul's "Honest Money" bills. Send a message to Congress asking them to do this.
You can paste-in some of the bullet points above to your personal comments so the politicians will know that you know what's happening. You can send your message here.
If you really want to drive the message home, you might consider sending a second message on our "Un-funded liabilities" campaign. Once again you could paste in some of the bullet points above, and stress that you know the government is facing a bleak future in terms of meeting its commitments. Now is the time to cut spending, balance the budget, and start paying down the national debt. You can send that message here.
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