Don’t expect the economic crisis to end anytime soon.
After stock markets across Europe and Asia shed 5 to 10 percent on Monday, the United States market appeared ready to open down considerably on Tuesday. Pre-market volume was heavy and fear rippled across market centers from New York to Chicago.
But then a miracle occurred. The Federal Reserve and Chair Ben Bernanke slashed interest rates by three-fourths of a point, the greatest single cut since 1984. By the end of the day, the Fed’s quick action had turned around a 500-point loss on the Dow Jones Industrial Index, and Wall Street celebrated.
What could be wrong with that? Unfortunately, the Fed’s activity will only exacerbate our economic woes in the long-term. If current trends hold, the real value of stock prices will continue to fall for several years. Inflation, which causes both the bubble and the ensuing crash, will get worse because the only way for the Fed to hold interest rates down is to create more money.
Make no mistake. Tuesday’s rate-cut was good for Wall Street. The newly created money in the form of lower interest rates will go to the big banks first. But the rate cuts aren’t necessarily good for everyone else. Although artificially low rates will relieve some of the pressure on homeowners, higher inflation will eat away at savings and drain incomes at a time when most people can least afford it. It looks like Bernanke doesn’t mind saving Wall Street at everyone else’s expense.
And speaking of expense, last week Bernanke told Congress that he supported tax cuts and an “economic stimulus” package. Tax cuts are great of course, and if they are accompanied by necessary cuts in spending, the economy will benefit greatly and most people will be better off. But that isn’t the way it usually works. When Bush cut taxes in 2003, almost no corresponding spending cuts occurred; in fact, war spending combined with the tax cuts to produce a federal budget deficit of $378 billion — a record at the time.
The truth is that if the government cuts taxes without cutting spending, Americans will end up paying for their own tax cuts through inflation and future taxation. So at the very best, the tax cuts would have no net effect, except to boost short-term consumer spending and some corporate profits. Meanwhile, there will be a net transfer from savings to consumption, and the real U.S. savings rate will plunge further. Savings are the basis for future production, so a drop in the savings rate will undercut future economic growth.
As long as the Fed exists, it will continue to operate for the benefit of the politically-connected rich at the expense of everyone else. Time and again, it will bail out Wall Street and major banks by making more money. The Fed could never bail everyone else out too, because it does not create wealth, but merely redistributes it like any other government program.
The only solution to the boom-and-bust economy and never-ending wealth redistribution through inflation is to abolish the Federal Reserve and get the government out of banking.
Tell Nash what you think the Fed should do by e-mailing him at [email protected].
