The Fed's Low Interest Rates Prevent Growth!

It appears some people never learn. On Tuesday, the Federal Reserve’s Open Market Committee announced they would be keeping interest rates at record lows until at least mid 2013. In a statement from the FOMC, the Fed stated “To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent”. The FOMC has decided to keep interest rates at record lows in an attempt to pick up growth since the recovery has been slower so far this year than expected, but keeping rates this low will have the opposite effect.

After the financial collapse of 2008, the FOMC decided to lower the federal funds rate to 0-0.25% in December of 2008 to have credit flow more freely to financial institutions in an attempt for these institutions to recover after experiencing near bankruptcy. Many mainstream economists said the Fed’s decision to set interest rates at record low levels was a brilliant idea, and was necessary in order to prevent an economic depression. Government officials and the Fed stated that more liquidity in the US markets was the answer to solving our problems and putting a halt to the recession. However, the decision to significantly lower interest rates has not shown any real results in economic recovery, as the unemployment stays high, stocks have not shown any real growth, and the US dollar continues to lose its value against commodities and foreign currencies.

Although some argue that significantly low interest rates by the Fed prevented a depression after the 2008 financial collapse since we haven’t seen depression level figures for the US economy, it can be refuted by stating these artificially low interest rates have just prolonged the harsh recession that should have happened in late 2008. When the Fed decided to lower interest rates to a 0% level for the first time in its history in December of 2008, they took action in lending trillions of dollars in 0% interest loans to banks, corporations and financial institutions in the US and abroad from late 2008 to present day. These no interest rate loans have allowed these companies to pump their bank accounts full of temporary assets based off credit from the Federal Reserve. These assets have allowed companies to prop up their books and avoid having to record any significant losses as they can cover such losses with temporary cash they have on hand from the 0% interest loans.

Since the Fed has artificially propped up US markets by allowing some of the largest corporations in the world to borrow money without having to pay interest, the Fed has allowed these corporations to avoid showing losses which will be inevitable in the long run. Since the majority of the companies that are borrowing at 0% interest rates right now should have declared bankruptcy in 2008-2009, no true recovery will begin to happen for the US economy as long as they borrow money from the Fed on cheap credit to avoid having to report significant losses. The Fed’s recent decision to keep interest rates at all time lows until at least 2013 will just continue the trend these companies have been on in artificially propping up the assets on their books. The best and only decision the Fed should make at this time is to raise interest rates and allow the US economy to face reality before things get worse.

- Liberty_Mike

Bernanke, What Are You Talking About??

Last week, Federal Reserve Chairman Ben Bernanke held the first ever Fed press conference. During this press conference, Bernanke discussed the labor market, inflation, commodity prices, the housing sector, monetary policy and the overall health of the US economy. After listening to this staged event hosted by Bernanke, it is all too clear that the press conference was nothing more than a publicity stunt by the Federal Reserve in an attempt to gain public support for recent Fed policies. Since the Federal Reserve has been under attack by critics due to a serious lack of Fed transparency, Bernanke figured that holding a press conference would be a good way to give the public more insight about the Federal Reserve’s policies to calm overall criticism. In reality, this conference gave no real insight about recent policies, and showed how out of touch Bernanke is with American consumers by stating overall inflation is not affecting the US economy.

In his opening statement, Bernanke stated that increases in commodity prices are due to geopolitical developments and robust global demand. He also stated that there have not been any indications that inflation is getting bad enough to prompt the Federal Reserve to tighten monetary policy, and that the Fed will in fact carry out the rest of their US Treasury bond purchases to complete QE2 by this summer. When asked about QE2 and whether or not the program was successful, Bernanke stated the program has been very successful so far, and that the program has led to overall better economic conditions for the US. In making these statements during the press conference, Bernanke is either trying to trick the American people, or he truly is clueless about inflation and the current devaluation of the US dollar.

Since November 2010 when the Fed took action in pursuing QE2, commodity prices across the board have increased, and the US dollar index has declined. When looking at recent increases in commodity prices and the appreciation of foreign currencies in comparison to the US dollar, it is clear that inflation of the money supply has affected the value of the dollar, and that the Fed should do the exact opposite of what Bernanke stated they would do during last week’s press conference.

Two commodities that are the most sensitive to inflation are the monetary metals gold and silver. Gold hit all time record highs in 2010, and has skyrocketed since January 2011, now priced at over $1500/oz. Silver is near all time record highs ($50/oz in the 1980s), floating around $48/oz. In November 2010 when QE2 had just been announced, Silver was priced under $30/oz. Other metals such as Platinum, Palladium and Copper have increased in price over the past few months as well. Looking at commodities other than metals, oil/gas prices have also increased. Crude oil has significantly increased along with unleaded gas and heating oil. Natural gas prices have also increased since November 2010, although the increase hasn’t been as significant as the increase of other gas prices. Most food based traded commodities such as corn, soybeans, wheat, cattle, hogs and coffee have also increased in price since QE2 began. Along with these across the board increases in commodity prices, the US dollar index has declined in the past few months to around 73, approaching a 5 year low. Foreign currencies such as the Canadian and Australian dollars have recently surpassed the US dollar in value. When looking at the numbers, it is not hard to determine that the current increase in inflation is a problem, and that it is starting to affect the American people. If Ben Bernanke and the Fed do not wake up to this reality soon and take action in tightening monetary policy, the value of the US dollar will continue to decline and American consumers will continue to see a decrease in their standard of living.

- Liberty_Mike

The Federal Reserve Blows Past China in the US Treasury Market

It’s official!  Within the past couple of weeks, news was released that the Federal Reserve has surpassed China as the largest holder of US Treasury bonds, more commonly known as governmental debt. The Federal Reserve now holds around $1.1 trillion in United States debt, while China holds around $891 billion. If you don’t think the Federal Reserve’s recent increase in purchases of government bonds is anything to be worried about, think again.

In early November, 2010, the Federal Reserve announced they would purchase $600 billion in US Treasury bonds over an 8 month span in a program called QE2. Federal Reserve chairman Ben Bernanke stated this program was a necessary form of economic stimulus to help speed up the recovery for the US economy. Although many critics and inflation hawks (such as myself) immediately challenged the proposal of QE2, stating it would spark inflation and prolong the recession, many Keynesians and inflation doves such as Bernanke took action in following through with this plan while ignoring their critic’s concerns.

The purchasing plan for QE2 was for the Federal Reserve to buy US Treasury bonds at a rate of $75 billion per month. Considering this program started in mid-November, the Fed is almost at the halfway point of its $600 billion planned purchase. This means the Fed still plans to purchase $300 billion more in US Treasuries over the next 4 months. Such an action will further strengthen the Federal Reserve’s new standing as the number one holder of US debt.

For those who don’t know, the Federal Reserve is the central bank of the United States. The main duty and obligation of a central bank is to regulate the nation’s currency by increasing or contracting the money supply. In doing this, their main objective is to hold the value of the currency stable and minimize the risk of inflation and deflation. When the Federal Reserve purchases US Treasuries as they are with QE2, they do so by simply printing the money out of thin air and adding it to the United States’ money supply. As the money supply increases at a rapid rate, inflation starts to rise, and the value of the US dollar declines in value against foreign currencies. Both foreign and domestic goods increase in price as inflation starts to rise, and it becomes tougher for the US to pay back its debts to foreign nations. Once this point hits, foreign nations become less likely to lend money to the US government, and the only way the US can continue to borrow is by going to its own central bank and ask them to crank up the printing presses.

The Federal Reserve acting as the top bond holder of US debt is a very bad policy, and it will inevitably slow down the recovery instead of speed up the process. As the federal government continues to spend and foreign nations become less interested in funding such habits, the Federal Reserve will continue to increase its purchases of US debt in an attempt to be seen as an economic stimulator and savior of the US economy. In reality, they will prove themselves to be the exact opposite.  If the Federal Reserve does not immediately slow down their holdings of US debt, it will take a longer time period for the US to pull out of recession.

- Liberty_Mike