Sunday, June 15, 2008

Fed To Deal With Inflation

Benny B says he is concerned about inflation. Hank says he won't rule out Treasury intervention. The World breaths a sigh of relief and the dollar begins to regain some of it's losses against foreign currencies. The most optimistic inflation fighters expect a series of quarter percent increases, over the next several months, that will have short term government interest rates back to the 5 1/2% rate they were at, prior to the series of rate decreases at the beginning of this year. Those who are more conservative, believe that just the cessation of further interest rate decreases and the prospect of rate increases, at some later time, will be enough to stem inflation.

While increasing interest rates will help to curb runaway inflation, current interest rates are so low that they would have to increase by at least eight or ten percent to have any effect and increases of that magnitude would throw World markets into turmoil. There are also other things that need to happen before inflation can be lessoned. The trade imbalance needs to be at least neutralized, if not moved into a positive mode. The Government must at least balance the budget, if not beginning to pay off the massive debt built up over the last few years. It isn't interest rates that have stoked inflation but the massive increase in the money supply, without any backing at all for these increased dollars and the wholesale movement of all this newly printed money overseas.

Don't kid yourself. There is no plan to deal with inflation.

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