Thursday, March 13, 2008

Is The Fed Re-flating The Economy?

Commodity markets, particularly gold, seem to be answering yes to that question. For centuries governments have fell to the temptation to use asset inflation to solve economic problems. They did so often knowing they were only trading today's problem for an equal or larger problem in future years.

In recent weeks the Fed's response to the credit market's problem has been to lower interest rates and expand the money supply, even though neither step will have much impact beyond psychological. The fact is lending institutions and investment bankers combined to act with incredible stupidity and all the money in the world at near zero rates will not repair the damage. It will simply take time, and yes institutions and homeowners will have to accept their medicine. When my children were teenagers I called it the law of collective stupidity. Meaning the more teenagers you add to a group the lower becomes their combined IQ's. Based on this my son was never allowed to invite more than 2 friends to join him on our boat, allowing him in turn to enjoy those summers accident / incident free. It looks like Wall Street got together with mortgage bankers while ignoring my law of collective stupidity.

But, as to inflation, the US dollar is at an all time low and commodity prices are almost all at record highs. Almost every business is feeling the effects as food, fuel and everything imported goes higher. Consider steel, much of it is imported. Almost everything, it seems anyway, at Walmart is imported. So, if we are in line for more inflation it will eventually work its way into the price of real estate creating a sort of backdoor bailout. While I hope this is not the case I fear it may be the real Fed agenda.

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