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Does the Fed Know What They Are Doing?

By: Steve Johnson

2/26/2008 - 14 Comments

The Fed is fully aware that their actions are creating inflation.  No doubt about it, inflation is on the rise – and the Fed money policy is the primary cause.

The Fed money policy to increase the money supply by lowering the interest rates, loaning billions to the large banks at extra low interest rates and printing money as fast as they can, is creating inflation. And not just in the US, but all over the world, because the dollar in the most widely used currency with many nations pegged to the dollar.

Reference Article: Consumer prices jump more than forecast. It's the biggest jump in 19 months for prices excluding food and energy, a signal that inflation lurks in the economy.

Blaming The Fed

It’s easy to say, “The Fed is causing the problem, so let’s just get rid of them – by electing new political leaders”. But, there is a problem with this augment. The plunge protection team (Fed and the Administration) include some of the smartest people in the world with access to the most accurate economy information that exists.  Don’t let anyone tell you that they don’t know what they are doing.

My experience researching questions with an obviously looking answer like this one usually end when I realize that I didn’t have all the information or fully understand the complete set of potential consequences. Another words, “Things are usually the way they are for good reasons”.

I am - like many - very skeptical that the Fed is only creating a larger economic problem down the road by increasing the money supply. Even if the Fed is juggling many economic concerns that factor in to their decisions, it still looks like they are only delaying the mother of all recessions.

Perhaps There Are Other Reasons

One of the most perplexing questions is why the Fed is helping the giant banks and Wall Street firms who are carrying billions of dollars of loans and mortgage-related securities whose value has declined along with the sharp drop in the housing market.  Why help the guys that helped create the sub-prime problem, by packaging sub-prime mortgages and selling them around the world? Why not just let these firms go bankrupt?

At this point, I cannot answer this question with certainty, but it looks as if the Fed has no other choice. It’s like this, either they inflation your dollar to lose half its value and bailout the financial firms or they let the financial firms go bankrupt and the economy stops dead in its tracks – causing everyone to lose their jobs leaving you with no money.  Would you rather lose half your purchasing power to inflation and keep your job or lose all of your purchasing power when you lose your job?

After all the bailouts, rebates and low interest rates have run their course, the Fed will have to pull in the money supply to stop inflation. What they are doing is creating a window of opportunity for the financial firms to get their feet under them – so that there will be money available for businesses to borrow and hire people.  It is absolutely critical for the financial firms to be operational when they pull in the money supply.

Get Ready

Perhaps these are the good reasons behind the Fed's actions. But, make no mistake about it, the Fed money policy is going to change as inflation moves towards double-digits. This is the time to get your personal finances in order.

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