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Will the Fed Succeed in Saving the Market?

By: Steve Johnson

3/17/2008 - 32 Comments

The US Federal Reserve is fighting like mad to keep the financial industry from collapsing, knowing that it will take the stock market with it.

Japan’s combined crash of their stock market and housing market in the 80’s is a perfect example of what not to do.  It took Japan ten years to recover.  If the US stock market crashes, while we are suffering from the worse housing market decline since the great depression, it will probably take the economy ten years to recover.

Luckily, the Fed still has a few economic strongholds to lean on – inflation is low (2.3%), unemployment is low (5%), and interest rates are low (6%).  But, the Fed is running out of time, as the dollar is dropping very fast, and creating problems around the world for China, Russia, Japan, and the Gulf states who have huge piles of dollars.  When the dollar goes down, they lose billions.

Will Foreign Nations Bail Out the Fed?

As the Fed is busy bailing out the financial industry, who is going to bailout the Fed?  If the Fed continues to hold interest rates low while increasing the supply of dollars to help support the struggling financial firms, the dollar will continues to lose value.  This policy puts a lot of pressure on the foreign nations, some of which are enemies.  Many Arab countries have their entire economies based on the oil industry, but because oil is traded in dollars, their economies are dollar-based whether they like it or not. 

At some point, the world’s financial authorities are going to have to try to halt the drop of the dollar. It is becoming too dangerous to their economies.  They are beginning to wonder if the dollar is headed for a larger drop and what alternatives they have.  Japan suffers as the yen rises because the country has the largest reserve of dollars in the world and is a major exporter to the US.  The higher the yen, the greater competitive disadvantage they have in exporting goods.  At some point, the central banks of the world may try a coordinated effort to buy up dollars to give the dollar a much needed bounce.

Or, if they find an alternative, they may just let the dollar drop. But, that is unlikely because they have too much invested in dollars and there is no possible way for them to get their money into an alternative currency any time soon.  Therefore, if the dollar continues to decline, the world is in for a recession – and the US will be blamed for it all.  If you think we have a few too many enemies today, just wait until the dollar crashes, we may be facing a very hostile world.

The Dollar is used like a Global Currency

The dollar is the most widely used currency in the world, with two-thirds of the dollars in print used outside the US.  The actions of the US Federal Reserve affect the economies of the world, yet foreign nations have zero control over what the Fed does.  It’s like when someone else has your credit card. The Fed better find a way to save the financial markets quickly or they risk a new round of wars.  This is not Monopoly money they are playing with. Its real money used to operate the economies of the world.

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