Its official The Federal Reserve under Ben Bernanke has made it clear the priority is to "support growth" by cutting interest rates as needed at the expense of rising inflation in the US economy. So the Fed has weakened the US dollar, printed more dollars to fund the Iraq war which has led to an increase of the money supply added to this Bush's fiscal tax cut, and a President out of step with reality as the consumer is hit with high energy prices and rising food costs. The Dollar this week has taken a pounding due to the dismal economic news coming out of the economy, the dollar against the Euro has for the first time breached €1.50 to the greenback also the Yen is at a three year high. The weakened dollar may help the trade deficit but it is storing up problems for a pro-longed down turn in the US economy as inflation takes hold.
My major concern as aired before is that the US is headed for a period of Stagflation this was backed up by a report in the FT dated Feb 20th. Also the "Market Oracle" has this to say,
"The Bernanke Fed's aggressive rate cuts have doing more harm than good for the US economy, by leaving the US consumer with slumping home prices on the one hand, and soaring food and energy prices on the other hand, otherwise known as the “Stagflation” trap. According to Bill Gross, chief investment officer at Pimco, the Fed's rate cuts of 2.25% since September have not brought mortgage rates lower, with the Fannie Mae 30-year mortgage rate stuck at 5-3/4 percent. “Here is the startling point, the markets that the Fed is trying to affect haven't changed,” he said. Gross thinks the housing downturn is still in its early stages, and expects a 20% decline in total. “A 20% decline in housing prices is confidence destabilizing, its credit imploding,” he added. And how long can US Treasury yields stay under the exploding rate of inflation, or negative rates of interest?
Commodities investment guru Jim Rogers said on Feb 25th, “the Fed is printing money and are trying to prevent the recession, they are putting on Band Aids,” he told an investor conference in Dublin, Ireland. Rogers added, “as long as the US central bank and the federal government keep making mistakes, you will have a longer period of slowdown, and it will be perhaps, one of the worst recessions we have had in a long time in America,” Rodgers predicted.
Put simply the printing of money then having that money injected into the money supply will cause inflation, but with falling house prices, a weak currency and consumer confidence at a all time low we need to be prepared for this recession, Stagflation and then possibly deflation to be around for some time. Reckless economic policies by the Bush administration is at the core of this major crisis. As Bernanke lowers interest rates the credit markets tighten lending it has a knock on affect to all corners of the economy. If you are smart enough to see what's going on you will sense that the inflation rate as published by both the US and UK central banks is a lot higher to what's being said. We can feel it in our pockets every time we shop at Tesco's or Sainsbury, transport costs have also risen is UK inflation really 2.1% I think not.
UK Banks have announced they have written off over £6.8bn in individual household debt as families struggle to meet repayments also mortgage loans approved in January 2008 totalled 74,000 the second lowest since 1999.
As Gold edges to $1,000 oz it shows investors are truly worried about the world economy and inflation, Oil was up this week as high as $107 a barrel, Platinum, Wheat, Soybeans,and Iron Ore .
I am worried that neither Hilary, Barack or Senator McCain have a clear plan for the US economy, as many will be looking for a leader to announce clear and concise plans of how to get back on track.
I expect the BOE and ECB to keep interest rates on hold as inflation this side of the Atlantic is a major concern.
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