Dow up 365!

Posted by David A. Peterson on 22. December 2008 in Issues |

On Tuesday December 16, 2008 the Dow shot up over 350 points. The general thinking is that this gain was due to the Federal Reserve’s action of lowering the Fed Funds rate 0.75% points. We are told that the Fed is looking for a range between 0% to 0.25%.

A 0% to 0.25% rate means that the banks are getting money from the Federal Reserve for basically free. Hopefully they will pass these incredible / historical interest rates on to the consumers. Right now the Fed would be happy if the banks would just start lending.

To be fair if you have good credit then you are probably breezing right through this economic lending mess – at least in terms of getting a note or refinancing your home. Banks are lending to their very best credit risk customers. You can buy a car if you have a 750 credit score. However, if a person has a credit score around 600 then that person is probably experiencing  the credit problem first hand.

Now multiply that first hand problem by millions of people and businesses and you can see why the Feds thought they had to act by lowering the rates.

The Federal Reserve has played it’s last major card in our economic crisis. The interest rate cut is historic. The government in the waining days of the Bush administration is working overtime to make sure it does exactly the opposite of the Hoover administration in 1929.

The Bush administration is flooding the financial markets with money. The Obama administration is expected to continue most of these policies.

In the past few months Bush has allowed the Fed Funds rate to drop to 0.25%, he has created the $700 billion TARP, given the automakers $25 billion to retool, and is feeding the automakers $17 billion as a bridge loan.

The incoming Obama administration is expected to launch a trillion dollar (i.e. $1,000,000,000,000) economic stimulus package. Obama’s stimulus package is going to be nothing short of a “Newer Deal.” The object is to get people back to work using public work’s projects. No doubt the country needs to get people back to work and there are certainly no shortages of roads to be built and bridges to be fixed.

The original New Dealers tried to tax the wealthy and redistribute the wealth. The thinking was that the rich had all the money so tax the rich and give to the needed. Both Hoover and Roosevelt tried this strategy. The result was 10 solid years of depression.

We now know that Bush will not adopt that tax strategy and we are pretty sure that Obama has backed away from his campaign rhetoric on taxation. History tells us that taxing the rich will only prolong the problem.

On the other side of the coin, what about all of the new programs? What about all of this money that Bush and Obama have printed or will print to move the country forward? Isn’t there a chance that all of this meddling in the economy will have the opposite effect?

The opposite effect of a depression is inflation. If you want to know how bad life can be in an inflationary country just look at the countries of Zimbabwe (1,021%) or Argentina (unofficially 20%).

The Federal Reserve’s main mandate is to keep inflation in check not to stimulate lending. Our government is so preoccupied with the current economic mess that it may be actually creating a near-term problem. That problem is rampant inflation.

I agree it is hard to see any inflation at the moment. That is because the housing market, commodities market, and the stock market were all in a deflationary spiral this past year. It currently looks like all of the markets have stabilized at their new levels.

The pop in the Dow Jones of 365 points last week is just a pop. The current Dow Jones trading range is currently between 8,000 and 9,000. When the Obama administration takes over it may see a rally in all the markets. Just as the Roosevelt administration saw its own  post election rally. Don’t confuse the post election rally as a justification of fiscal policies. As an example: Roosevelt’s rally was short lived.

What President Obama must do and Republican must keep reinforcing is to keep the government from meddling too deeply in our economic issues. The government needs to stop the printing presses from creating money out of thin air -immediately.

 All of us over the age of 45 remember the late 70s and early 80s when a mortgage of 10% was considered good and a car loan at 16% was what a young person had to pay to get basic transportation.

Inflation is not hard to imagine. Our most recent instance was $4.00/gallon gasoline. That is inflation in its most basic form. Prices rising with impunity. We all saw this rampant inflation this past Fall with milk prices rising close to $4/gallon, and grocery stores were giving the impression of stable pricing by selling items with less product in the package for the same price.

Inflation is just as bad as deflation. If we see the Dow, S&P, and Commodities markets all stabilize in a narrow trading range then the government needs to back off and let businesses do what they do… that is let businesses hire new workers, produce more product, create innovative designs, and expand the economy naturally.

If the government keeps printing money and doesn’t recognize the stabilization then they have the opportunity to make the economic mess worse. If inflation kicks in (which it could with all of this government money sitting on the sidelines) then we may start begging for $4/gallon milk and gasoline.

Thankfully Bush and Obama have the past to look at to help navigate the current crisis. The lesson they need to take away from this point forward is that the New Dealers kept meddling in the economic issues. This meddling didn’t lessen their economic crisis it kept the country in the grips of the crisis for 10 years.

The Dow up 365, that doesn’t mean we are out of the woods that just means that we are still within the trading range. Trading ranges give investors confidence. They give business people the stability to move their businesses forward. If this does turn out to be a lengthy trading range then that is the signal for the government to back off and let business do business and government do government.

If government wants to meddle here’s an idea – how about using your current rules for regulations and go investigate the Enrons and Bernie Madoffs of the country instead of just printing money. Oh yea while you are at it… how about enforcing regulations and actually governing the Feddie Maes and Fannie Macs of the world instead of just spending their petty cash that they have laying around.

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