The greatest confidence builder Ben Bernanke and his colleagues could craft in the next two days would be for the Fed to not cut interest rates any further. It would have three salutary effects.
- The Dollar would rally. The differential between U.S. aggressive cutting of rates and European stasis has moved short term money into Euro Bonds and out of the dollar. A rate pause would force all the currency speculators who are short dollars to unwind those trades.
- Commodity prices (especially oil, wheat and corn) would fall. Because we buy oil in dollars, the sellers keep raising prices to compensate for the fall in the dollar (84% vs. the Euro). As the dollar rallies, oil prices will moderate. Same is true in world food commodity markets.
- It would signal a bottom to the credit crisis. It is clear that some risk taking has come back into the market. Big smart money like Buffet and Kerkorian are putting their money to work and the banks have raised billions in new capital over the last six weeks.
I don’t for a minute think we are out of the woods financially in this country. But the nature of the threat is different than the one the Fed has been fighting since the fall. I have suggested that we are in a world of Malthusian resource constraints for the first time in history. As the Times pointed out this morning, “Higher (oil) prices have done little to suppress global demand or attract new production, and the resulting mismatch has sent oil prices ever higher.”
What is needed now is a complete rethinking of how we measure societal success. Is the only marker for happiness an incresing GDP? If we understand that a strategy of more savings and less consumption is the only way to avoid what Buffet calls “the sharecropper society“, then it would require both an economic but also a philisophical and spiritual transformation of our country.
This is where the Digital Utopians can help.