The Fed Should Pause

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.

  1. 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.
  2. 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.
  3. 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.

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0 Responses to The Fed Should Pause

  1. Harry Pottash says:

    I think that the reason we use GDP as a shorthand for societal success is because it measures how _much_ we are able to accomplish. The questions of _what_ we should be accomplishing are pretty complicated, and very subjective. Which is more important health, sustainability or happiness? I don’t think anyone can nail down that answer for sure.

    Another reason that I think we lean on the GDP as a yardstick for success is because, for the last hundred years or so, It has been a pretty effective measure of who would win an all out war. If your society does a great job of developing, say, spiritual enlightenment and happiness and doesn’t work on it’s GDP then you are at risk of having your next-door neighbor come over and eat you. (See: Tibet)

  2. Dan says:

    I can’t claim to understand economics, but I do understand that more credit drives the dollar down, which drives prices of foreign commodities up, which just digs the hole deeper. The trouble (for someone with very limited understanding of economics) is that you can find this kind of push-the-bugle-here-and-see-it-pop-out-there problem all over the place.

    I suspect that what the FOMC does is more like black magic than anything; or at the most rational, you might say that they’re steering an oil tanker, in the dark, during a storm, through a busy port, and any nudge they make now may have unintended consequences later on.

  3. Zhirem says:

    Am I oversimplifying, or would some person here, (very smart people the lot of you), enlighten me as to where my thinking is flawed:

    Money is cheap right now. Meaning, it is very inexpensive to borrow money. It have been very inexpensive to borrow money for some time now. Years. Many years.

    Why does the Fed think that the way to stimulate the economy is to make money *even cheaper*? In a nation that has nearly completely eviscerated it’s own capacity to manufacture much of anything? When that happens, we *import* more things (see Wal-Mart & China). Our dollar taking a public sodomizing in the world currency markets, does not engender our greenbacks to buy more plastic crap from China, or more of that sweet,sticky go-go juice of ancient sunlight.

    One of the only things buoying the dollar right now (though having a hard time acting like a good buoy), is the fact that the world’s oil is traded in dollars. Not dinars, rubles, scheckels, etc.

    When that starts to change, (Iranian oil bourse? OPEC moving or even splitting stocks being sold on the Euro?) the dollar will continue it’s meteoric trajectory.

    I hate to lay this at the feet of the Republican Americans, but didn’t we determine that the ‘trickle-down’ theory was that if the average Joe on the street couldn’t feel the wet of it, then the rich folk above him weren’t urinating *hard* enough?

    My point is, why do we need to make tax cuts permanent for the silly-wealthy (a la Bushboy), when the economy is taking it in the shorts, job creation has *not* kept up even with population increases, *AND* money is so cheap to borrow, and has been cheap to borrow (historically) for some time now?!

    Surely, I am a dolt, and I am missing something painfully obvious that will make the whole mess even somewhat comprehensible?

    – Zhirem

  4. Morgan Warstler says:

    Oil rich nations invest their dollar profits in the US. This is one real reason for keeping capital gains taxes low, low, low is because it keeps keeps our wealth here in the U.S.

    Quoting someone quoting Buffet:

    “This annual royalty paid the world – which would not disappear unless the U.S. massively underconsumed and began to run consistent and large trade surpluses – would undoubtedly produce significant political unrest in the U.S. Americans would still be living very well, indeed better than now because of the growth in our economy. But they would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an “Ownership Society” will not find happiness in – and I’ll use hyperbole here for emphasis – a “Sharecropper’s Society.” But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us”

    Note the focus, is paying off foriegn owners.

    There’s an argument to be made for regressive taxation, like the gas tax, because it decreases demand for commodities. We don’t need rich people storing dollars in the future price of food.

    It’d be so nice if Obama made clear he’d decided to leave capital gains taxes alone. I’m fine with his increase in the top income tax rate (no more than 40% please), but capital gains it what keeps a larger faction of the owners being American.

  5. Jon Taplin says:

    Zhirem- I don’t think you are oversimplifying at all. The notion that the way out of our current dilemma is to make tax cuts for millionaires permanent, takes a kind of twisted logic only our Republican leadership can fashion.

  6. Jon Taplin says:

    Morgan-In order to reduce our debt to the foreign owners we need to pay our own way. Buffet suggests that keeping the inheritance tax and letting capital gains go back to their Reagan era level would be part of the solution. The second part would be to reduce Military expenditures.

  7. Danny Kenny says:

    This signals a bottom to the current crisis on Wall St. Next up is regional banks, who are overloaded on commercial real estate and construction and development loans. Regional banks are the primary lenders to small businesses as well. There really has not been a credit crunch felt by anyone but the big banks on Wall St so far. That is about to change.

    And the reason why it seems Malthusian ideas are finally coming to get us is that when you flood the world with cheap money, demand increases because everyone has more money. Prices follow suit, and rise with demand. People assume that prices will be higher tomorrow than today (which is a correct assumption) so they hoard, and create supply disruptions. The same is happening with oil, there are no real supply shortages, but uncertainty due to monetary instability is causing people to hoard, including the US strategic petroleum reserve.

  8. Morgan Warstler says:

    Jon it is nice to say less military, but paying our own way really means less entitlements. It is simply silly to pretend otherwise. The meat of it is cuts in services.

    Let’s say Social Security at say age 75.

    How about providing healthcare coverage for the poor through medicare, but ONLY for preventative care? All your tests and screenings are free, but if you get really sick, you better have your own coverage.

    Cutting back entitlements is about drawing lines, who gets cut off when? And you can’t expect to apply it to all people equally, the wealthy are going to get extra-care. So, to really solve these issues, you have to specifically define the boundaries of benefits, and they have to fit within $MAX.

  9. JohnHurt says:

    Money money money! Oil oil oil! Girls girls girls! Politics! The Fed! A wide stance! My pastor is wild, I tell you! Wild! Your entitlement blows my entitlement. Right out of the flood water. What you don’t understand is that when we are talking about war we are really talking about peace! When are you dolts going to catch on?!?

    More junk mail!

    Why do we carry on so?

    Why? Why? Why?

  10. Jon Taplin says:

    Danny Kenny- I agree that the perfection of the credit business (securitization) allowing millions more people to get in hock is partially behind this rise in middle class demand. But I’m not sure that all those Chinese and Indians moving up from Motor bike to automobile are doing it with credit. They may be spending their hard earned savings from making products for the US.

  11. Danny Kenny says:


    I don’t disagree. But how were many (most) of the goods paid for by us (the US) with credit fueled money? And that doesn’t explain the parabolic rise that we’ve seen over the past 6 months to a year.

    I think that this would have been a much more gradual readjustment had it been allowed to play out naturally. Oil prices would more likely be well below $100, but nowhere near the $20-$30 we were used to.

    The extremely quick readjustment we have seen over the past few months may well be the new reality (I think it is), and we will have to adjust to higher prices. But I think that these shortages are more a result of the vast uncertainty of this new paradigm. Should a more severe monetary crisis develop, I think that today’s problems will seem minor, but we need to see what is at the heart of the crisis, that is inflation, which is ‘always and everywhere a monetary phenomenon’, or something along those lines.

  12. Morgan Warstler says:

    JH, no matter how mad you get, I still like you. :)

  13. Rick Turner says:

    Morgan, I see you feeling entitled to the oil in Iraq. What’s different about that?

    I do think the SS age can creep up, by the way, but I also think that there shouldn’t be a cap on contributions… The richer you are and the higher your salary is, the better you can afford that SSI payment, so let’s not make it regressive. We’re talking safety net here, folks. The lack of a a safety net for mental health is costing coastal California it’s soul. The mentally ill street people in San Fransico on up to Seattle and down to San Diego are a national problem, not a state issue…

  14. John Hurt says:

    Like me?!? You should be annointing my feet with oil, you unregenerated whelp of a knave. Were it not for my many interventions on your behalf, these commonist motherfuckers around here wo uld have tarred and/or feathered you by now.
    So now, ingrate, down on your face before I make you wish your mother had swallowed you.

    Like me? You should adore me. I am everything you aspire in your darkest dreams to be.

    Peace and love

  15. P. Cross says:

    Free markets? A social welfare system that is a disaster, paying babies to have babies. We have spent trillion’s to eliminate poverty, and? Seniors dependent on a ponzi scheme. Farm policies designed for cheap food, now cheap fuel ? Energy policies designed to create shortages. Drug policies that only create profits and crime. Bureaucracy’s that inhibits production, Redistribution of wealth, fighting wars where the rules of engagement have to be deemed politically correct

    An educational system designed for failure. To begin with how can you educate children when the teachers aren’t even safe? On and on and on!

    The best part is that those who propose to fix this mess are the ones that created it, with the willing help of the irresponsible and ignorant, that’s us.

    A chaotic void?

    Mao would say so far so good, but their not quite ready yet.

  16. John Hurt says:

    It’s getting better all the time!

  17. Zhirem says:

    “couldn’t get much worse…” – John Lennon

    – Zhirem

  18. pond says:

    Here’s a contrary view of things.

    As the Fed lowers interest rates and generally ‘loosens’ monetary policies, inflation rises. If we calculate current inflation rates the way we used to calculate them 40 years ago, inflation would be running at an official 12% or so. (Actually it is running at 12% or so, it’s just that the ‘official’ rate has been screwed with, so that politicians look good, and Social Security recipients and union members, and anyone else whose compensation is tied to CPI, are screwed.)

    Inflation going forward, if you look at the inflation of the money supply the Fed is orchestrating, will soon rise to about 20%. That is: the money supply is now growing at 20%, so all else being equal, prices will be rising at that rate.

    Debtors like inflation, because their current debts will be paid in worth-less money.

    There is no bigger debtor in the world than Uncle Sam.

    It is thus in the US government’s self-interest to foster higher and higher rates of inflation.

    The greatest fear of the debtor is deflation, which would have him paying back his debt in worth-more money.

    Fed notes from 2002 show that Greenspan’s great dread was deflation, and that was the reason he drove interest rates to below the level of (real) inflation and kept them there so long. (Hell — interest rates today are lower than inflation.)

    The trick for the Fed right now is to simultaneously:

    1. Inflate the currency so as to help the US exports and the ‘debtor nation’ that we have become.
    2. Make inflation *seem* to be under manageable levels.
    3. Prevent hyperinflation in real terms.
    4. Stop the economy from being sucked down into a black hole.
    5. Make sure the banks, brokers, and other financiers in the Ruling Class don’t get hurt too much, and don’t suffer much threat of populist reforms.

    Doing all five is nigh impossible, so the Fed must somehow balance on the basis of priorities.

    My guess is that the Fed will keep lowering and inflating.

  19. John Hurt says:


    If you were as advanced as I am, you would realize that not that long ago old people didn’t even have a Ponzi scheme. When they got sick they would just put them off the wagon by the side of the road or throw them in the river, or something. This is why you should be ashamed of yourself for being ashamed of America. And, of course for quoting that cowardly old hippy peacenik Commie Marxist, John Lennon. And not even one of his better lines.

  20. Another Jon says:

    30 years ago today the first spam mail was sent.

    Happy Anniversary Morgan!!!

  21. Morgan Warstler says:

    Thanks AJ! You remembered…

  22. JR says:

    To help pay our own way why can’t we ; 1) end the War in Iraq, 2) end the cap on payroll taxes, 3) end the Bush tax cuts for the rich and redistribute some of the cuts to what’s left of the middle and lower class who still pay taxes, and 4) raise the capital gains tax. The argument that the Right makes; that raising the capital gains tax effects millions of middle class Americans is false. The middle class owns stock in their retirement and other accounts that are exempt from capital gains tax.

  23. John Hurt says:

    The only real problem facing America is this Commonist preacher from Chicago and all the brainwashing he’s done to the next president. That and what in the world is ever going to happen to Herr Spears. Everything else pales in comparison to those realities.

  24. Morgan Warstler says:

    JR, it’d be sooooo much easier if we just agreed/determined that there is $MAX amount we can take from economy, and then do it out of income or consumption. Taxes on any kind of savings, is bad news, because it increases foreign ownership in US corporations.

    I’ll say it again, the absolute limit to how much we can give, is tied directly to how much we can take. And all the hyperbole points to a group of people, not ready to discuss, the cutoffs of largess, who doesn’t get helped, what suffering doesn’t get ended, what part of the glass remains empty.

    That’s where the conversation gets interesting. That’s where the rubber meets the road. To that end, I’m willing to bet that anyone here, who is not pro-Obama, is more than prepared to fiat for discussion purposes, that sure, we’ll increase tax rates to 40%, etc. etc. in the next administration.

    Now that we have done so, the real expenses are: entitlements and debt servicing.

    Sure, ok – let’s pretend to cut the military, ok, done.

    Now, what services are getting cut? Social Security – extended to what age? Medicare? More support for the young, at the expense of the old? How do we make education dramatically cheaper? Fire teachers?

    Without these conversations, it is very hard to take Dems seriously. Someone, hopefully Obama or McCain, has to deliver the belt tightening news to the public. And do it with the wisdom of King Solomon. Clinton did his part with Workfare. GWB’s horrific prescription drug give-away was certainly no help. I personally think we need to re-invest in youth, which means delivering harsh news to the elderly, but I’d love to hear you folks actually come down.

  25. Pingback: The Fed’s Move « Jon Taplin’s Blog

  26. John Hurt says:

    Can we make the pie bigger?

  27. Another Jon says:

    Sing a song of sixpence,
    A pocket full of rye,
    Four and twenty blackbirds
    Baked in a pie.

    When the pie was opened
    The birds began to sing—
    Wasn’t that a dainty dish
    To set before the king?

  28. John Hurt says:

    This place is finally turning into a poetry slam!

  29. Rachel says:

    The king of Marigold was in the kitchen
    Cooking breakfast for the queen
    The queen was in the parlour
    Playing piano for the children of the king

    Cry baby cry
    Make your mother sigh
    She’s old enough to know better
    So cry baby cry

    Are we there yet?

  30. John Hurt says:

    Old Men

    People expect old men to die,
    They do not really mourn old men.
    Old men are different. People look
    At them with eyes that wonder when …
    People watch with unshocked eyes;
    But the old men know when an old man dies.

  31. JR says:

    Morgan, It wouldn’t take much to fix Social Security. A combination of higher payroll taxes and a slightly higher retirement age would do it.

    The program that’s out of control is the Medicare program, supported by Bush, written by and votes paid for, by the pharmaceutical companies. The only thing the Bush Administration had to do was lie about the program’s cost to get the Democrats to roll over. I’m sure a fairer and less expensive version can be designed (maybe one that doesn’t outlaw negotiating lower prices with the drug companies.

  32. Morgan Warstler says:


    I was serious before about only providing preventative care to everyone through Medicare.

    In my mind this would provide some level of fairness to even the worst off amongst us. Everyone would be told repeatedly by a practitioner for free about “eating a proper diet, getting adequate exercise, losing excess weight, abstaining from smoking, drinking only in moderation and practicing proper sanitation,” and they would be constantly cajoled by their care provider, “dude, you better have some health insurance.” Maybe even give the care provider a piece of the action, for who he signs up.

    In this way, the currently healthy could be optimally scared shitless into getting themselves health insurance BY CHOICE. And it removes the easy excuses of folks (and our sense of guilt) who decline insurance, but claim ignorance later.

    And yes, I get that Social Security can be “solvent” with less tweaks, my point is, by actually pushing retirement back significantly, it can reduce the amount the young pay for the old, and leave them more money for stuff like health insurance – or say owning stuff.

    I don’t often meet 72 year old men and women who shouldn’t be working, do you?

  33. John Hurt says:

    Doctors are trained in emergency rooms and are good at crisis management. They are not trained to prevent disease. They are trained to react to disease.

    Morgan, your idea has merit. It will require a completely new focus in the medical establishment. Senior health care, wellness communities, et cetera, is massive growth industry. If you like money, you might look at that space. And come up with some solutions. You could do it. There is serious capital out there for this reality. If you make a billion dollars, please think kindly of me in your dotage.

    Meanwhile, off the subject, check this out. If you are up for it, read it to the end.

  34. JR says:

    I’m not planning on retiring, that’s for sure.

  35. Hugo says:

    Marvelous poem on old men, John!

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