ECONOMIC ANALYSIS:

Thinking about Rates, Part 3

by Fred Cederholm
Uncle $ugar and the US public consume based not upon what they "need," but rather on the "money" they've got--and the "money" they can borrow or finance.
I’ve been thinking about rates. Actually I’ve been thinking about morphing, inflation, "money," demand-pull, cost-push, and the big bath. In this past week, the "hot button" issue impacting the future of the US economy (and the stock markets) has miraculously morphed from the Fed’s measured interest rate increases to the raging demon of inflation. There is a cause to effect relationship here, but which was/is the cart and which was/is the horse?

You see, inflation is an underlying rise in the prices paid for goods and services. If these increases come from changes/improvements to what we purchase via innovations made to the goods or more time required for the services, THAT is not inflation. When we pay more for the "same-old, same-old" stuff (or pay the same and get less stuff in return), THAT is inflation!

Inflation is frequently defined as "too many dollars chasing too few goods." This nation consumes based not upon what it "needs," but rather... it consumes based upon the "money" it has. More importantly, this nation consumes based upon the "money" it can borrow/finance. This spending of "what we’ve got, AND what we can get" applies to Uncle $ugar and the US public.

Uncle $ugar’s "money" is the income received from levying taxes and selling off assets from the public domain and the "money" created via the US Treasury issuing debt and the Fed running the printing presses. The national debt is now within pocket change of $ 8TRILLION, up from $5.728 TRILLION when Bush 43 was sworn in as President on January 19th, 2001.

Money supply is defined in terms of "M’s." The M1 refers to the printed currency and all deposits in checking accounts (demand deposits), and unredeemed/outstanding travelers’ checks. The M2 picks up the M1 components plus all time-related deposits--savings deposits, small CD’s and non-institutional money market funds. The M3 picks up the M2 components plus all large time deposits, institutional money-market funds, and short-term repurchase agreements, along with Eurodollar holdings. In January 2001, the M3 stood at $7.25 TRILLION; for the week ending October 3rd, 2005, the M3 stood at $10.04 TRILLION – a $2.79 TRILLION increase on top of the $2.272 TRILLION increase to the US National Debt over the same period of time.

The US populace’s "money" is their income derived from all sources plus the proceeds from any liquidated assets/savings owned. Then... there is the matter of the "cash flow provided" from the mortgage equity loans and the increased balances on their credit card debts. For the general public, their M1 is their earnings, their M2 picks up their dis-savings, and their M3 picks up their increased outstanding debts/mortgages as well. If you TH*NK the populace’s money supply is fully picked up by the Treasury’s "M’s," TH*NK again! Increased mortgage debt and increased outstanding plastic balances provide additional spending "cash" for the public is the same manner that the Fed’s printing presses provide additional spending "cash" for Uncle $ugar. Any idea how many of these non-Federal Reserve Note "Dollars" have been created by the general populace’s increased debts since Bush took office? It’s a very, very, very big number.

The policies of the US Treasury under Bush, and interest rates effected by the Open Market Committee of the Fed, have kept the US economy going on life support these past few years.

The policies of the US Treasury under Bush, and interest rates effected by the Open Market Committee of the Fed, have kept the US economy going on life support these past few years. The so-called momentum and growth of the GDP (gross domestic product) in these years have been fueled--not by an ongoing and increasing rise in earnings, but rather by the ongoing and increasing debt obligations of the government and the general population. We’ve had the party, and now we face the hangover and the bills. Interest rates must and will continue to increase--adding to the pain. It’s not going to be fun, and... it’s not going to be pretty.

We’ve had the party, and now we face the hangover and the bills. Interest rates must and will continue to increase--adding to the pain. It’s not going to be fun, and...it’s not going to be pretty.

Inflation comes from two fronts. The cheap money and the addiction to increasing our debt over these past years have fueled the unacknowledged demand-pull side of inflation with a vengeance. This front will not receive the credit/blame for our travails. The cost-push side of inflation triggered by the sharp rise in oil/energy prices and the infra-structural destruction of Katrina and Rita are already being spun as the culprits for this eleventh-hour acknowledgement that "Houston, we HAVE a problem!" A forensic accountant knows better than to believe this, and now... so do you.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2005 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

To "Audit" this column, and to learn more about the subjects discussed, please check out:




Copyright © 2005 The Baltimore Chronicle. All rights reserved.

Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.

This story was published on October 18, 2005.