We saw how effective the first “decisive” proposal was. Bush announced a plan to give every adult taxpayer (no poor people, thank you) $800 in a tax rebate this April. The stock market responded to this idea by dropping a few percent. The idea, as I wrote in my last column, was stupid to begin with because, with the US no longer producing much of anything, all that bonus borrowed cash would end up getting spent on imported goods anyhow, doing next to nothing for the US economy.
There was one place where the Fed's action did have an impact though: the exchange value of the dollar in foreign currency markets. No sooner was word of the interest rate cut announced, than the dollar fell against major currencies like the British Pound, the Euro and the Japanese Yen.
And there's the rub. The Fed is in a trap. It cannot cut interest rates much more without causing a collapse in the dollar, which, because of the huge US trade imbalance, and all those consumer goods and raw materials-especially oil-that are imported-would lead to serious and politically dangerous inflation. And there is another constraint: with the current rate cut, the US now has the third lowest interest rates in the world. If the Fed makes another cut, as it has hinted it might in a week or so, only Japan would have a lower interest rate environment than the US. That makes the dollar a very undesirable currency for foreigner investors, which means they won't want to hold dollars, and they won't want to hold US stocks.
Yet if the Fed doesn't cut interest rates even further, the stock market will continue to plunge, which again discourages foreign investors from pouring their money into the U.S., which in turn puts downward pressure on the dollar.
This was all predictable.
An economy that is almost wholly dependent on consumer spending, which is the case in the US, is in big trouble when consumers start to worry about the security of their jobs, and when they see inflation eating away at their disposable income. They naturally just stop spending. And that is happening, too.
So get ready for some hard economic times. The next step will be soaring inflation, as strapped companies in China, India and elsewere start raising their prices for goods shipped to the US and paid for in dollars. Then the Fed will have to respond by raising interest rates again, in an effort to shore up the currency. And with that will come deeper recession and an even lower stock market.
The Bush chickens—endless deficits as far as the eye can see, and a $2-trillion military debacle that has no end in sight and that is sucking money out of the country like a giant industrial vacuum cleaner—are coming home to roost. The President and Vice President clearly hoped that they could pass the wreckage of their eight years in office on to the next president and run off to retirement and senior stateeman status before it all blew up, but their luck ran out. The economic shit has hit the fan. Chances are that the war that they have tried to tuck away in the closet with a “surge” in troops and a brutal campaign of aerial bombardment, will also blow up on them before the year is out.
That's small consolation for all of us who have to live with the ensuing disasters, but at least—if we can't see them properly impeached and indicted, we'll have the satisfaction of seeing Bush and Cheney run out of town next January on a rail.
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This story was published on January 22, 2008.