This will appear in the Farmerville Gazette, Farmerville, Louisiana, USA.

Addiction is tough. It’s tough on the body and it is tough on the mind. Heroin is extremely addictive and when a person shoots up, uses a syringe, there is immediate gratification and the addict feels relief. During the addiction cycle the narcotic user realizes that he is hooked and desperately wants to quit. Of course the dealer providing the drug never wants the addiction to stop. This is how the pusher maintains control; as long as the addict craves the drug the pusher is in control. The user wants someone to pull the needle out of his arm but he cannot do it himself. The user is trapped and has become a slave. The Federal Government has now established fiscal policy that has placed the American economy in the same position as the addict.
Today the Federal Government’s Bank that sets monetary policy, The Federal Reserve or better known as “The Fed”, is stimulating the economy by buying long term Federal bonds. The Fed usually buys short term bonds to control short term interest rates but due to the dire financial condition of the country it is buying long term bonds. This in essence controls the interest rates on long term loans. These are the loans used by Americans to buy homes and build or rebuild businesses. So how does this work.
The price of a bond is inversely proportionate to the rate paid by the bond; the interest. If the federal government buys back a lot of federal bonds the supply of bonds is reduced and the price of the bonds rise. This is known as supply and demand. With the price of federal bonds going up, the interest rate on the same bonds will drop. Now at the same time corporations are selling bonds to fund expansion so banks are willing to buy corporate bonds instead of federal bonds because they will get a better return. The corporations are then funded for their expansion. At the same time the banks are making more money on the extra interest on the corporate bonds and thus have more money to loan to individual investors for material goods such as homes. All this leads to greater investment and more jobs being formed. But there is a down side.
The encouragement to spending is artificial. In a healthy economy normal supply and demand and marketing initiatives drive growth and growth drives competition and competition drives ingenuity and this leads to price reductions and better products. If the government has to intervene in a free market to prop up the economy, there are serious problems and the economy then becomes dependent on the government much as the addict depends on the pusher.
There are two problems with government intervention by buying large quantities of long term bonds. First the Fed sets a target rate that they want the interest rates to be. These rates are usually not relevant to what the business world needs. Business is being controlled by Federal control. Second, if the Fed pushes the interest rate down to 0% and more stimulation is required there is nowhere to go. Hence, the policy will be a failure and there will be nowhere to turn.
The important thing is that everyone realizes that we cannot artificially stimulate the economy forever. However, like our addict, we don’t want to make it stop. When the head of the Fed, Ben Bernanke, even hints on a reduction in the bond buy back policy Wall Street reacts with revolting actions; the stock market tumbles. Even providing a date to stop buying bonds that is months in the future; this action can send shivers up the spine of the stock market. We have become so dependent on the Great Federal Fix that bad economic news can cause the stock market to rise since bad news means that the feds will continue to artificially stimulate the economy. This is intervention out of control. The federal government now possesses the power and is using it to control a large amount of what was a free market economy. Two things are certain. The stimulation will eventually end and we will see emotional reaction that will lead to a steep and quick drop in the market. This will be sort lived and the market will eventually rebound. The second thing is that we will soon have a new head of the Fed. If politics enters into the new head of the Fed then we will have a long protracted continued stimulus program that will ultimately weaken the dollar on the world markets and lead to more financial problems than we face today.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s