The other day I was frankly stunned to see President Bush in a panic. He was flanked by the Secretary of the Treasury and the head of the Federal Reserve as they rolled our sick economy onto a gurney to the OR. Congress witnessed this as defibrillator paddles were thrust into the country's open chest and screams of "clear" were heard as far as Washington, as a jolt of $150 billion dollars in tax cuts was administered. It's a rare sight, indeed, to see not only the President of the United States but the Secretary of the Treasury, Chairman of the Fed, and both parties in Congress, in panic mode pushing for greatly increased government spending. Obviously, government does not see itself as the problem!
Financial markets around the globe sensed the panic and responded dramatically, creating volatile and sinking markets overnight. Our economy's heart attack sent the financial markets swooning and even with the infusion of cash mentioned above, flu-like symptoms still exist. But what can one expect given the economy's diet over the last five years which consisted of mainlining "easy money" sugar, and the consumption of mountains of fat (in the form of trillions of dollars of new consumer and corporate borrowing). This risky diet has finally taken its toll on the economy's waistline.
Today, in a surprise move, the Fed swiftly responded as attending physicians, led by the Paulson and Bernanke, imposed an interest rate cut of 3/4 percent. This move was intended to offset a potentially huge sell-off in the stock market, but it indicates the Fed will continue to feast on sugar, and the government will continue to offer a high-fat diet to the feeding-frenzy American consumer in the form of lower interest rates and easy money. Forget about savers; they're not only forgotten but mugged in broad daylight by the Fed and US Treasury as interest rates drop well below the rate of inflation, and the rate of inflation is forced up.
Inflation is raging now and even with hedonic adjustments and chain weighting tricks, the CPI is up 4.1 percent year-over-year. (Without the tricks used to distort the CPI down, the actual inflation rate is probably more like 6 percent). The American worker is also on life support because the cost of food and fuel is eating them alive and stagnant wages aren't helping to pay the bills, now that home equity extraction is no longer an option.
So where do we go from here? Today's prescribed cure (more like a band aid solution over a sword wound) will fuel even fatter federal deficits funded by new money printed up by the Federal Reserve. So the prognosis for the economy may not be death by heart attack, but it will remain in intensive care or in a comma for years. The citizens of our great country experienced an intense sugar rush over the last decade as their waistlines expanded and they ran up very fat personal deficits amounting to over $14 trillion dollars. (It is estimated that $500 billion dollars of that easy money created debt could be in default very soon). Too much sugar, too much fat, a collapsing dollar, and higher inflation can cause an economic heart attack. It happened this week, and you should watch for it to happen again and again.
