THIS TIME IT REALLY IS DIFFERENT!
by the Optimist
April 4, 2005
In his excellent (as always) article of 3/30/05, the Mogambo asked The Big Question - Will the next rate increase by the Federal Reserve be a quarter point or a half point? That very same Big Question was the subject of considerable speculation before the previous FED meeting. Not even the mighty Mogambo offered to answer The Big Question, but the Optimist will do so now. The Optimist is happy to advise that the next FED meeting will result in an interest rate increase of no more than a quarter point, and the meeting after that may well be a surprise reduction in interest rates! The Optimist is pleased to be the first to present this unexpected perspective!
Contrary to the derogatory comments made by others about the intellectual quality within the FED, and despite the continuing process of dollar destruction caused by massive printing of excess dollars, the Optimist is confident that the FED is composed of people who are of reasonable (maybe even above average) intelligence. As evidence of that well disguised level of intelligence, the Optimist points to the masterful way they camouflage their prolific printing of excess dollars with statements which are cryptic to the point where anyone can interpret them to mean anything! The Optimist therefore can make the leap of faith that the members of the FED will be smart enough to see the US economy as clearly as the average high school student.
Any recent graduate from high school can readily report that there is no longer an abundance of good manufacturing job opportunities available in the USA. Many high school grads will be grateful to just get a job as a sales clerk in a deep discount store (which sells products made by the many new manufacturing jobs in China, Japan, and India). The Optimist notes with despair that even the number of service sector job opportunities are already declining as a result of the recent fitness craze causing a reduction in the number of previously sought after jobs like Journeyman Hamburger Fabricator at McD's. The point is that there is no longer a strong backbone (or leg bones, or arm bones, or anything else resembling a structural skeleton) of jobs which can continue through increases in interest rates that have historically been applied to cool the fires of inflation. Instead of a strong supporting skeleton, the USA economy has a soft underbelly of jobs which depend on the consumer to find a little more monthly income with which to make an additional minimum monthly payment on yet another new widget. Consumers no longer ask how much the widget costs. They need only be assured that they can fit the minimum monthly payments into their already crowded credit card agenda.
The Optimist is confident that our members of the FED, who have average or possibly even higher levels of intelligence, will be smart enough to foresee that increases in interest rates will directly translate into consumers having less minimum monthly spending ability. If the deep discount stores don't have buyers for that huge warehouse full of widgets, then the stores will quickly cut back on the precious service sector jobs our economy depends on. The quick result of higher interest rates will be a substantial loss of real service sector jobs of a magnitude that is difficult to hide among the already massively adjusted statistics. The Optimist is confident that a policy which leads to obviously rising unemployment is not politically correct.
Even though inflation will be increasing at a rate which cannot be disguised by clever hedonic adjustments, the Optimist offers the positive view that interest rates will not be permitted to rise to the level where the few remaining USA jobs are threatened. Since jobs will be the limiting factor, the Optimist is happy to share the good news that interest rates will be kept well below the true rate of inflation for the foreseeable future, and that silver and gold investments will prosper greatly over the years ahead.
Relax, gentle reader, and buy as much silver and gold as you like, without fear of a repeat of the 1980 approach Paul Volcker used to fight inflation. This time, consumers don't have an abundance of savings to dip into for a cash flow problem, or an unused credit line available for them to meet additional needs. This time, home owners don't have a substantial amount of untapped equity built up in their home. This time, the USA economy is barely afloat in an endless sea of debt, and would quickly drown under the weight of high real interest rates. This time, there is no base of strong employment to act as a life preserver to ride out the storm. This time, there is no possibility to massively increase the amount we borrow from the rest of the world. This time, we cannot dramatically increase our budget deficit to offset the economic drag caused by high interest rates. This time, there is no political will to be the party responsible for pushing the USA economy into depression. The Optimist is honored that he can be the first to tell you that this time, it really is different!
© 2005 Optimist
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