Fed's Bernanke Tells Real Story About Economy
January 26, 2011
Signaling he will not raise interest rates until 2014, Federal Reserve Board Chairman Ben S. Bernanake told the real story of about the economy: It’s on life-support, barely showing a pulse. “The Fed statement has a dovish flavor to it since the Fed has pushed out keeping rates exceptionally low until late 2014. That is why were seeing the dollar sell off and yields push lower . . . “ said Richarad Franulovich, senior currency strategist at New York’s Westpac. Keeping rates at rock bottom means the Fed sees sluggish growth for the foreseeable future, pushing monetary policy to the breaking point. Foreign investors have no incentive in the current low interest rate environment to invest in U.S. treasuries, driving more foreign investment to Europe and Asia. With interest rates so low, there’s simply no place for foreign or domestic investors to make any cash in U.S. markets.
Speaking on the State of the Union Jan. 24, President Barack Obama asked U.S. businesses to bring manufacturing back to the States. While citing companies, like MasterLock, Inc., for their commitment to manufacture in the States, Obama asked all businesses to do their part in bring jobs to the domestic economy. With the U.S. still suffering a 8.5% jobless rate, the country has added 3.2 million jobs since the 2008 meltdown, costing the country 8 million jobs. Whatever problems in the Eurozone, Germany’s unemployment rates remains around 3%, unheard of by U.S. standards. Germany wants all Eurozone countries to run budget deficits at no more than three percent of nations’ Gross Domestic Product, an unrealistic fairytale. With Barack pushing Congress to raise the debt ceiling $1.2 trillion to $16.4 trillion, the budget deficit to GDP ratio has now ballooned to over 10%
Given Bernake’s commitment to record low interest rates and mushrooming deficits, prospects for the U.S. currency look bleak. GOP Presidential candidate Ron Paul (R-Texas) has warned repeatedly about hyperinflation, so far not borne out by the Fed’s stats showing about 3% annually, when taking out energy and food prices. “The Fed’s statement saw little changes to current economic conditions and to the tone regarding the outlook in which “significant” downside risks remain,” said economist Sean Incremona at New York’s Cast LTD remaining bearish on the U.S. dollar. Currency devaluation has the same effect as inflation, reducing the purchasing power of consumer goods, especially commodities like gold and oil. Over the past two weeks, gold and petroleum have risen nearly 10%, accounting for expectations of a devaluated U.S. dollar.
Obama faces stubborn GOP opposition in Congress to raising the debt ceiling another $1.2 trillion. Most Republicans believe that printing more cash further erodes the currency, pushing up inflation to dangerous levels. Paul has pushed Congress to urgently cut $1 trillion out of the federal budget, slashing the current $1.4 trillion deficit. Obama has opposed massive federal cuts to prevent tossing thousands of federal workers into unemployment. Paul hasn’t explained how he expects to deal with the massive up-tick in the jobless rates. His economic theories assume the private sector is supposed to compensate for losses in federal employment. One thing’s for sure: Bernanke’s refusal to raise interest rates suggest he sees the economy stalling sometime soon. With the Dow Jones Industrials at 12,734, there’s the growing possibility that markets could sell-off sometimes soon.
Bernanke’s forecasts don’t jibe with the current market up-swing suggesting strong corporate earnings. While there are bright spots, including Apple Computer hitting record highs in of share prices and profits, consumers remain cautious. Obama’s plan to incentivize businesses to manufacture in the States could take years to reduce the jobless rate. If Barack’s health care plan survives the U.S. Supreme Court this Spring, it could fuel that largest Medical industry growth in U.S. history. Adding 30 million more to the ranks of the insured requires urgent expansion of doctors, nurses, clinics, laboratories, pharmacies and the entire village needed to provide comprehensive health care services. Most GOP critics don’t see the upward potential to the economy of expanding the existing health care infrastructure to accommodate 30 million more insured patients.
Keeping interest rates at record levels signals that Bernanke’s tea leaves don’t look all that rosy for the economy. Expecting sluggish growth suggests that the stock market got ahead of itself, signaling a major sell-off sometime soon. Barack hopes, during this Election Year, that he can keep the markets rolling, proving that his economic policies favor pro-growth. “The fact they expect to keep rates at these levels through late 2014 is somewhat bearish for the dollar,” said Omer Esiner, chief market analyst for Washington’s Commonwealth Foreign Exchange. Low interest rates give the best barometer of future economic activity. Keeping rates at record lows indicates the Fed sees anemic economic growth for the foreseeable future. Markets—whether commodities or stocks—caught up in the current feeding frenzy could wind up biting off more than they can chew.
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