While most in the media, and for that matter, most Americans, have been celebrating yesterday’s announcement that the Fed is lowering interest rates by 50bps, that is the exact opposite reaction we should have. This is the financial equivalent of junk food. Sure, it will result in a few good news cycles and people will be happy they got a break on interest rates for a while, but what happens after the euphoria wears off?
By Dr. David Phelps
While most in the media, and for that matter, most Americans, have been celebrating yesterday’s announcement that the Fed is lowering interest rates by 50bps, that is the exact opposite reaction we should have.
This is the financial equivalent of junk food. Sure, it will result in a few good news cycles and people will be happy they got a break on interest rates for a while, but what happens after the euphoria wears off?
The short answer is we get more of the problems that this is supposed to fix. It’s the proverbial “kicking the can down the road” one more time. And the results of doing that are never good.
It drives further inflation, which is already far higher than officials admit. Most Americans aren’t aware that the government’s criteria for measuring inflation has changed over the years, and because of the way it’s calculated today, official data has become essentially meaningless.
What’s worse, this was an act of desperation. It wasn’t based on sound financial principles — it was simply a Hail Mary pass that Fed Chairman Jerome Powell had hoped would create a positive public sentiment as we head toward the November elections.
This may be the final nail in our economic coffin. The “market” is bigger than the Federal Reserve and will have the final say.
Anyone who isn’t already in the top 20% of Americans, in terms of income and assets, is going to be hurt financially, while those who are in the top tier benefit from the continuation of easy money policies and gross domestic product (GDP) growth based primarily on government job expansion and continued deficit spending. That’s like a family living on credit cards and feeling good about their lifestyle…until the debt comes due.
Don’t get me wrong — I’m a huge fan of the free market and think we should encourage a healthy profit from our work, but not when it’s explicitly at the expense of others. While the free market is not a zero-sum game, it can behave as such when the government interferes too much. And make no mistake — our government absolutely has interfered to the point of turning our economy into rubble.
To put this all into perspective, the U.S. dollar has lost over 88% of its purchasing power through inflation, which is driven by government monetary policy. Specifically manipulating interest rates and the supply of money.