<<As for the market, I am not convinced that we are out of the deep end as so many pundits would have you believe. Historically, it takes years
for cuts in interest rates to have a lasting effect on the direction of the economy and I see too many pot holes still in the road ahead. Of major
concern is the energy crisis. By all accounts I've heard, the rise in natural gas prices that we saw last winter will be even worse next winter and
California's electricity problem is predicted to spread to other states, as well. You can't sustain a 0% inflation economy when the very fuel that
everyone depends upon is going up 30%, 50%, or 100% in key economic territories like California. I am also not convinced that we've seen the
last of a rise in gasoline prices. So far, gas prices have been restrained but all it would take is one minor set back in the oil production food
chain to send prices up over $2/gallon. We haven't seen higher gasoline prices reflected in consumer products yet because businesses have
been buckling down to control costs. For example, UPS, our nationals biggest package courier, has now expanded their delivery territories for
each of their drivers and required that each delivery driver work and extra hour every day so fewer drivers can be used which, in turn, offsets
the rising cost of fuel. Other companies have done the same sort of cutting back. However, you can only stretch people just so far. If gas
shoots to $2/gallon, companies like UPS will have no choice but to raise their prices and THAT IS inflation!>>>
You said rate cuts take years to have a lasting effect on the direction of the economy. Tax cut may take years but interest rate cuts can and do impact the direction in about a year, if long term rates fall in sympathy with short term rates.
Home owners refinance like crazy and end up with greatly reduced expenses, corporations will also refinance callable debt. While elderly people who invest in certificates of deposits, money market funds and other fixed income obligations see their income decrease they were not spending their income at the same pace as younger home buyers.
Governments cause inflation by printing money. If oil and everything that are made out of it go up in price, consumers will have less to spend on everything else and the lack of demand will cause those prices to fall. In addition the high price of oil and gas will lower consumption of those products, so consumers feel the impact only to the extent they do not modify their consumption. Once lived in a country with gas costing $4 per gallon. There was no inflation in this country. Its' currency remained stable and other prices remained unchanged. |
