Mr. Franks,
You claimed that you have a PHD in economy. Let me give you a lesson in economy here, maybe you can understand, I hope so.
As you know inflation means the cost of living goes up , which also means the employee of corp America ask for higher salary to balance out the effect of higher cost for their food, gas, and housing, and other expense, it also means the
cost of Corp America goes up , and they have to increase the price of their products
to maintain the profit margin. So, all in all, the purpose of cutting inflation is to
improve the living standard of Americans and the profit margins of corp America ,
and to maintain the ability of corp America to compete in the world market by holding the cost. That is if you can hold your cost while your competitors' cost
is keeping going up, then you can compete. Now, look at what is happening in the world, the competitors' cost is keeping down by devaluation of their currency, while the US corps is holding their cost steady , relatively speaking , the US corp's cost is going up, as a result , the US corp can not compete in the world market, and American's living standard will go down . What cause all this ? High interest. The current interest is way too high relative to the value of dollar comparing to the currency of other countries. As a result of high rate, the cost of money is high for corp America, high rate in US also make the value of dollar high comparing to the rest of the world, this also degrade the ability of American Corps to compete in the world market. Relative high rate also reduce the consumption of consumers, and this also hurt the profit margin of corp America further, as a result bankruptcy, reduce salary, cutting workforce, and a chain reaction start from here. AG's speech in Berkley indicated that he probably has sense the danger ahead by holding the current rate. The rate, the value of currency, the salary, the profit margin of corps make the balance of the economy, i.e the confidence of consumers. AG better act fast than late to cut the rate , probably 0.25% in September, and another 0.25% in October. Otherwise, once we drop into a recession or depression, the rest of the world will be in a bigger economic crisis, and AG realize that we can not get away from it. Recession means less revenue for the Government, and budget deficit, and government compete with corp America for money , which also means higher rate,
and less consumption, and bankruptcy and unemployment everywhere, it also means we repeat the nightmare of 1977 to 1980, high rate, high deficit and high unemployment.
So, the happy result is lower rate, continue stable economic expansion, and the rest of the world get out of the financial crisis, especially Japan, and the stock market continues its healthy up trend, surplus of budget for Fed. So, the short should be very careful as the steps of Sep and OCT is getting closer.
Conclusion : There are two sides in the story of rate. To increase the rate to reduce consumption, and demand, and cool down the economy. This generally happen when the supply is smaller than deman, so by reducing the demand, you cut the inflation. To reduce rate to encourage consumption, i.e increase consumption, so that producers can maintain a reasonable profit margin to survive . This generally happen when the supply is larger than the demand, and this is what is happening now . |
