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Why The Fed Left Interest Rates Alone
by John Finger

On September 17, 2003, The Federal Reserve Board's
Open Market Committee (FOMC) decided to leave interest
rates unchanged. The FOMC sees low rates for a
"considerable amount of time," and, though spending has
increased, the labor market has weakened. Policy-makers
also said deflation risks, though minor, remain their top
concern. Since the FOMC sees deflation as their top
concern, the public can't help but wonder what these
people are smoking during their closed-door meetings.
The best quote of the day came from Joel Naroff of
Naroff Economic Advisors: "As usual, as long as you
don't eat, drive, heat, cool or light your home, are in
need of medical care, insure anything, have any children
in college or use water, sewer or trash services, there
is no inflation."

Since inflation is so obvious to all of us except the FOMC,
why do they tell us this nonsense that deflation risks are
their top concern? It can all be summed up in one word:

Take a look at the charts on this link:
http://www.safehaven.com/showarticle.cfm?id=979. They show
the growing mountain of consumer debt, left unabated by the
economic downturn or the supposed recovery in which we find
ourselves now. Some of the charts don't even reflect the
mega-mortgage refinancing activity from the lower-interest-
rate period before June. As of July, total consumer debt
stood at $1.763 trillion, up 3% from July, 2002. That's a
lot of dough. Much of it is subject to variable interest
rates: if rates go up, so does the debt burden, and so do

Corporate debt, already at record levels, increased 1.4% in
2002 and at an average annual rate of 3.7% in the first
quarter of 2003, to $4.9 trillion. That borrowing usually
goes for productive things, like building factories and
hiring workers. That's not happening this time around:
businesses continue to keep a lid on corporate spending by
firing workers. Example: 93,000 layoffs in August,
according to the unemployment report.

We all know about our government debt, but let's put
together some numbers as a refresher. This fiscal year,
our national deficit will be more than $400 billion. It
could approach $500 billion in fiscal year 2004, which
starts October 1, 2003. The $5.6 trillion budget surplus
we estimated would accrue over the decade when the Bush
administration took over has turned into a $5 trillion
deficit. That's on top of the current national debt of
$6,813,239,615,899.16 shown in this morning's figures at
http://www.nationaldebt.org. That figure goes up by nearly
$5 billion per day. Oh, and that's the good news. The bad
news is that we're applying current Social Security and
Medicare trust fund surpluses to the budget deficit. Those
funds were supposed to be dedicated to pay future
expenses. However, the trust funds will themselves turn
into deficits when more Baby Boomers retire and find that
all they have in the cookie jar is, at best, a deflated
dollar or, at worst, an I.O.U.

The states are in no better shape. Forty-seven of them face
fiscal crises. The most popular news story is California's
projected $38 billion deficit, plus the cost of a recall
election which may or may not happen. The disadvantage to
states is that they can't simply print money, unlike the
federal government. Unless we bring back the Articles of
Confederation, the states won't be able to print their way
out of this crisis.

Then there's the trade deficit, otherwise known as the
current account deficit. In July alone the trade deficit
widened to $40.3 billion. That equates to roughly $500
billion we continue to pile on in debts to foreign
investors every year. If they decide to pull their money
out of the United States, the dollar, stocks and bonds will
sink as fast as the Titanic. The International Monetary
Funds' chief economist, Kenneth Rogoff, stated that "[The
United States] is borrowing a great deal in order to
sustain this very high recovery~This comes at the cost of
mortgaging further growth down the road." Economists are
always optimistic.

Federal Reserve Board member Ben S. Bernanke acknowledged
the Fed's ability to turn on the printing presses in order
to avoid deflation. In turn, the use of the printing
press, electronic or otherwise, is the only way our federal
government can get out of its quagmire of multi-layered
debt. If the government succeeds, welcome to the world of
hyperinflation. This conjures up 1920s images of Germans
toting wheelbarrows full of Marks in order to buy a loaf of
bread. If the government fails, we will see defaults on
the safest of all investments: U.S. Treasury bonds,
accompanied by a depression which will make the 1930s pale
by comparison.

Low interest rates are the only way to keep this debt boat
afloat. The Fed has to do its part by weighing deflation
as a heavier concern than inflation.

One of the many atypical consequences from the latest
downturn is that debt didn't go away. Surely we've had
steep rises in bankruptcies and foreclosures. This time,
however, everybody has joined the debt bandwagon, the
result being that debt continued to climb. It can all be
summed up this way: "Every debt is eventually repaid ~ if
not by the debtor, then by the creditor."

This article courtesy of http://www.investment-index.com.
You may freely reprint this article on your website or in
your newsletter provided this courtesy notice and the author
name and URL remain intact.

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