by John M. Curtis
(310) 204-8700

Copyright January 8, 2008
All Rights Reserved.

ith the economy teetering on recession, Federal Reserve Chairman Ben S. Bernanke hinted strongly that he will slash the federal funds rate perhaps as much as 50 basis points or one-half percent when the Fed Open Market Committee meets on Jan. 29-30. Bernanke knows that avoiding recession is more important than fighting inflation, especially in today's stagflation environment. Real economic growth has slipped below two percent and may be heading into negative growth. Bernanke knows better than most that cutting rates further erodes the struggling U.S. dollar, currently hammered on most foreign exchanges. He also knows that commodity prices—especially food and energy—are inflated by the dollar's devaluation. While supply and demand play a part, the dollar no longer buys the same quantity of food, oil and gasoline, driving them to new highs in domestic and foreign markets.

      Dropping interest rates makes U.S. investments less competitive than foreign markets, where investments pay twice the dividends. Foreign investors in both U.S. stocks and bonds—especially U.S. treasuries—watch investments shrink with (a) lower dividends or returns and (b) unfavorable exchange rates. “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risk,” said Bernanke in Fed-speak, signaling he intends to slash rates at the next FOMC meeting. Despite the White House insisting the economy remains sound, the Fed chairman has begun administering urgent CPR. President George W. Bush has long ignored the elephant in the room: That the U.S. economy can't tolerate the Iraq War without serious repercussions. Tax cuts won't save the economy from intolerable defense spending.

      Making peace overtures in the Middle East won't solve America's economic woes caused directly by runaway defense spending, bleeding the economy into its current deteriorated state. Bernanke also knows that another stock market meltdown will dramatically reduce government receipts, driving the expected deficit through the roof. Wall Street reacted favorably to Bernanke's hint about lower interest rates, especially to Bank of American rumored interest in buying beleaguered Countrywide Funding, the nation's largest mortgage broker. During the subprime meltdown last year, Countrywide watched its stock fall from a high of $45 a share to a low of around $6. Today's share prices rebounded about three dollars on rumors that BofA might consider a buyout, helping, along with Bernanke's remarks, to stem a slide that had stocks falling 7% in the last week.

      Bernanke's hands are tied with respect to urging the White House to slow down defense spending or risk plunging the economy into recession. If the stock market tanks and government revenue evaporates, it's going to be difficult to push further tax cuts. Bush attributes the economy's strong performance over the last four years to his tax cuts, failing to credit former Fed Chairman Alan Greenspan for slashing rates down to 1.5% in Aug. 20, 2004. Now that the election heats up, it's a complete fantasy to attribute the economy's economic growth since hitting the last bottom in 2003 to tax cuts. “The Federal Reserve is not currently forecasting a recession,” said Bernanke, hoping to reassure markets, adding, the Fed is “forecasting slow growth.” Bernanke knows that the Fed must live with unintended consequence of deflating the dollar and driving up inflation, especially food and energy.

      Slashing interest rates is no panacea for an economy unable to control runaway defense spending. Nearly five years into rebuilding Iraq, it's become obvious that the U.S. economy can't sustain $12 billion a month without serious repercussions, including sacrificing important domestic programs like Medicare, Social Security, infrastructure rebuilding, emergency services and many other vital services. No tax base can accommodate the current outlay without dire consequences. No Democrat or Republican candidate has addressed this issue. Finding an exit strategy in Iraq has become a matter of economic survival. When oil topped $100 a barrel, the White House should get the message that the current budget is unsustainable. Handing the oil industry record profits at the expense of virtually every other business can't continue without dangerous economic fallout.

      Fed Chairman Ben Bernanke is the nation's leading economist, not a magician. He can't pull a rabbit out of his hat without cooperation from the White House and Congress on runaway spending, specifically the $12 billion a month spent on the Iraq War. Slashing interest rates stimulates growth but fuels inflation by devaluing the U.S. dollar. Winning the war at the expense of the U.S. economy saves face for the White House but wreaks havoc on business and consumers. “However, any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate” the Fed's task of maintaining price stability, said Bernanke, pointing to his dilemma: Slashing rates fuels inflation and devalues the U.S. dollar. With the economy sputtering and no end in sight in Iraq, the GOP has a tough sell in 2008.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

©1999-2005 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.