Radical Noesis - Thinking outside the box

First, one has to ask what is driving inflation, and what might be driving the slow economy. The answers seem pretty clear to both questions - increased oil prices and a rising deficit.

Rising fuel costs
Greenspan, who steered (for better or worse) the U.S. economy may have retired, but does that mean he should be silenced? So why was he disrespected and the news largely ignored when he testified to the Senate Foreign Relations Committee on June 8th? Only two committee members even bothered to show up. A few others drifted in late and then drifted back out again. Why was he there? To "Testifies on Oil Dependence."

"For those who were listening, Greenspan had few soothing words. The balance of world oil supply and demand "has become so precarious that even small acts of sabotage or local insurrection have a significant impact on oil prices," he told the senators. And, he added, while the U.S. economy "has been able to absorb the huge implicit tax of rising oil prices so far . . . recent data indicate we may finally be experiencing some impact.""

Yes rising petroleum costs are driving up other costs, and that is inflationary. However, increasing interest rates and tightening money supply seems unlikely to ease the cost increase caused by petroleum costs. In fact, it would seem to make it that much harder for the average person to make ends meet.

Deficits
It was reported on June 9, 2006 that the US trade deficit reache[d] $63.5bn. Thus far this year "The trade gap was $252bn for the year to date, leaving it on course to exceed the record $716bn recorded in 2005."

And what is that deficit primarily linked to? Oil costs of course.

"Most of the trade deficit's widening can be put down to an $1.44bn increase in oil costs after crude prices climbed to record levels in April."

However, there are other deficits the matter - like the national debt. As Melanie Colburn notes in her article in Mother Jones "Why Deficits Matter" the $8.2 trillion debt is roughly 65% of the United States' gross domestic product.

Of course, what is happening in the U.S. (and in global petroleum prices) effects the global economy as well - "Global Markets Suffer A Hit." According to this article, hedge funds are taking a beating which is driving investment into more "quality," "secure," stocks. In other words, the Fortune 500, which had decreased in value during the slide. Among other "secure" investments was Treasury bonds which caused prices to go up, but yields to fall.

So Hike The Interest Rate?
So The Fed's answer (as well as a number of other international banks and treasurers) is to raise interest rates thereby tightening money supply. What this does is to drive additional profit into the pockets of lenders. Where that hits hardest in the United States, is the borrowing (and heavily indebted) public. Interest rates on consumer debt goes up. People who have adjustable rate mortgages get hit - heavily. Businesses may also get hit causing them to place on hold - or cancel - new hires and wage increases.

An article in Bloomberg on June 6, 2006, highlights the struggle facing the public and its sources.

" Consumer credit, or non-mortgage loans to individuals, rose $10.6 billion, or at an annual rate of 5.9 percent, to $2.17 trillion, the Federal Reserve said today in Washington. In March, consumer debt increased by $1.4 billion.

People who relied on equity from their homes rather than bank debt during the five-year housing boom may be returning to more conventional credit as the real estate market cools. Higher interest rates will slow the pace of borrowing and consumer spending in coming months, economists said."

...

" Higher energy prices and a slowing housing market will leave consumers with less cash, pointing to slower retail demand in coming months, economists said. "

...
" ``The consumer is basically getting hit two different ways,'' said David Lereah, chief economist at the National Association of Realtors in Washington. ``They're getting hit with high oil prices, which eventually seep into consumer confidence, and they're getting hit by slower housing, which is reducing the wealth effect.''"

Credit card debt is expected to rise from 38% of total consumer debt to 48% by 2009 "adding over $1.5 trillion of growth potential."

Growth for whom one might ask? Certainly not "growth" for the "consumer" who is putting food, gas, utilities, and health care, on her/his credit card because they can't afford to pay for it and no longer have savings to fall back on. Of course, either taxes are going to have to go up significantly or all public expenses (including the military) need to go unfunded to pay the national debt.

Let's face it. The accelerating cost of an increasingly scarce resource (petroleum) is not a simple inflationary matter, and it is not solved by increasing the interest rate. It is also true that you cannot borrow your way to wealth - particularly when all that is happening is debt and not investment. This is true for nations and it's basic kitchen table economics.