One Investor to Another The Blog of Ted Allrich These Are The Times That Try Fed's Souls... 2:55 PM PDT, August 27, 2010 - Chairman Benjamin Bernanke, as in Chairman of The Federal Reserve System, spoke on Friday.....when he speaks, we all listen....arguably the most powerful man in the world since he can move economies and affect more people than anyone.....except when times are like these....that's when much of his power, for the whole Fed, does no good....the reason: money has to be used in order for it to be helpful in resurrecting the economy..
...the Fed can add more money to the economy by buying back bills, notes and bonds....it can lower interest rates further, though not by very much, and only on the short end of the curve, taking them to zero.....but none of that will do anything for the economy unless business and people want to spend money, borrow money, use it in some way....it's called the velocity of money, the turnover that money has in the system....if money just sits and doesn't get spent or borrowed, then the economy isn't going to revive....it will stay moribund because money is the oil that makes it go and grow....so even though the Fed chairman is determined not to let the economy go into a double dip, there really isn't much left he can do about it.....throwing more money into the system won't do very much because businesses already are sitting on trillions of dollars.....they're spending some of it on technology or buying other companies but they're not hiring people because there is weak demand for what they produce or little demand for the services they provide.....people don't want to borrow money because they're afraid they'll lose their jobs.....or they already have.....they can't take on any more debt because the assets they buy (think homes) will most likely go down in value, as they have for the last 2 years......or they don't want to pile on more debt because those monthly payments can be really tough when you don't have a job......there isn't much the Fed can do....the remedy lies more with Congress and the President....they have to lower taxes, give incentives to businesses to hire, to create jobs.....or they have to sit on their hands and let the natural course of an economic cycle run its course and hope the upturn comes sooner rather than later....that could be political suicide which none of them wants.....while it's great to hear the Fed is concerned and dedicated to restoring the economy, it can only do so much....it's already done most of what it can....pouring more money into the system won't be the cure....in fact, it could come back to bite when the recovery starts and adds fuel to any inflation fire.....there are other remedies that will work....Congress and the President have to administer them, not the Fed..... Click here to see more of Ted's Blog... |
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