So our friendly inflation-hawk Fed has caved to public pressure and lowered interest rates by a half percent. Wall Street has shown Mr. Bernanke & Co. immediate gratitude with a nice spike in the Dow. This is appropriate, since the main effect of yesterday’s move will be to reward hedge fund operators, institutional bankers and other kingpins of the political donor class for their past history of ignoring potential risk in their reckless pursuit of financial gain.
For a full-on rant about all of this, check out George Ure’s post today… he’s in high dudgeon, and he lays things out pretty well for the ‘Invisible Depression.’ Yeah, Wall Street is really happy, and the Dow is jumping, but you also need to consider that commodity prices are rising at the same time. Oil hit $82 this morning, and gold briefly touched $725/oz before sliding back a bit. The message here is that while housing and the Street might benefit from this cut, a lot of other things are going to feel pain due to inflation.
Check out the monthly charts here for Wheat, Corn and other commodities. Wheat has the most pronounced spike right now, but the general trend for many commodities is upward. While some of this is due to supply & demand issues, a lot of it has to do with the scads of cash the Fed is pumping into the markets to keep them liquid right now. So, the money supply is increasing, the dollar is losing it’s value versus the Euro among other currencies, and the net result will be you and I paying more for pretty much everything sooner or later. Food inflation is a worry I’ve mentioned before, but if this trend continues we’ll see the same problems for other goods and services. Our take-home income won’t rise nearly fast enough, naturally, so we’ll start seeing what George U. refers to as a ‘Lifestyle Crash.’
Another thing to consider… rising energy costs, plus rising commodity costs will equal higher food costs. A good chunk of the US service economy consists of restaurant jobs, many of them in fast food. A commentor on The Oil Drum left a really interesting thought that grabbed my attention:
The end of cheap meat is the end of fast food is the end of the tier of employment keeping many from the streets. Coming soon to an urban area near you – a United States’ interpretation of Mexican tortilla riots.
This statement might be overly pessimistic, but the writer has a point. How many people are going to pay $10 for a crappy hamburger at the drive-through? Not enough to maintain current fast food employment would be my guess. A major contraction in the lower end of the service economy will spell trouble for sure. How much trouble? We may get to find out sometime in the next few years.
Anyway, the Fed has taken a path that means redemption (literally and figuratively) for Wall Street, with the costs to be borne by the rest of us schlubs through the hidden tax of inflation. For all of their tough talk about watching inflation, Ben Bernanke & crew have taken the path of least resistance and proved once again that they’re no Paul Volcker. Instead of administering some tough medicine to the market, they’re letting the party continue on our dime, which is only delaying the inevitable correction and making it worse in the process.
That which goes up must come down, and when it does come down it’ll be ugly… perhaps that’s the point?