The Monetary Puzzle in 2008

On Tuesday, our Fed Chairman Ben Bernanke spoke via satellite to a conference in Spain. While he touched on many things, I think the important thing to note is that he is keenly aware of the threat that inflation presents to the economy and to the American people. As I would like to say, Chairman Bernanke’s heart is in the right place.

A fair and just central bank must be fair and just to the least among us as well as to those most able to withstand the effects of inflation. When you are making over a million dollars a year, $3, $4 or $5 gas is not going to break your piggy bank. But, what percent of the population makes over a million dollars a year? A half million? A quarter of a million?

The task before the Fed is not a simple one, and the Federal Government’s penchant for running deficits does not make the Fed’s task any easier. The realities of the trade deficit and the budget deficit are two important pieces of the puzzle that the Fed must deal with. These two large numbers impact the Fed’s ability to administer to a monetary policy with little or no inflation.

On the one hand, the Fed would like to be able to raise rates. Debt service on new US Treasury obligations would go up as key central bank rates would certainly dictate a rise in short term rates. Long term rates are a little more complex. While short term rates are influenced by the supply and demand for capital, long term rates have the added components of the present rate of inflation and the anticipated rates of inflation going forward. If the Fed raises the discount rate, the fed funds rate or increases the reserve requirement, interest rates will go up. Through Open Market Operations, buying and selling of US Treasury debt, the Fed can fine tune interest rates and in turn the growth rate of the money supply. When the Fed buys US Treasuries in the open market, they put money into the banking system. Conversely, when the Fed sells US Treasury debt from their portfolio, the Fed takes money out of the banking system.

But, if the Fed is serious about fighting inflation, the Fed can take big steps to slow the economy. And, that is the problem. The central Bank wants low inflation and a growing economy. Given the problems in the credit markets, the mortgage market and the slow down in the housing market, the Fed is being called upon to keep the economy on track with hopefully more new jobs coming online, while at the same time keeping price inflation under control. The Fed could use a little help from Congress and the President. What can the Congress and the President do?

This country has run on cheap energy since the end of the Second World War and the end of gas rationing. We can not become green over night, it will not happen. Realistically, the energy policy with regards to oil drilling here in the United States needs to be modified. We need to take responsibility for a bigger percentage of our oil needs. This one move can slow down the rate of inflation. We also need to build some new state-of-the-art oil refineries. Our exposure to foreign oil must be reduced if we are going to get more control of our economy. At this point, OPEC is playing the tune and we are dancing to their music. Strategically and economically this has to stop.

A lower price for gas may not fix the credit problem, the sub-prime mortgage mess or the housing market, but it would take significant pressure off the consumer and permit family budgets to repair themselves. What is the Stimulus Package of 2008, passed by congress and signed by the President, all about? After the consumer’s budget has been taxed by first $3 and now $4 a gallon gas, how much money is left for needed purchases for a family? Do not look now, but these gas and diesel prices are a form of a tax. And, this kind of a tax eats into the budgets of those least able to afford $4 a gallon gas. Not to mention what the price of diesel fuel is doing to the trucking industry and the price of everything that we buy and use that is brought to us by trucks!

We would never let OPEC or Saudi Arabia be responsible for our defense, so why do we let them control our economy? They are not on the ballot in November and yet we pay a tax to them every time we fill up our tank. Perhaps it is time for the American consumer to wake up to what the economic facts are. Do not be confused by labels and colors on a map. Stop and think about where your money is going and how much your money is purchasing for you when you shop. This country needs a new energy policy, and while long term oil may not be the answer, for the present our need for cheap gas and diesel must be recognized as imperative for our economic health and recovery. Stay tuned.