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International Investors Disgusted By Fed's Inflationary Rate Cuts

The Federal Reserve is trying to save irresponsible borrowers from themselves by cutting interest rates to ridiculously low levels, even though that will trigger increased inflation rates (which are already rising) and bring back the stagflation that plagued the 1970s.

Amazingly enough, Congress is saying that the Fed's indulgence towards borrowers is not enough, and liberal Congressmen and Senators want to bail out irresponsible borrowers by blocking foreclosures or writing off mortgage loans that exceed current home value (which most often happens to borrowers who made little or no down payment because they neglected to save any money for a down payment).

Such low interest rates will spark increased inflation, will further weaken the dollar (thus driving up gas prices), and will discourage international investment in America, resulting in lower economic growth and increased unemployment -- the very opposite of the Fed's goal.

International investors are openly disgusted with the Fed's inflationary easy money policy, which seeks to artificially prop up the economy and keep American unemployment rates (which are low by international and historical standards) from rising by making it easy and cheap to borrow money (even though Americans already borrow more than residents of any other major country, and have shown little penchant for saving) in order to finance spending that is unsustainable over the long run. In the long run, they believe the Fed's policy will result in increases in both inflation and unemployment.

The Swiss investment bank of Julius Baer, which runs successful international mutual funds (such as BJBIX) that have vastly outperformed domestic stocks, is scathingly critical of American policy makers' emphasis on avoiding short term pain even if it endangers long-term economic gain. In pp. 10-13 of its 2007 annual report to shareholders, it rails about "The Age of Decadence" in America.

The Fed has shirked many of its responsibilities: by allowing asset bubbles to form unfettered; by maintaining ultra-lax monetary policies; . . . and, by succumbing easily to the faintest political pressure," while Congress and the President have "spent irresponsibly and accumulated record budget deficits.

Similarly, The Wall Street Journal today warns that "a global run on the dollar could become a rout" if the Fed continues its irresponsible, inflationary easy money policy and interest rate cuts, which impoverish people with savings accounts in order to benefit people who have recklessly run up their debts.

The Fed's main achievement so far has been to stir a global lack of confidence in the greenback. By every available indicator, investors are fleeing the dollar for other currencies and such traditional safe havens as gold and commodities. Oil has surged to $110 a barrel, up from under $70 as recently as September. Gold is above $1,000 an ounce, up from $700 in September, and food prices are soaring across the board. The euro has hit record heights against the buck, and for the first time the dollar has fallen below the level of the Swiss franc.

Speculators are adding to this commodity boom, betting that the Fed has thrown price stability to the wind in order to ease U.S. housing and credit woes. The problem is that dollar weakness is making both of these problems worse. The flight from the dollar has made U.S.-based investments less attractive, at a time when the U.S. financial system urgently needs to raise capital. And the commodity boom is translating into higher food and energy prices that are robbing American consumers of discretionary income. In the name of avoiding a recession, reckless monetary policy has made one more likely.

The analysts at Julius Baer likewise argue that by cutting interest rates to artificially low levels in the past to stave off the mildest of recessions, and thus making irresponsible borrowing artificially cheap, the Fed managed to reduce international confidence in the dollar, and thus reduce its use as a "reserve" currency abroad. That's bad, because when foreigners hold U.S. dollars, it often operates like an interest-free loan to the U.S. economy, making us richer.

Moreover, Julius Baer argues:

[American policymakers] also created structural imbalances and excesses in our economy that led to one bubble then another—the least painful way to contain one bubble is to create another; hence postponing the day of reckoning. In this period, we made useless financiers fly-by-night billionaires, destroyed most Americans' living standards by depressing their wages and sinking the dollar against most currencies known to man—with few exceptions such as the Zimbabwe dollar.

To try to prop up the economy and prevent a bubble from popping, the Fed recently engineered the bailout of the Wall Street investment bank Bear Stearns, which it arranged for J.P. Morgan to buy yesterday at just $2 a share -- far less than the $30 Bear Stearns was selling for on Friday. It did this to try and promote investor confidence, but investors weren't fooled: Financial and investment-bank stocks declined after word broke of the Fed's actions.