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Wednesday, August 13, 2008

Who the Fed cuts cut the Deepest.

The result of the gerrymandering of the economy in order to encourage misallocation of capital on a massive scale by funneling enormous streams of revenue into assets such as exurban homes, SUV's and the equity markets, was the creation of myriad credit-induced bubbles, the bursting of which, have brought us to our current state of a collapsing financial sector, crumbling infrastructure, and bloated, and growing, Federal and State government deficits. And because these "assets" were then leveraged, via mortgage-backed securities, "collateralized" debt obligations, and the like, they all rode high on a wave of debt, i.e.liabilities, misconstrued as assets. As if loans made to people with no collateral to back them, were as good as those made to fund the building of a factory, which at least had the potential to produce future returns able to finance the payment of the interest on that debt.

So, for those consumers who took out risky loans, and speculated on the pipe-dream of ever-expanding property values, while the citizens of the country in which that property was located continued to have their livelihoods eroded by a Corporate-Government collusion to castrate the bargaining power of labor, and could buy the consumer goods brought to its shores by the productive capacity of those whose totalitarian government brooks no dissent, only by extracting the phantom profits from their property's rising price, the Fed cut of the Discount Rate was a boon...for now.

But they will soon join the rest of us, receiving paltry returns for savings, in experiencing the ultimate failure of the cut as it raises the prices of those very same imported goods, by raising the inflation rate around the globe for those consumers in other countries, where our exported inflation (which is what lowering the interest rate on the World's Reserve Currency does) has caused much more rapidly increasing prices (including for those goods they export to us). But for those who have access to capital at a cost far less than the inflation rate, i.e. the banks, whose deregulation and subsequent chicanery got us into this intractable situation in the first place, the Fed cuts are a Godsend of Corporate Welfare and Stat-ism, explicitly pandering to the needs of these well-endowed Corporate hogs.

This is important , because, even as several articles have been written about the "New Frugality", and that Frugality is the "New Cool", such frugality fights against extremely powerful headwinds, as the Federal Government continues to increase an already unpayable National debt, of which the interest alone ($250 Billion) is equal to half of the Current fiscal year's budget deficit of half a Trillion dollars. This means that no matter how thrifty one may be, the government is spending your money faster than you can save it.
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