The first government response to America's sinking economy was denial. We were told as recently as a month ago by administration officials and Wall Street charlatans that the economy was robust and that there would not be a recession. Now we are told that the economy is in trouble, but that the government is taking decisive action to shore it up.
We saw how effective the first "decisive" proposal was. Bush announced a plan to give every adult taxpayer (no poor people, thank you) $800 in a tax rebate this April. The stock market responded to this idea by dropping a few percent. The idea, as I wrote in my last column, was stupid to begin with because, with the US no longer producing much of anything, all that bonus borrowed cash would end up getting spent on imported goods anyhow, doing next to nothing for the US economy.
So now the Federal Reserve has weighed in with a 3/4 percent cut in the Federal Funds rate. Even though commercial banks followed suit, lowering the prime lending rate by a similar 3/4 percent, the stock market showed how much good that move would do, dropping almost 300 points at the opening bell today — about what it had been expected to do even without an interest-rate cut.
There was one place where the Fed's action did have an impact though: the exchange value of the dollar in foreign currency markets. No sooner was word of the interest rate cut announced, than the dollar fell against major currencies like the British Pound, the Euro and the Japanese Yen.
And there's the rub. The Fed is in a trap. It cannot cut
interest rates much more without causing a collapse in the dollar,
which, because of the huge US trade imbalance, and all those consumer
goods and raw materials — especially oil — that are imported — would
lead to serious and politically dangerous inflation. And there is
another constraint: with the current rate cut, the US now has the third
lowest interest rates in the world. If the Fed makes another cut, as it
has hinted it might in a week or so, only Japan would have a lower
interest rate environment than the US. That makes the dollar a very
undesirable currency for foreigner investors, which means they won't
want to hold dollars, and they won't want to hold US stocks.
Yet
if the Fed doesn't cut interest rates even further, the stock market
will continue to plunge, which again discourages foreign investors from
pouring their money into the U.S., which in turn puts downward pressure
on the dollar.
This was all predictable.
An economy that
is almost wholly dependent on consumer spending, which is the case in
the US, is in big trouble when consumers start to worry about the
security of their jobs, and when they see inflation eating away at
their disposable income. They naturally just stop spending. And that is
happening, too.
So get ready for some hard economic times. The
next step will be soaring inflation, as strapped companies in China,
India and elsewere start raising their prices for goods shipped to the
US and paid for in dollars. Then the Fed will have to respond by
raising interest rates again, in an effort to shore up the currency.
And with that will come deeper recession and an even lower stock market.
The
Bush chickens — endless deficits as far as the eye can see, and a
$2-trillion military debacle that has no end in sight and that is
sucking money out of the country like a giant industrial vacuum cleaner
— are coming home to roost. The President and Vice President clearly
hoped that they could pass the wreckage of their eight years in office
on to the next president and run off to retirement and senior stateeman
status before it all blew up, but their luck ran out. The economic shit
has hit the fan. Chances are that the war that they have tried to tuck
away in the closet with a "surge" in troops and a brutal campaign of
aerial bombardment, will also blow up on them before the year is out.
That's
small consolation for all of us who have to live with the ensuing
disasters, but at least — if we can't see them properly impeached and
indicted, we'll have the satisfaction of seeing Bush and Cheney run out
of town next January on a rail.
Writings 
The first government response to America's sinking economy was denial. We were told as recently as a month ago by administration officials and Wall Street charlatans that the economy was robust and that there would not be a recession. Now we are told that the economy is in trouble, but that the government is taking decisive action to shore it up.
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