CapitalistMarks

The interest rate conundrum.

Posted on 22. Oct, 2009 by scott in economic daydreaming, political munglings

I will be the first to admit that the recession may not be over . . . despite the obvious rhetoric the administration is pushing.  In fact, I do NOT think the recession is over even if we have a quarter or two of positive GDP #’s ahead of us.  The worst may yet be ahead of us, though I hope not.

How can this be?

Too many times in the past unemployment has prolonged a recession and this time we are experiencing the worst unemployment since WWII.  That is the primary reason to be dubious.

However, since the administration, as well as the Federal Reserve’s own Ben Bernanke, is touting their imagined upswing in economic growth we are faced with a real dilemma (or conundrum).

These hard choices are ahead:

Should Obama proceed with the third stimulus that has been bounced through the media recently?

Should the FED raise interest rates?

Should we just keep plugging along and hope all will be well?

The answer to all three of these questions is a resounding NO!

We do not need a third stimulus that is intended primarily to influence voters by extending the time an unemployed person can draw Unemployment Compensation.

We absolutely should not raise interest rates (despite the ever-present specter of inflation) until the recession is over for most of the 10 to 15 million homes with unemployed adults.

And we sure as heck can’t go on the way things are now.

Presaging all of these difficult decisions is the incredible deficit spending that looms for years, if not decades, ahead.  Now we know that last year’s deficit (fiscal year ended September 30 2009) was $1.4 trillion . . . as compared to the previous year’s (2008) $544 billion.  Yikes!  Nearly three times the previous awful record high set in 2008 by Bush’s administration.

There seems no end to the bassackwards budget our wonderful (primarily incumbent) congress has planned for us.

We know they can’t continue this way and presumably they do too.

After all, who is going to buy our debt when interest payments become more than 10% of the ENTIRE government budget for the year.  Although only $191 billion last year it could easily exceed $1 trillion soon if interest rates increase significantly.China won’t.  Neither will any other fiscally responsible government.

Further, with the diminished economy and subsequent reduced economic output, unemployment and business contraction, tax receipts are way down as well.

Hence the conundrum.

To change the terrible deficit forecast two things must happen –  though not both at once necessarily.  Taxes will have to be increased.  The FED will have to raise interest rates.

Neither of these are a good thing for consumers or small business.  Hence neither of these are a good thing for the employment crisis.

Yet, the deficit looms.

So what happens now?

Though I have promised not to complain without offering a solution, I can only say that this problem is one I simply don’t know how to handle in an assured way.  But I think I understand enough to offer the best approach (better than ANY I have heard from the vicinity of Washington, D.C..

What comes first?

We have to deal with unemployment by diverting the balance of the second stimulus (about $400 billion is left to spend) to jobs creation — public projects, infrastructure, housing incentives and such.  Things that will create jobs quickly.  Not rocket science dudes.

What’s next?

Raise interest rates to a reasonable level — probably 5% or so for the FED benchmark that affects interbank borrowing and hence the prime rate.  But, ONLY when unemployment drops a point or two below the 8% level promised by Obama when he was pusing the 2nd stimulus upon us.

Finally?

Implement the inevitable tax increase but do it with a totally revamped tax system.  One like that which I have previously suggested (see here).  Fair and balanced and equitable to all!

This entire process will probably take 2-4 years but do not doubt that something has to be done and the above proposal should handle the problems correctly.

You must be asking yourself how do we ‘the people’ get this done?

Start by sending this message to your congressmen(women) immediately.  Then followup by letting them know that you have no intention of voting for incumbents unless they do the ‘will of the people.’

There is a secret here too, and please don’t send this to your congressmen(women). 

We the people don’t intend to vote for incumbents anyway!!  Not until congress passes a law that implements term limits on ALL elected officials so that they don’t keep creating ways to keep themselves in office — they are to serve us, not the other way around.

Thank you and have a wonderful day!

thanks to secretlondon123 for the photo at flickr

Tags: federal reserve, inflation, President Obama