We’ve seen it specifically in housing in the 80’s … and with the dot-coms of the late 90’s.

I *really* hope that you’re ignorant enough to think that our housing market will never recover. Because I’d be happy to buy the property you missed out at to the tune of 30% gains in 2011.

You people astound me.

Our exports were doing well with a lower dollar and now most believe will not do as well. Most say that a strong economy translates into a strong currency, am I missing something.

So I ask the question, why is the dollar going higher now? Now that every other country is doing as poorly as we are now why does the dollar rally and we suffer.

OK, with higher currencies abroad they were effectly exporting their inflation back overseas. But at the same time they were buying more of our goods and services. Exports were up and companies were doing better.

I thought the dollar was to flat freely with other currencies. Now it seems that with lower oil prices that we all screamed for, the dollar has been driven back up hurting our economy. Why does the dollar have to be tied to oil. We can’t win, oil goes up we suffer, oil goes down we suffer. Its the “Best of Times and the Worst of Times”. Tale of Two Cities.

I think it is time the Fed starts on a campain of selling dollars to push the currency back to netural and get back our competitive edge.

Although the Fed prints money, it actually stimulates a lot more than that.

I see preference for fed acion breaking into two camps:

(i) working age folks – the would benefit from lower rates/inflation. Wages will eventually rise over time with inflation and they’d at least have jobs because of strong exports. Also, the true value of their debt will decrease. Will wage increases match inflation? Probably not, unless we rebuild the productive (non-financial/real estate/service) parts of our economy. But working people would be better off than under the other scenario (esp. the younger ones).

(ii) retirees and near-retirees who have accumulated assets and would suffer from lower purchasing power due to inflation, essentially a devaluation of their assets. Unfortunately, these folks are the baby boomers. If they vote en mass to pursue a strong dollar policy to preserve their assets, we’re in for a long, slow slide into depression, which they can watch on CNN from the comfort of their golf course homes. Of course, the baby boomers have never shown any capacity to act in any manner other than their crass self-interest.

The country has gone stray and we’re in for difficult times one way or the other. To wax poetic, the US economy will end in fire (inflation) or in ice (deflation/depression). If in ice, it will be a fitting capstone on the legacy of the most destructive and self-congratulatory cohort of Americans to have ever existed.

Money is created not by the FED, but by banks (although the FED can have some influence on the process, it does not actually fine tune it.) And the banks are limited not so much by reserve ratios but by capital ratios. If they need to borrow money for reserves that is never a problem, but if their capital falls short they risk having to fold up shop.

WIth a system based on loaning out money from private banks at interest, creating only the principal for the loans, unless additional new money is continually created (by loaning to other borrowers) to enable borrowers to repay their loans the resulting credit contraction (or even a period of money supply growth at a rate smaller than the cost of capital) over time will cause borrowers to default in aggregate across the economy, causing banks to tighten lending.

If borrowers default, the bank that created the money loaned to them must shrink loans by an amount equal to 1/the bank’s reserve ratio (about 19x the loan amount) in order to maintain its capital ratio. After the excess capital margin is gone, the bank has to stop lending to all but its best customers and will generally do so long before that.

So the FED rate cuts have at best a second-order impact on stimulating the economy because the banks really control the money supply and if their capital ratios are endangered lowering rates will have no impact.

The issue is really one of system design – a fractional reserve system in which banks are allowed to create money and loan out much more than they have on deposit is fundamentally unstable and prone to credit bubbles on the upside and similar positive feedback on the downside, hence we are told the ‘business cycle’ is a natural part of our economy.

In other words, even though the Fed has slashed the federal funds rate from 5.25% to 2%, many beaten-up banks have nevertheless substantially tightened credit standards for businesses and consumers.”

The Fed cuts were for the banks, not for we common people. Don’t be fooled.

A weaker dollar also gives business a big incentive to develop alternate energy sources and reduces our demand for foreign oil. That all might mean short term pain, but long term gain.

Today, we are bogged down in two wars, we have a $500 billion budget deficit, exploding defense expenditures, and ridiculously high energy prices. With the government borrowing so much money, they directly compete for capital in the markets, which raises interest rates. If you’re an investor looking for an ultra safe investment, do you buy a US Government T-Bill or a Fannie Mae Mortgage Bond? The answer is pretty obvious.

The situation today is much like the early 1980’s when the budget deficit ballooned. Any rate cuts go directly into gas tanks or to bank profits, which really only keep the banks from outright failing and making the situation worse.

The current economic situation will only be resolved when the US government brings it’s fiscal house in order. The 2001 tax cuts, which were predicated on a “peace dividend”, need to be repealed or expired and the government needs to stop spending money. The government needs to get out of the capital markets for the situation to get better.

Additionally, the energy cost situation needs to improved. We need to be looking for ways to keep the currency spent on energy at home, through US based alternative fuels *and* domestic oil production.

Basically, the rate cuts aren’t working because of the US budget deficit, high oil prices, and high defense spending.

Here is prove:
“The Wall Street Journal reported on Thursday that the Commodity Futures Exchange Commission is investigating whether companies are reporting false oil inventory levels to benefit their trading positions.

However, EIA spokesman Jonathan Cogan said the agency is unaware of any such probe.”

It’s pretty much impossible given today’s economy. When the “value” of your country is tied strongly to hard goods, natural resources, manufacturing capacity, etc., everyone can mostly agree on what it’s actually worth. Up until the middle of the 20th century, that still worked, at least sort of.

But when a big chunk of “the economy” is information technology, financial services, etc., it’s nearly impossible to put a price tag on what your currency should actually be valued at. It’s sort of like how the market capitalization of a company can sometimes have little correlation to its actual hard assets. (e.g. How much is Google really “worth” versus their market cap?) Floating currencies have their issues, but non-floating currencies are pretty much untenable these days.

As far as inflation… the Fed has less control over real rates than you might think. They can put a floor on interest rates to some extent, but what consumers and small businesses are going to pay depends on how willing banks are to make the loans — and, increasingly, on how willing private investors are to back them. The worse the overall economic situation, the more of a safety cushion lenders/investors will want on top of the fed rates.

“I like the fact they say they need to raise rates to fight inflation and everyone goes along with the myth. When they say they are fighting inflation and rise (sic) rates they mean they are fighting to keep inflation alive.”

One of the economic theories guiding the US since WWII has been that low levels of inflation are safer and easier to maintain than either trying to keep no inflation or flipping back and forth between inflation and deflation, so I guess that in some sense they are always “trying to keep inflation alive”. Right now it may be impossible, since it seems like so many investments were overvalued by so much over the last few years.

Raising interest rates DOES tend to reduce overall inflation, because it reduces the incentive to borrow money. The cheaper it is to borrow money, the more leveraged most financial institutions will get, and the more total money will be in circulation. Of course, some of the effects depend on how you define “inflation”, and that is far from the only factor.