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Bernanke Dilemma: 'Pushing On a String'

I join with other investors in disappointment of seeing a 1/4% drop in the Fed Discount Rate.

The market didn't like it and turned from about a 50 point gain in the Dow to a 220 point loss. And the market has another hour to trade.

But what can Bernanke do? Rate cuts drive the dollar down in value. And raise the risk of inflation as imported products climb in price.

The interest rate supports the value of the dollar which has plunged approximately 44% against the Euro in the past 7 years under President Bush's leadership. That means that in a global economy, the value of everything we own has been devalued by about 1/2. When we travel abroad, we can see the effect of the weak dollar when it takes $5 to buy a Coke in Italy.

Dollar/Euro price chart from Yahoo:

With the subprime mortgage mess unraveling and the derivatives and hedge funds shenanigans continuing to come to light, our economy needs a stimulus like a rate cut. But if we fail to support the dollar, the Chinese are likely to resist continuing to fund our debt instead turning to Euro-backed securities and the OPEC folks are likely to once again consider pricing oil in Euros and not dollars.

I am greatly concerned for our economic vitality and prosperity.

We have unfortunately continued to be led by politicians who subscribe to the Grover Norquist pledge of 'no new taxes'. Why taxes are bad --aren't they?

But can we continue to cut taxes and pour money and resources into military activity without paying the piper somehow? Should we really believe that tax cuts are essential to grow the economy when this endless printing of dollars in terms of an expanding budget deficit is a threat to our well-being.

Should we be concerned about the ever-growing disparity between the wealthy and the poor?
Even Henry Ford knew he needed to pay workers enough so they could buy a Model T.

We cannot depend solely on high-end retailers catering to the wealthy to sustain this economy.

Balancing the budget needs to be a national priority. Tax policy must not work to encourage the continued outsourcing of quality jobs overseas. Efforts to repeal the Estate Tax will only insure more of a continued Plutocracy in America with the wealthy getting richer and the poor poorer and our economy will suffer. Cuts to education will not help the poor rise up out of their economic morass.

This country has been headed in the wrong direction under this President and we are all paying the piper.

Bob

29 Comments:

watermelon said...

I totally agree with Bob.

john said...

The secular problems we face do not begin and end with one president and they are a collective responsibility.

BobsAdvice said...

This President and the Republican Party have exacerbated the problems with irresponsible tax-cuts while starting a contracted-out war effort when none was required. They have exacerbated our problems by gutting the regulatory bodies that investigate business matters by placing lobbyists for those industries in regulatory positions. It is far too easy to say 'everyone does it' and it is a 'secular problem'. Things were better under Clinton.

Bob

Mo said...

I think the amount of the cut wasn't the issue; the thing the markets didn't like was the slightly bad-conceived / badly worded Fed statement accompanying that.

Trading Goddess said...

It costs $5 to buy a KO in Italy? Yikes!

Anonymous said...

Dear Bob,

You apparently trust the government to spend our money wisely. Reagan did not and cut taxes running up the deficit because there is no other way to get Congress to not spend more and more. When "cutting taxes for the poor" is offerred to people not paying taxes in the first place, we know that the level of politician's deceit knows no bounds.

As the internet, cell phones and computers increasingly render governments irrelevant, any raising taxes will simply see both businesses and the rich leaving the Country.

I recently shipped a car from CA to the East. Although a US company took the order, an Indian call center managed all details and a Chinaman who could neither speak nor read English handled the pickup and transit. Only at the other end did the company admit that they would only accept cash, no checks. This is how US business is now conducted. No US employees, no US taxes paid.

Our tax laws are going to be hopelessly outflanked by technology. The only hope is to cut spending.

BobsAdvice said...

Anonymous,

Thank you for reminding me about how Reagan also cut taxes and ran up the deficit.

Bob

Anonymous said...

You are correct that lower rates will place the dollar under increased pressure. However, the current explosion in US regulation and socialism leaves no other solution except the devaluing of the dollar. We must suffer dramatic declines in the value of our dollar in order to get our socialistic state's GDP net of the cost of government into balance with other world economies. With 20 million illegals doing most of the labor in construction and some of manufacturing, the US worker is currently not competitive with the world market. The Fed is trying to pretend that higher rates can defend a dollar ravaged by the conversion of the US from a capitalistic economy to a government controlled economy. Can't be done.

BobsAdvice said...

TG,

I was in Rome last year and indeed did spend $5 for a Coke. It was the same price for a glass of wine.

YIKES is right!

Bob

Anonymous said...

Dear Bob,
Reagan had no other option and neither does Bush. The captain of the Titanic also had few options. Any of our presidents can pretend otherwise, but in a world economy rendered "flat" by the internet, there is no place for the emporer to hide. Naked is naked.

mags said...

Raising taxes will not improve the economy--it never does. The federal deficit is not the problem; it has been improving dramatically in the past two years. As a percentage of gross domestic product, it is half the average it has been since 1970.

Anonymous said...

Amen Mags.

Anonymous said...

"This is how US business is now conducted. No US employees, no US taxes paid."

The business transaction you've described is what most of us would instead call a "crime".

Market Speculator said...

Lincoln had a lower approval rating in his second term than Bush ever has in both terms...

Fun Facts.

Market Speculator said...

Top 50% of Income earners pay 99% of the taxes...

So let's tax the ppl who are paying taxes more!!!

Anonymous said...

I'm sure the Gilded Age had its fans and defenders, too.

Rock on, America.

"It is not worthwhile to try to keep history from repeating itself, for man's character will always make the preventing of the repetitions impossible."

elwoodblues said...

Good thinking, instead of cutting pork let's raise taxes to fund an even bigger government with grander pet-projects. So where do we start...how about even higher gas taxes that only affect folks who are just scraping by as it is? Maybe a tax on the internet, that would be good, no? Why not up the death tax so even more family businesses & farms go under at the same time as it's patriarch. I do see your point though, government is indeed a much better steward of capital than that of the unwashed masses.

Yup, Hillary will get this economy straightened out in no time flat, she did after all sit on the board of Wal-Mart.

I'll bet the trains still run on time in Italy too.

Anonymous said...

Elwood,
Well said. I was worried the libs had taken over this blog. Any government as steward for our money is a disaster. Coincidentally just as this was being discussed here yesterday, CA woke up to the news that over half a billion dollars of the States workers comp funds had been given away to insiders involved with the State. Of course, by government standards half a billion is chump change. When Katrina funds were dolled out, almost two billion went to criminals who spent much of the money in Las Vegas. Our best and brightest never take government jobs. Self-serving, often corrupt individuals go into government "service". No socialist country has ever thrived and the poorest of the poor live in such socialistic countries.

Market Speculator said...

amen anonymous!

Anonymous said...

Ignorant bigots all around on both sides.

Take the "conservative vs libs" nonsense elsewhere. Politicizing monetary policy is the cause of so many of the economic problems. Whether you're pro-tax, anti-tax, pro-Repub, pro-Demo, whatever. Any choice that politicizes monetary policy at the expense of rational decisions (even if they go against the party-line) will cause more problems than it will fix.

BobsAdvice said...

Anonymous,

Point made. What should distinguish between liberal/conservative governments should be their priorities and activities. What shouldn't distinguish them is their view of deficits and responsible management of the nation's resources. In other words, irresponsible government that drives us further into debt and destabilizes our currency is to be avoided whether it is from a liberal or conservative administration.

Government isn't inherently bad. Private contractors failed us at Walter Reed and they are failing us in Iraq. Our soldiers who are part of the government have done a better job than any paid soldiers and I support our troops.

Taxes aren't evil either. And progressive taxation is the ultimate in fairness. Everyone needs to shoulder the burden of taxes, but the wealthy are able and should shoulder more of that burden--as they often do.

Death Taxes aren't about dead people paying taxes. Dead people don't do anything except decompose. Estate taxes is about heirs and heiresses paying taxes.

I am growing tired about hearing how that money already had been taxed. Virtually all of us have income that we pay taxes on that has been taxed before. If you work for a company, they paid taxes on their income and still you need to pay taxes. Same with dividends. If you pay income taxes and buy something at a store that gives THEM a profit, that store also pays taxes even if that money had been taxed previously.

I hate nonsense.

Anyhow, I am glad that this discussion has allowed people on all sides of this debate to chime in.

You can be liberal and be an investor.

Like Warren Buffett. Or George Soros. Not bad company don't you think?

Bob

Anonymous said...

Bob "gets it".

Keep up the good work.

The other Gilded Age didn't last forever and neither will this one.

Market Speculator said...

Buffet has already made his billions, but he wants to tax my money more.

Sorry, no can do.

Is it fair for someone to reap all the benefits that the govt provides without paying their share?

70%+ of the poor in Colorado are illegal immigrants...

stocktube said...

bernanke (or bush as well?) is dancing to the tune of the investors ... his nose is being pulled and paraded around town ...

i don't think alan greenspan would do the same (submit to investors demand) although i'm not a fan of alan ...

cheers ...

Anonymous said...

Bob,
I know Warren well. He is incredibly disingenuous. He pays no taxes and yet aspouses higher tax rates. Easy for him to say, but his position is deceitful. Warren never ever at any cost invents anything. He sucks cash flow out of mature businesses and plays only for ROE. Inventors get low ROE's but they advance the state of our lives. Warren judges life in economic terms and has no passion. This makes him a great investor and a terrible spokesman for our society.

Not bad company? Not correct. You are in bad company. I know it is fashionable to like everything Warren because he is rich and talks calmly. Give me a passionate patriot who regrets that he has but one life to give for his Country. Give me an inventor and someone who will not go quietly into this good night. You can have your traders and money changers.

Trading Goddess said...

Anon,

"I was worried the libs had taken over this blog."

Let me remind you that this is my blog, and I welcome and appreciate all the contributors, like Bob, to it.

I find it very refreshing to see this point of view. I am sure you can find what you seek (and the usual "non-lib" point of view) over at WSJ or IBD.

I also like to see adult discussion instead of the usual bashing and name calling that is so prevalent when discussing issues like these.

I would like to see a solution to our problems, wouldn't you? That should be the goal for us all, imo.

elwoodblues said...

T.G.

This entire post was a bash on conservatives & was meant to elicit a response. I don't see the use of the word lib as name calling, I'm a liberal myself on many social issues. It's funny though how in general country folks have a totally different view of the world than those who live in cities. All one has to do is look at a map of red vs blue states. And for the record, if I have kids someday & wish to leave them with the land, buildings & equipment to cary on if they choose, I don't believe that view to be "nonsense."

In an interview, Tiger Woods was once asked his political views. He responded with a no comment, adding that he would be foolish to alienate half of his fans & sponsors.

Peace :-)

Trading Goddess said...

Elwood,

I do not see this post as "an entire bash on conservatives". I see a lot of references to factual articles, which appeals to my logical side of the brain.

And I didn't say that callng someone a "lib" was name calling - I just didn't appreciate the Anonymous person's way of phrasing his comment.

This is not my post, and other than asking people to vote, I have never made my political views known.

I rarely talk politics, and religion as well, simply for the fact that not too many people can do it respectfully, and with the goal of a solution in mind.

And just because a person lives in the country or lives in the city, does not automatically make them right about a certain issue.

And unfortuneately, we still live in a world where there are people who couldn't care what political view Tiger Woods has - just the fact that he is African American is enough to alienate them from anything he says or does.

Peace is correct, my friend. And if you truly know me, you would realize I am all for that.

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