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We are playing a very dangerous game with fiscal policy

Dangerous Fed Monetary Policy


By —— Bio and Archives--January 6, 2019

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Dangerous Fed Monetary PolicyI came across this chart and felt it important to share. The exchange rate between the U.S. dollar and the Mexican Peso remained almost constant until the implementation of NAFTA in 1994. Look what that did:

US MEXICO EXCHANGE RATE

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In November of 1993 the dollar was worth just a hair over three pesos. Now it is worth 19.42.

Weak money means imported goods cost more BUT exports cost less - thus encouraging sales. So what has Mexico been doing since NAFTA was implemented? Inflating their currency so as to reduce what they buy from us and sell us a lot more Mexican-made goods (thus costing America jobs) while funding government programs. It’s been very good for them; they have been profiting at our expense.

If we had retained certain trade barriers and tariffs this would never have happened. How many factories have been outsourced south of the border? Labor is cheap there, the auto worker’s union isn’t squeezing company profits, and materials can be had for less money. No wonder we have had such a sucking sound from what is now called the “rust belt” - the place that used to be the industrial heart of America and home of the middle class. These used to be solid Democrats, but now they are starting to flip, because the Democrats have thrown in their lot with Mexicans and others from outside of the country.

Remember, Bill Clinton spearheaded NAFTA, although George W. Bush was a big fan. Bush was a Republican, and the top echelon of the GOP continues to support the fleecing of the United States.

Also, look at the tail of the graph; since 2016 the peso has grown stronger. This coincides with the end of the Obama era and the beginning of the Trump Presidency. Love him or hate him, Trump has made it his mission to renegotiate all of these international deals, and he has effectively killed off NAFTA. It was this artificial market that was depressing the value of the peso.

And it’s not as though the U.S. pursued a strong dollar policy in the last twenty years; quite the opposite.

The dollar index - the value of the U.S. dollar against foreign currency - has fallen 2.5% this year. Now that is partly because of events outside our control, like foreign countries tying their currency to the Yen or Euro or whatnot. But it is also a function of strong economic growth worldwide; other countries are enjoying ramped up markets that are inflating the value of their currency. Also, Trump’s hard stance on China and other nations that artificially manipulate currency have led to stronger currencies there, leading to a falling dollar. But the point is, if we were in danger of an economy “overheating” which is the justification for the Federal Reserve to keep raising interest rates we would see a stronger dollar, not a weaker one. A strong economy means a strong dollar.

So why is the Fed raising interest rates while the dollar is falling? That is exactly the opposite of what they should do. A stronger dollar leads to more volatility in the stock market because it reduces the value of international profits and sales. We have a weakening dollar but a lot of market volatility these days because the Fed keeps raising rates. Why are they doing this?

Take a look at this graph

US DOLLAR INDEX:

 

Fed monetary policy

The dollar hasn’t been this strong since 2003. And most of this rise has been

Fed monetary policy was very similar to this in 1929. for instance:

The Fed had in fact been pursuing a tighter monetary policy since the spring of 1928 and continued this policy until the stock market collapse of October of 1929.

If we look at the discount rate the Federal Reserve Bank of New York was charging we get further evidence of this pursuit of tight monetary policy. In 1926 and 1927 the New York Fed’s discount was in the range of 3.5 to 4.0 percent. In 1928 it was 3.5 to 5.0 percent. Then in 1929 the range shifted upward to 4.5 to 6.0 percent. In 1930 the range fell back to 2.0 to 4.5 percent. Clearly the Fed was attempting to puncture the speculative boom in the stock market. By 1930 the New York Fed’s policy was having its effect. It must have immediately become apparent that the tight money policy was a mistake and the Fed tried to reverse the course but without much success. It was not easy to unpuncture a balloon.

And they conclude:

 

Blame for the Great Depression lies firmly with the failures of the Federal Reserve

Thus the blame for the Great Depression lies firmly with the failures of the Federal Reserve. This is a blame not only because the Fed did not take counter measures to forestall the economic decline but also that the Fed’s actions precipitated the decline in the money supply.

Once the Depression was developed the money supply was increased but that did not end the Depression. Once a balloon is punctured it is not easy to re-inflate it.

So the Feds’ actions in the last year and a half are acting to strangle the economic growth unleashed by the recent tax cuts.

Another point to ponder; the rising dollar will hurt developing economies, and the end result will be more economic immigration to the U.S. - something that serves the democratic party well, as all these newcomers will vote for the people who give them the most. Jerome Powell’s policy will help overwhelm efforts made by Trump to secure the border, and I suspect he knows it. That is why the Democrats want to raise taxes (to damage the economy and hurt Trump’s re-election chances) and at the same time strengthen the dollar, so the markets in Mexico, Central America, and elsewhere weaken and all of their unemployed try to migrate here. Oh, and if there is no wall we can’t stop them…

 

Fed is raising rates before the Administration can increase tariffs. In essence, the mother is trying to eat her own offspring

It should also be pointed out that Trump is pursuing a policy of tightening international trade and increasing tariffs - which he is using as a tool to keep other countries in line. The Fed is pursuing a 30s policy of tightening the belt right when Trump is doing the Smoot-Hawley thing. These guys are supposed to be experts and they know what this means. This is in my opinion, their way of trying to force the current administration to follow the policies of previous administrations or face ruin. I really do believe this is part of their overall strategic thinking. Congress passes Smoot-Halwy AFTER the Fed contracted the money supply and raised interest rates then, but now the Fed is raising rates before the Administration can increase tariffs. In essence, the mother is trying to eat her own offspring.

We are playing a very dangerous game with fiscal policy.

Here is more on how the Fed mismanagement could trigger another depression.


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Timothy Birdnow -- Bio and Archives | Comments

Timothy Birdnow is a conservative writer and blogger and lives in St. Louis Missouri. His work has appeared in many popular conservative publications including but not limited to The American Thinker, Pajamas Media, Intellectual Conservative and Orthodoxy Today. Tim is a featured contributor to American Daily Reviewand has appeared as a Guest Host on the Heading Right Radio Network. Tim’s website is tbirdnow.mee.nu.


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