What Won’t Work in the Economic Slowdown Ahead

So the word on the street is that we’re taking it on the chin economically. The dollar is falling, there is talk of banks failing, gas prices and the price of goods are up, and the stock market is tanking—it’s fallen below the 12,000 mark as of this writing. The federal government and the Federal Reserve are trying several options to get us on the right track, but I don’t think it’s going to work. Let’s look at some of the numbers:

- Taking profits of oil companies won’t work. There is talk of reviving the windfall profits tax and repealing subsidies from the oil companies. Ultimately, the amount of money they pull in pales in comparison to the government’s operating budget. Oil prices at the pump are determined further up the chain. The President cannot control oil prices—the prices are set by OPEC, which some argue is a cartel (and I really don’t disagree there very much). Besides, chances are that a large segment of Americans who own a 401(k) retirement plan profit from the oil companies revenues anyway. Taking away profits probably will hurt more than help.

- Cutting Interest Rates won’t work. The Federal Reserve will be meeting soon and is expected to cut interest rates again for the 5^th time this year. What this does is makes it cheaper for banks to lend money to each other. Unfortunately, it also discourages investment in our dollar (money markets). A good example of this is the interest rate you get at your ING Direct account. Notice how it falls when the Fed cuts rates? Many people choose to move their money to a currency with a higher return on interest. When people leave the dollar, the value falls because the market will be flooded with low-interest dollars—which means it would take more money to buy things.

- Creating Money Won’t Work. The Feds also just made $100 million dollars and injected it into the market. Not because of increase in labor output or anything logical. The stock market and credit lenders needed more money to bail out their bad lending decisions and so the Feds pressed “print,” and sent the money to the banks. That does NOT improve the dollar. It’s like giving everyone a million dollars—people would be a whole less likely to work, productivity falls, and so does the worth of your money.

- Giving out $600 Checks to everybody won’ t work. We’ve talked about that here.

So, the obvious question is: What will work?

I can’t say what will work with any confidence except let the problem work itself out. It sounds callous, but I think it’s the best solution. Sometimes, it’s better to just fall rather than trying to do everything to prevent injury because you can potentially make it worse. Many people got into houses they cannot afford. These folks should be willing to (a) downgrade or (b) consider renting again until they have to funds to truly get into a house.

The government, if they do decide to borrow money, should probably focus on infrastructure improvements. As for the interest rate cuts--they should remain reasonable and not in response to when Wall Street stomps their feet. Rates have been cut several times this year, and we’re not even through the first quarter yet as cuts are expected to continue. I’m not ready to embrace Ron Paul’s Gold Standard idea yet, but I may look into it.