Monday, January 21, 2008

Fix the Damn Dollar

Justice does exist in the world, whether people choose to practice it or not. The men of ability are being avenged. The avenger is reality. Its weapon is slow, silent, invisible, and men perceive it only by its consequences—by the gutted ruins and the moans of agony it leaves in its wake. The name of the weapon is: inflation. - Ayn Rand, Egalitarianism and Inflation

And the Republican administration is supposed to be a friend of capitalism? Steve Forbes has another great editorial, "Bush's Big Boo Boo" from this week's edition of Forbes. Boo boo is putting it mildly. The looming recession is a complete result of mishandled monetary policy, and another glaring reason why the free market should be running monetary policy, not the central bank.

In a thesis that Forbes has been pounding for over two years, he asserts that the Fed is creating inflationary pressure by injecting more credit into the economy. Voila, $100/barrel oil! Excess liquidity means speculation; voila, sub-prime housing market. Devalued assets means fire sales for foreign investors; voila foreign bank bail-outs in return for equity stakes. His best indicator for this phenomena the last few years? Gold. It's price has shot up more than two fold in the last two years. There is nothing else to explain this except inflation, pure and simple.

With it, oil has doubled from $50 to $100/barrel reeking havoc with more than just gasoline. My industry, the petrochemical industry, is heavily dependant on oil as a major feedstock, and this industry feeds all the major industries, plastics, construction, personal care, etc. Rising feedstock costs disrupt operations and throw supply demand balances out of whack causing diversion of time and effort simply to keep up pricing with costs.

Temporary stimulus packages such as the President is proposing will not do any good. There is only one solution and that is to slowly mop up the excess liquidity in the market and fix the currency. This is not a quick fix, but it is the only one.

If I had to choose at this point, I think a competent enemy is sometimes not as bad as an incompetent "friend" of capitalism. At least I watch the enemy closer and don't let him play with the really dangerous toys.


evanescent said...

Great post. I was discussing this today with work colleagues over lunch. When will people realise that government meddling with the market is the cause of these sort of problems, not the cure?!

Rational Jenn said...

Awesome! We are looking at some craziness in the future for certain.

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