Wednesday, February 18, 2009

Fed Recognizes Sharp Contraction in Economy!

from The Wall Street Journal
Feb. 18, 2009

Citing a "continued sharp contraction in real economic activity," the Federal Open Market Committee on Wednesday said it is expecting GDP to contract by up to 1.3% in 2009, a larger drop than it had forecast in October.

The Fed's latest projections also show the FOMC expects unemployment this year could rise as high as 8.8%, higher than its October projection of 7.1% to 7.6%. January's unemployment rate hit 7.6%, according to the Labor Department.

Separately, the Fed said in the minutes from its meeting Jan. 27 and 28 that members saw no indication that the housing sector was beginning to stabilize.
First, who cares what the Fed is forecasting? Does it really matter what they are forecasting?

Second, the Fed caused the recession in the first place by making it possible for literally millions of people to buy houses they couldn't afford. The Fed did this by expanding credit and the money supply beyond all reasonable correspondence to real economic possibilities. The Fed had the help of Congress, which did everything but hold a gun to the heads of bankers and near banks to get them to extend mortgage loans to people who couldn't afford to buy a house. But you have heard all this before, right?

Third, why would the housing sector improve? The government and the Fed are doing everything they can think of to keep housing prices from falling further. Until the over supply of houses on the market diminishes, the housing market cannot improve. What can bring supply of housing back into balance with demand for housing?

The demand for housing will have to increase, since the supply of housing is already in place at too large a quantity. What will increase the demand for housing? Lower real prices, or inflation so rampant that the elevated nominal prices of housing are lower, after adjusting for inflation.

Inflation is the friend of the federal government. It's also your friend, so long as your income can keep up with the rise in the average level of prices, and so long as your investment portfolio is inflation-protected. Do you fit into that category? Me neither.

Inflation is a tax on every dollar you hold, and on every dollar-denominated asset you own whose value does not keep up with inflation. Enjoy your tax, especially if you voted for the same member of Congress in your district who has been in office for more than four years.

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