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How State Taxes Put a Bigger Pinch on the PoorWhile it is being reported the Fed Not Expected to Change Key Rate from the 5.25% level it has maintained for over a year now, I feel that eventually Federal Reserve Chairman Ben Bernanke and fellow Board members might have no choice but to raise rates.
Yes, that would hurt the housing industry further and other major sectors of the economy would feel the pinch. Naturally, this would affect corporate earnings and the stock market too. The Fed is the self-proclaimed inflation hawk that has made its priorities well known. However, if other countries raise their rates (as they have been), we may have no choice but to follow suit. If we do not, then we will have to print money to make up for the lack of borrowing power via treasury notes. While both borrowing and running the printing presses are inflationary, the latter solution is more so in the short term, because with notes the government only prints money to pay the interest on the debt.
According to an article published on June 15 by the Economic Policy Institute entitled U.S. current account deficits contributing to surging long-term interest rates:
- Falling purchases of U.S. treasuries, which could sharply increase U.S. interest rates, might reduce trade deficits by pitching the economy into a recession. A goal of U.S. policy should be to persuade China to stop manipulating its currency so that continued disruption of financial markets and of the U.S. and world economies can be prevented.
While the article makes some great points and backs my view that rates are going up not down, the blaming of China for our woes discussed in the article leaves out a few points. While China may be manipulating its currency, how is this whole discussion different as it relates to us and other countries manipulating our own currencies. After all, what is the changing of rates, printing money (or not), regulating markets and more all about?
The other issue that is ignored is that the booming world economy over the past five years is due in large part to the growth of the Chinese economy. If the Chinese make major shifts in their currency policies and it affects their economy, the whole world may find they do not like the results of that either. In addition to our rates going up, we are going to see the value of the dollar fall further. I believe the same will be true of the euro as well, as emerging economies simply continue to out-produce older economies. They simply produce more for less, and there is no fix for that except devaluation.
Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.
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Reader Comments (Page 1 of 1)
6-27-2007 @ 12:08PM
Frank said...
Raise interest rates? When it comes to dealing with a recession vs. raising rates, the Fed will choose to lower rates every time. Basically we now have an economy in the USA that will totally stall out at 7% 10 year note interest rates. there is no way the Fed would risk slipping from a slow-growth to a below-growth situation.
6-27-2007 @ 12:25PM
Sheldon L said...
Frank,
Your comments are quite rational. But just for discussion how big do you think the interest rate gap can get before the Fed would have to raise rates to keep pace with foreign bonds?
6-28-2007 @ 9:15PM
Mr. noitall said...
Didn't I tell you the Chinese would stop buying our treasuries? Now we're seeing that happen.
I also think the dollar will get weaker, but not the Euro, a good number of those emerging economies are now part of the European market, the Euro is their currency.
8-28-2007 @ 10:18PM
Maks said...
Mr Liber, you are wrong because raising interest rates leads to less circulating money on the market, no one will borrow money when rates are high but they will bring them to the bank.