If there is a worse job in the financial world at this moment than being the Chairman of the Federal Reserve, I cannot think what it might be. The latest minutes show that the economy is on the verge of having to deal with a condition that was said to be highly unlikely.
The combination of rising commodity prices and a weak economic environment is leading us into stagflation, an economic condition that has not existed in the U.S. since the 1970s. The question at this point is what is left for the Fed to do to combat it, and what can investors do to protect their capital.
The Fed's Empty Holster
With regard to combating stagflation, the Fed is pretty much out of bullets at this point. The aggressive rate reductions have accomplished nothing beyond saving a few investment and commercial banks from what some might observe would be a well deserved extinction.
On Main Street, people are still losing their jobs, while food and energy costs continue to climb. The cuts did not fix the real estate market or invigorate the economy. They did not even bring mortgage rates down. Now the government looks for the much-ballyhooed stimulus checks to save the day. Somehow, I suspect those paltry sums go to the grocer, the gas pump and to catch up past-due car and credit-card payments.
They cannot really raise rates to fight off inflation either. Even the Fed governors acknowledge that growth will slow and unemployment will climb. It would not work anyway. Demand from other nations is driving prices for commodities and energy far more than at any time in the past. India and China are still growing at very rapid rates and are starting to develop more of a middle class than at any other time in economic history.
Tim Melvin
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