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September 18, 2019 | Fed’s Decisions (9/18/2019): My Take and Perceptions!

Donald B. Swenson: Born January 24, 1943, Roseau, Minnesota. Graduated H.S. 1961, Moorhead High, Minnesota. Graduated College 1968, Moorhead State University, Minnesota. Designated member of Appraisal Institute (MAI), 1974. Employed with Western Life Insurance Company, 1968 – 71; Iowa Securities Company, 1971 – 73; American Appraisal Company, 1974 – 81. Part-time teacher/valuation consultant/bartender, 1979 – 2008 (taught workshops at Waukesha County Technical Institute, Wi. and Madison Area Technical College, Wi.). Retired 2008 (part time teacher/blogger), AZ. Self educated economist/philosopher/theologian: http://kingdomecon.wordpress.com.

Jerome Powell chose to lower the Fed Funds interest rate by 0.25%. He also suggested that ‘organic’ growth in the Fed’s balance sheet should be expected. This means more QE (official counterfeiting of the dollar) to assure that rates stay low and liquidity grows within the marketplace. What is my take on all this change?

My view is that our general economy is heading for more deflation as the lower interest rates will allow America to import at lower prices (in relative terms). In relative terms our interest rates are much higher than Europe or China and this means that imports could grow even as exports decline. A decline in exports means a higher trade deficit going forward. This also means higher deficits for the government (watch: http://www.usdebtclock.org) for these changes.

The relative trade balance (deficits) will grow for the time being. Mr. Trump may not like this result. Deflation means that consumers should benefit from the recent actions of our Fed (as many prices will decline). Temporarily, this may help with consumer demand but all this will not benefit the trend which is a slow-down in our overall global economy.

The bigger issue, however, is that deflation will slow price increases and increase debt defaults (by year-end). The general economy (globally) is slowing even as the American economy benefits from temporary price declines. All this change, however, is not positive for the longer term. Deflation will slow our economy (especially real estate and manufacturing). This means that our Fed will likely increase QE in a few weeks as our bubble markets start to deflate.

My sense is that our Fed will need to increase QE (substantially) by year-end and further rate declines are likely. As I write, Europe is slowing, China is slowing, Latin America is slowing, Australia is slowing, and Africa is slowing. The Baltic Dry Index is slowing (reversing) and the demand for copper is revealing that demand is slowing (globally). Why is deflation emerging?

Deflation emerges as demand declines in relative terms. At the margin, demand is slowing and inventories are increasing. This means that price declines will continue for the time being. At some point our Central Banks may resort to huge QE operations so as to pump up demand. When the Fed says that they desire ‘organic’ growth in their balance sheet this means that they plan more official counterfeiting of the dollar soon.

Basically, all is calm for the time being as relative demand is still keeping prices stable and lending for growth continues. It may take a couple more months before our Fed recognizes the consequences of their decisions. Deflation is a danger if this continues. Keynesian economics is based upon demand increases, borrowing growth, and higher real estate prices. The canary in the coal mine could be the real estate sector. Watch this sector going forward.

If real estate starts to crash (in value) then consumer demand will also slow substantially. Can the Fed balance all these factors continually? My sense is that they can’t. The cycle for this bubble economy is changing fast and I expect the American economy to recognize this situation in a few weeks. Have a good day! Watch sales and the real estate sector. I am: https://kingdomecon.wordpress.com.

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September 18th, 2019

Posted In: Kingdom Economics

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