Economic Gloom

The Federal Reserve Bank’s usual treatment for a recession is to lower interest rates. In six months or so the effect of the rate cuts are felt throughout the economy and the recession eases or disappears. It seems to work well, and the Fed has been reasonably successful through the years in dealing with recessions. A few years ago, though, the Fed cut and cut and cut, and when all the cuts were felt we had superheated growth, and inflation jumped up. Inflation is manageable though by raising rates, so the Fed did that and took the heat out of inflation growth.

This time as we enter a recession, however, the process is not so simple. The massive deficits we have had the last few years have driven down the value of the dollar to an alarming extent. The Euro is worth more than $1.50, the British pound is over two dollars, and even the Canadian dollar is worth more than ours. To buy crude oil we now spend about half again what we spent in the past, and the high oil prices are causing us to have high production and transportation costs, leading to high food prices, and more inflation. Normally the Fed raises interest rates to combat inflation, but with the recession staring us in the face, they won’t do that. If the Fed cuts interest rates to fight the recession, the dollar slides down even further, and imported goods, like crude oil, cost even more, and inflation grows as the economy is in recession.

Add to these problems the sub-prime mortgage losses in the credit markets, the potential for more runs on financial institutions like the one on Bear Stearns last week, and the situation gets very precarious.

If you read the current editorials, or follow the financial news closely, you know our economic situation is becoming a nightmare. How we weather this is uncertain and for the astute among you, even terrifying.

I have no advice to give. Hang on and hope is the best I can say.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.