Federal Reserve Cuts Rates but Repeating Same Mistakes of 1929-1930

The Federal Reserve cut interest rates once again this week but by just 1/4 of a point and the timid move was greeted with a large sell-off on Wall Street. As disappointing as the small move was the most disturbing thing was contained in the Federal Reserve’s official statement about the move.

“Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.”

This Federal Reserve statement is eerily similar to what the Federal Reserve members were saying back in 1929-1930, when the Federal Reserve refused to replace the money that was continually being written off by financial institutions. As asset prices plummeted the Federal Reserve kept saying they did not want to create any money in the economy because that might cause inflation.

When financial institutions are continually writing down assets and taking losses money is lost from the economy. When money is being lost in the economy the threat of inflation is non-existent. You cannot have inflation in the face of massive asset write-downs. Yet here we have an official statement from the Federal Reserve in which they are talking about inflation at a time when financial institutions are taking massive write-downs.

The statement shows just how clueless the people running the Federal Reserve are. How can you be talking about inflation in the face of the massive deflation taking place in the housing sector? Deflation that is forcing financial institutions to take ever larger write-downs which means money is being lost in the economy.

Back in 1929-1930 the Federal Reserve took timid steps to staunch the asset write-downs which were continually taking place in ever larger amounts. The Federal Reserve took timid steps because they feared they would be causing inflation if they reacted strongly and replaced the money lost in the economy. The Great Depression ensued causing misery for everyone in the country. The massive write-down of assets that took place at the time caused massive deflation in the economy. Had the Federal Reserve taken strong action and replaced the money lost in the economy from the massive asset write-downs taken by financial institutions the Great Depression would never have happened and such action would not have caused inflation.

For anyone to be talking about inflation at a time when financial institutions are taking large write-downs is ludicrous and historically inaccurate. Yet that is exactly what the Federal Reserve is doing. If the people running the Federal Reserve do not wake up and realize what is really happening in the economy we could see the same type of economic devastation that took place during the Great Depression.

Those who ignore the past are doomed to repeat it and right now the Federal Reserve is clearly ignoring the past by talking about inflation at a time when money is being lost in the economy from ever larger write-downs.