Newspaper article THE JOURNAL RECORD

The Fed's Other Concern

Newspaper article THE JOURNAL RECORD

The Fed's Other Concern

Article excerpt

Certain conclusions may be derived from the tea leaves of economic statistics, and one is that the American consumer is really not very afraid of the Fed.

This is in marked contrast to the fear that seizes the business and investment community every time the Federal Reserve meets to consider whether or not to raise interest rates again. Consumers, however, just go to the mall and assuage their anxieties by buying more goods and services, spending not just their paychecks, which have been rising, but borrowing more as well.

It has become a very bad habit, persisting month after month in spite of warnings that excessive demand, such as they have been demonstrating, eventually drives up prices and borrowing rates.

The lesson the Fed has been trying to drive home, via six interest rates increases in the past 14 months, is that such behavior is self-defeating, and that for heaven's sake save something.

It falls not so much on deaf ears as on a consumer spirit that seems to believe good times are eternal and that, besides, why should I save when my stocks are doing the saving for me.

Well, says the Fed, for this reason: Dig deep down into the mysteries of finance and you'll find that savings are the foundation of good economic times. They are the fuel that finances growth.

The consumer senses that this couldn't be true because the economy seems to be doing pretty well, even if the July savings rates fell to its lowest rate ever, a negative 0.2 percent.

If they think about the problem at all, consumers dismiss fears by watching the economy continue its uninterrupted growth month after month, year after year, even as savings disappear. What's overlooked here is nothing less than the rest of the world, from which the United States is, in effect, borrowing to maintain its vigorous economy.

It goes this way: The American economy imports far more than it exports, something like an annual rate of nearly $400 billion a year. …

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