Economic policy turns out hurtful

  Whenever an action is taken to help a situation, one has to be careful that it does not actually worsen another situation. One has only to look at the current economic downturn and the higher prices being paid for things like gasoline and food to see the validity of that statement.

  I am, of course, aware of the separate elements of the downturn and prices. Most of us are experiencing it on a very personal level as we fill our gas tanks, shop for food and cut back on unnecessary spending.

  What I didn't fully realize until the other day was the connecting points that helped explain what is happening.

  I was listening to a market analyst talk about the commodities market - something that I find hard to understand - and how the decision by U.S. officials to soften the fall of the U.S. economy by lowering interest rates had actually hurt consumers.

  The primary way the Federal Reserve uses to attempt to control our economy is to either raise or lower interest rates. Frankly, I consider it akin to voodoo, as probably do many Americans, but economists claim it works to prevent inflation, shore up a declining economy or to encourage economic growth.

  One of the more direct impacts is supposed to be on the availability of money and the ability to loan it. But it also has an impact on the commodities market, I learned.

  The Fed has repeatedly lowered the U.S. interest rate that banks use - it did so this week for the seventh consecutive time since September - to try to keep the economy from declining even further and to shore up a disastrous housing market. The idea is to make money more available for lending and thus to stimulate investment and the housing market.

  As is readily apparent by consumer pessimism and continued talk of a recession, it has made little difference. Even with lower interest rates, it is difficult to get a loan because loan qualification rules have been tightened in the wake of a stream of foreclosures caused by bad lending practices in recent years. The slow economy also makes businesses more leery of investment.

  What it has done, however, is increase the cost of gasoline and certain other products U.S. consumers buy. As the Fed has lowered interest rates, the value of the dollar has also declined. That has a very direct impact on consumers.

  We essentially can buy less with our dollar while those who have other currencies can buy more. That is why we had so many Canadian winter visitors here this winter in comparison with recent years when our dollar was stronger. Their higher-value money meant it was a good deal for them to visit. There were in effect paying less than they would have otherwise.

  The same isn't true of U.S. consumers. They are paying more for many goods, especially those from other countries with stronger currencies, because the dollar is worth less.

  One of those things is gasoline. The price of petroleum in world trade has traditionally been determined based on the U.S. dollar. If the dollar is worth less, then it takes more of them to buy a barrel of oil. Thus, we have part of the reason we are paying so much more for gasoline and all the things impacted by the price of fuel.

  Another apparent impact of the interest rate cuts, one which I frankly don't understand that well, is on speculation in the commodities market.

  Commodities are "traded" in something like a stock market. Investors in effect "gamble" on their purchase of a future commodity "contract" being worth more when the product actually goes to market. If it is less, they lose.

  Apparently, when the Fed establishes a predictable schedule or interest rate cuts - each of which lowers the value of the dollar - it makes this commodities "bet" more attractive and encourages commodities speculation. That in turn increases the price of the commodities, including farm products, for consumers.

  Whatever the mechanics of the Fed's arcane economic practices and the vagaries of commodities speculation, what is clear is that while the rate cuts had a worthy goal - protecting the U.S. economy - they had the corollary impact of making things worse for some segments of society, especially consumers.

  Economic policy is complicated because the dynamics of the marketplace are complicated. There are many related components, each impacting the other. That is why many of us have a hard time understanding it, and why economists spend lifetimes studying it. Some like to view it as a science - if you do this, then this will happen. That really isn't true.

  When the government tries to control the economy, even with the best of intentions, it inevitably causes ripples that impact people. There are always winners and losers. Every time the government pushes the balloon in on one side, a bulge appears on the other.

  History has demonstrated repeatedly that government control of the economy and marketplace simply doesn't work - except perhaps for the special interest groups the government wants to help.
  The economy needs to be left alone to adjust on its own.

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Terry Ross is editor of The Sun. E-mail him at tross@yumasun.com or phone him at 539-6870.