Green Retirement Blog

High oil and gasoline prices, are causing price inflation across many sectors of the economy, negatively affecting the incomes of retirees. From food to fuel and everything in between, retirees and everyone else are paying more, while incomes from salaries and retirement savings remain stagnant. This situation may be about to change. Recent developments suggest that the Federal Reserve, may be forced voluntarily or involuntarily, to raise interest rates in an effort (once again) to save the economy.

Last August during the sub-prime mortgage meltdown, even though rising inflation due to higher oil prices could be seen affecting the economy, the Federal Reserve was forced to abandon standard monetary policy and lower interest rates, in an effort to prevent the collapse of the banking industry and with it the economy. This necessary action caused the dollar to drop even further, the price of oil to rise even higher, and inflation to get worse. The actions of the Fed affected not only our economy, but also the world-wide economic situation, causing food riots and work stoppages across the globe.

At the time, China, the Arabs, and the European Central Banks, stepped in and injected hundreds of billions of dollars into our stock and bond markets. None of them could afford the collapse of the world’s largest economy, if the U.S. economy had collapsed last August, the result would have been a world-wide economic depression not seen since the 1930’s. This infusion of foreign capital was made and continues to be made, to not only keep the world-wide economy going, but also to buy time for the U.S to reform and repair it’s economic situation.

The patience and money of all three of these players, to keep our mis-managed and corrupt economy going, may be coming to an end. Our creditors, China, the Arabs, and the European Union, who combined hold trillions of dollars of our debt, are growing steadily unhappy with our in-ability to get our economic house in order.

In the past few weeks, China has lectured the U.S. on how to manage our economy, the European Central Bank has threatened to raise interest rates, and Saudi Arabia held a conference blaming speculators for the high price of oil. If any or all, of these three players decide to pressure the U.S. Government into reforming it’s economy, by reducing their purchases of U.S. Treasuries (or if the European Central Bank dramatically raises their rates), then the Federal Reserve will be forced to raise interest rates.

The Federal Reserve may be forced into raising interest rates even before the world’s patience runs out. We have yet to feel the effects of $140 per barrel oil, their is a lag between the price of oil and product prices, which means inflation is going to get worse. Translating into more transportation and other industry layoffs, lower corporate profits, and even lower consumer confidence.

Their are three reasons why the Federal Reserve may be set to raise interest rates.

1) When the Federal Reserve follows standard economic policy, their reaction to higher inflation, is to raise interest rates. At some point, the Federal Reserve needs to return to standard economic policy, or risk causing even greater damage to the economy.

2) As I mentioned earlier, the Fed abandoned this policy, in an effort to save investment banks from going under due to the sub-prime housing bubble. Unfortunately, many of the same investment banks who were responsible for the housing bubble, through their hedge funds, are responsible for the ever growing oil speculation bubble. The Federal Reserve may not want to wait for another bubble to burst, and this time around, it may seek to instill some market discipline.

3) The Federal Reserve has the power to lower the price of oil. It can do this by strengthening the dollar, oil is priced in dollars, and raising interest rates will increase the value of the dollar. Lowering the price of oil will reduce inflation.

So far, the Federal Reserve has acted to protect the interests of the investment banks and Wall Street, at the expense of the overall economy. The investment banks have had nine months to clean up their balance sheets, the credit crisis is largely over, and so the federal reserve may soon decide to return to their normal policy of fighting inflation and recession.

If the Federal Reserve does decide to begin raising interest rates, as they should, then retirees will be the main beneficiaries of higher incomes and lower inflation. If they don’t, then the economy could enter into a long period of stagflation, which means no growth and high inflation. Let us see how the Fed responds. However, their are signs of hope for the millions of retired Americans who have suffered over the past year, that voluntarily or involuntarily, the Federal Reserve will begin taking the right actions and bring relief to Americans and their retirements.

Update 9/22/08: The price of oil has fallen dramatically, and will continue to decline as world economies slow, lowering overall inflation.  Inflation relief is on the way, it will take about 6 months, for the effects of lower oil prices to be felt.