More and more evidence is mounting that the "house of cards" economy built by George W. Bush and Alan Greenspan is coming crashing down:
Higher costs for energy and food last year pushed inflation up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas. Meanwhile, industrial output was flat in December, more evidence of a significant slowdown in the economy.
Consumer prices rose by 4.1 percent for all of 2007, up sharply from a 2.5 percent increase in 2006, the Labor Department said Wednesday. Consumers felt the pain when they filled up their gas tanks or shopped for groceries. Prices for both energy and food shot up by the largest amount since 1990.
4.1% is really a shocking inflation number. It may not sound like much but when you have millions of people living paycheck-to-paycheck that increase can be devastating. Inflation is particularly catastrophic for lower-income families who don't own assets (like stocks and real estate) whose rise in value can offset inflation. Food prices went up by even more.
Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.
And wages are not keeping up:
Workers' wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the biggest setback since a 1.5 percent fall in 2005.
The situation is actually worse than these inflation numbers show because the government has a vested interest in skewing these numbers to the downside so they can keep their jobs.
In response to these numbers it appears that Congress is trying to put together a stimulus package to give a boost to the economy. But therein lies the problem. For the last 7 years, the government has poured massive amounts of stimulants into the economy. There were the Bush tax cuts coupled with massive deficit spending partly as a result of the fiasco in Iraq. At the same time, the Fed printed dollars madly and encouraged lower interest rates which led to the housing bubble and a crash in the value of the dollar.
Now, it appears they have run out of ammunition. Further cuts in interest rates or increases in deficit spending could give a further boost to inflation. The more the government tries to fix things the worse they get. What we've learned over the last 7 years is that we can postpone recessions but we can't avoid them. They are a natural part of the business cycle and are needed especially after the excesses we have seen. By pumping the economy full of artificial stimulus all we have done is ensured that the recession will be deeper and longer than it otherwise might have been.
And, of course, I could be completely wrong. We are talking about economics here. It's just the way I see it.
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