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Economic fixes and unintended consequences

March 17, 2008 12:00:00 AM PDT
President Bush said it: We are in challenging times. Challenges include a weak dollar, soaring oil prices and the near-collapse of one of Wall Street's biggest banks. To meet those challenges, federal officials are making bold economic moves, but how will they affect you and your budget? Cause and effect: Do one thing and it affects something else. In this case, the Federal Reserve is trying to stimulate the economy with money and lower interest rates. But in doing that consumers are going to feel the effects in the wallet.

It is a Catch-22 for the feds. Infuse more money into the economy to get it jump started, and that causes the dollar to lose its buying power. In fact Monday, the buck fell to a record low against the euro. That means consumers can soon expect higher prices on all sorts of products.

Thinking of buying a new car? If it's a European model you may soon be paying more.

"The Germans in particular are seeing their wage rates compared to American rates, when you put the currency flows into the mix, just skyrocketing," said Chris Woodyard, USA Today automotive writer. "The Germans are facing much higher costs in some cases, so that's putting pressure on them."

And the same price hikes could be true for European clothing, handbags, antiques, beer and wine.

The dollar is also taking a beating against the Japanese yen, now at its lowest level in 12 years.

So expect televisions and other high-tech devices made in Japan to get new, higher prices in the coming year.

And as if home construction wasn't already suffering, the lumber it takes to build a house will get more expensive because most of it comes from Canada, and the dollar is not trading well against the Canadian looney either.

The feds are affecting the price of bread, pizza, cereal, anything made with wheat.

Federal incentives to grow corn for ethanol means wheat fields are shrinking. But not the prices. They have more than tripled.

"My salesmen told me, you know, next week or next month, [prices will] go up to $60 for 25 pounds, 50 pounds of wheat," said bakery owner Julian Bohbot. "It's ridiculous."

And as much as the economy needs the bread, so do those nearing retirement. Tuesday, the feds are expected to lower interest rates again.

While that may stimulate the economy, it does nothing for your investments with fixed rates of return like CD's and money market accounts. Just a couple of months ago you could have gotten at least 5 percent interest, if not more. With a $50,000 nest egg, you would have made about $2,500 in interest. When the feds lower rates again Tuesday you'll be lucky to get 2 and a half percent, so your investment will return only $1,250 a year. Half as much as before.

Meantime the price of a barrel of oil continues to set records and so does the fuel you buy at the pump.

According to the Auto Club, the price of a gallon of gas in L.A. County is up 47 cents from one month ago to $3.62. In the Inland Empire it's $3.63, and in Orange County you're paying $3.57. All new records.

On the positive side of the feds lowering interest rates, you can expect home equity loan and credit-card interest rates to come down too. And there is some talk among economists that the Dow may be getting close to the bottom. In fact, the Dow was up slightly Monday.

 

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