Are you stimulated yet?

The Fed, apparently, believes we've been stimulated enough, and finally has ended it's orgy of rate cutting. A hint that interest rates might even be going up in the not too distant future was enough to panic the stock market into bear country, although word of more write-downs by major banks certainly contributed to that panic.

Consumer spending has been flat at best, despite $152,000,000,000 in stimulus checks -- and even the habitual optimists are expecting the current economic malaise to be with us for another three quarters. At the same time, higher rates of inflation are inevitable as ballooning energy costs are passed along by businesses to their customers. What's a Fed governor to do?

The answer, apparently, is to try to restrain inflation rather than trying to goose a little more life into a moribund economy. As we learned in the seventies, monetary policy is not particularly good for addressing stagflation, so you address the greater threat.

Yes, yes, I know! There's no wage-price spiral this time, so we won't be getting the double-digit inflation of the seventies, and so I shouldn't be characterizing the current mess as stagflation -- but what else do you call simultaneous recession and inflation? Ralph?

Whatever you call it, the pain is likely to be the same. In the seventies, at least the union workers -- the wage part of the wage-price spiral -- were managing to stay even. This time, the inflationary pressures won't come from wages, and the pain of higher prices may be distributed more equitably. After thirty years of contraction, the unions still with us don't have much bargaining power left. Lately, all labor seems able to do is trade wages and benefits for a little more job security -- then discover that the "job security" was an illusion all along.

Along with energy, the force driving inflation this time will be the futures markets -- not because "speculators" are out of control, but because investors are looking for safer places to put their money than the stock market. If somebody is willing to pay 75 bucks for a pork belly delivered in August, you can bet that come August bacon will cost more.

When the banks finally are finished writing down all the bad loans, and house prices have bottomed out, and the wave of personal and business bankruptcies subsides, things will get better. Higher interest rates and higher credit standards will restore some value to the dollar, and people will learn to get by on a lot less gasoline. Until then, we just have to ride it out.