So the market suffered a pretty serious decline at the beginning of this week. And once again, the Fed used their all-powerful control over interest rates to balance the drop. I understand that a balancing force like the Fed does encourage investment by reducing the risk to investors of a sudden drop like the one that triggered the Great Depression. However, it also tends to mask the underlying issues behind market declines like we saw this week. Chief among these is the fact that the US dollar continues to fall compared to foreign currencies, which may be a sign of a weakening economy. This devaluation of our currency also hurts our buying power in the world market. Of course, it also means we may finally start balancing our trade deficit by exporting more. And that could be a very good thing for portions of the market.

Still, I can’t help but think that the optimism of some on Wall Street about the market’s ability to rebound is a bit unrealistic when you look at government fiscal policy. As we continue to run up our national debt by borrowing money to fund foreign activities and domestic welfare programs, our national fiscal crisis becomes ever more dire. While this may not seriously affect the marketplace right now, I do not think it bodes well for the future. Our national debt is currently over $9 trillion and growing, and one must wonder how the government will ever pay this off. I can think of a few possibilities, only one of which could benefit the economy.

One is that we print more money at a faster rate, driving up inflation and thus devaluing our currency and the savings of the middle class. As the Germans experienced after WWI, this is hardly a solution. This wouldn’t necessarily hit any part of the market especially hard, but the value of the shares in general would decrease.

Another option is that we could increase taxes, most likely on wealthy corporations and individuals. While this wouldn’t necessarily devalue the dollar, it would directly cut into the bottom line of US companies, reducing their profitability and thus their market value.

Finally, we could significantly reduce spending at the Federal level, cutting welfare benefits and adopting a less aggressive foreign policy. Although the immediate consequence would hurt those companies and individuals who depend on government contracts or handouts, it wouldn’t otherwise hurt the market as a whole. And the longer term consequence, rather than depress the economy, would be to fuel it. Once the debt is finally paid off, federal taxes could be reduced to the level needed to sustain the new, smaller, budget. And that would directly grow the profitability of US companies, and thus their market value. Not to mention increase the take-home pay of average Americans, which would fuel the economy even more once it is spent or invested.

Today the US Congress approved a $150 billion stimulus package to try to ease the recession that we seem to be heading toward. While the market will probably respond well to this, as it did to the interest rate cut, this “solution” is again temporary and does nothing to resolve the fundamental problem responsible for much of this country’s economic problems: a staggering national debt that currently shows no sign of shrinking.