The FED had been under increasing pressure from Wall Street and investment lobbies to again further cheapen our money by lowering interest rates—making credit (as in DEBT) more “affordable.” This makes no sense as the recent dip in share prices were about 8% off the all-time record high for the obscenely inflated Dow Jones Industrials (at 14,121)—which were still up (at the time of the rate cut) by almost 6.5% since the first of this year alone. The cut did little to help households being squished under the burden(s) of their credit card obligations and their resetting sub-prime mortgages, but it immediately sent the Dow upward to within 2.5% of the all time high – working faster than “the little blue pill.” Like that “little blue pill” taken to remedy another deflationary problem, the effects will soon wear off.
Chairman Bernanke and the Board of Governors of the FED were put in an untenable situation—which spinning propaganda lie would they tacitly admit was a falsehood, and which would they continue to sweep under the rug? For months they have denied both sides of the coin by keeping the rates static. By raising rates, they would have admitted that true inflation was a problem, and was far above the officially spun/hyped 2.5 to 3% anyone who buys stuff knows to be total hooey. A rate increase was really justified, but that would have exacerbated the housing bubble, credit bubble, and deficit(s) bubble.
By cutting rates, – even by a quarter-point, not the draconian a half-point they chose – the FED was admitting that the housing bubble/sub-prime lending/CDO derivative mess was a gargantuan problem that was threatening to bring down our entire system. Those myths/falsehoods that this was no BIGGIE were put to rest once and for all! While it was possible to ignore the freezes in liquidating investments in real estate and their derivatives faced here by US investors, queues of depositors lining up outside trying to withdraw deposits in the UK (and elsewhere) were just too juicy a video clip, but even those were never aired here – we got OJ and Britney footage instead. The FED acted to stem the tide (for the moment). It was a choice that would adversely affect the US dollar. It was an act of futility, desperation, and panic. What next from the FED? Another decrease? Or, a reversal with a rate increase?
From the moment of the rate decrease; equities rallied, bonds declined, and the dollar continued its descent relative to other currencies. A EURO which cost $ .89 at its origin in 1999 now costs a record $1.41. A British Pound is now over $2.00. The Canadian $ (which BTW is called a “loonie”) is now at parity with the US buck for the first time in over 30 years – and rising. So what, you might ask? A cheap dollar may make our exports a bargain, but it will also make our imports more costly. This country runs on energy - over two-thirds of which is imported. Every fractional drop in the buck is immediately reflected by a rise in “the dollar price” of crude and distillates. If you believe the short term answer to escalating cost of foreign made goods is to “buy American,” ask yourself this question: “Just what do we still make here right now?” I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.