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Ok, the Fed has rolled over and committed itself to turning the US dollar into the next trash currency. The 1/2 percent basis cut today was actually defended by the Fed Board on the basis - as the CNBC crawl stated - an

expectation of inflation to moderate in coming quarters

And the crude market moved up 75 cents in the half hour after the cut, the US dollar drop almost a half a percent in the same time. And traders talked about "inflating ourselves out of this recession."

WTF? More below:

Let me give you the meme for the next three weeks:

First, commodity prices will rally. The world prices commodities in dollars. As the dollar continues to tank, the world will continue to be willing to pay what they have been paying for food in their local currency. Therefore, dollar based commodity prices will rise.

Second, as inflation becomes a concern, the yield curve - future interest rates versus current interest rates will go up. This latest Fed rate cut is likely to increase the mortgage rates and tightening of lending for mortgages. Why?

Because loose monetary policy indicates increasing risk of inflation. Increasing inflation indicates that sometime soon interest rates must go up to decrease inflation. The spread between borrowing money for two years versus ten years is now over 2.25%. The 10 year bond is trading over 4.7% and it went up on the cut. So the Fed rate cut just raised 30 year fixed mortgage rates. Boy, that will help the housing recovery. In addition, that yield curve indicates increasing inflation risk - this could potentially cause mortgage lenders to tighten their lending criteria and especially their loan to value targets now because they are looking at increasing income risks.

Other side bar, in the end, the markets noticed - the Russel 2000 - the small and medium companies that fuel the US economy are not responding. The money managers are saying "Move your money into big companies with overseas sales because the dollar tanking increases their earnings in US dollars." These companies aren't expanding, the Fed rate cuts are just making exporting your business out of the US even more valuable.

Third, the US debt will continue to increase as the economy slows down - the cut ain't going to do a damn thing about US incomes for the non-investor class. And the dropping dollar is going to make the rest of the world less interested in buying US debt. So, the shoe that will drop is:

Four, US sovereign debt rating cut threats. Do not think this is a little thing - this is the same slippery slope that killed Enron in the end, killed Argentina as an economy and basically lets the World Bank take over the steering wheel. And the meme is already being tried out in Europe:

Privatize social security, don't even think of any government single payer program for medical bills (since you can't afford it) or watch us put your economy and government budget in the dustbin.

The Fed rate cut made a lot of traders a lot of money but is, very possibly, the bullet in the head of single payer. No President will sign a single payer law if they have a memo saying do "do this and we take your AAA credit rating away."

This Fed funds rate cut was the Berlin Wall to a lot of expected progressive actions in 2009. I'm so mad I could break something.

Originally posted to tjlord on Wed Jan 30, 2008 at 11:46 AM PST.

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Comment Preferences

  •  tip jar - though it may soon be my alms cup (15+ / 0-)

    Democracy is the only form of government wherein the people receive the government they deserve.

    by tjlord on Wed Jan 30, 2008 at 11:46:52 AM PST

    •  Wall St (2+ / 0-)
      Recommended by:
      Downpuppy, AshesAllFallDown

      owned the Fed from day one.  This whole experiment has been directed to devalue  this country's currency and, therefore, labor.

      But you can't talk about a gold standard, here, I forgot.  Back to my corner.

      I want to rule this kingdom/ Make sweet the breeze now defiled/ Dethrone the evil prince's iron fists/ In velvet gloves of sin

      by aztecraingod on Wed Jan 30, 2008 at 12:09:16 PM PST

      [ Parent ]

      •  Gold standard is the correction for a Fed that (0+ / 0-)

        is not basing its changes on money growth or inflation.

        Democracy is the only form of government wherein the people receive the government they deserve.

        by tjlord on Wed Jan 30, 2008 at 12:12:30 PM PST

        [ Parent ]

      •  Other way around (0+ / 0-)

        The Fed is an independent agency of the US Government.  But, the banks have too much say in policy.  They always favor too tight a monetary policy and too low inflation. This is because they are  in the business of lending money.  Monetary  inflation benefits borrowers who pay back in cheaper dollars.

        Inflation has been very low for years.  The fed has a dual mandate, to target low inflation and unemployment,  but they've put way too much emphasis on inflation and not enough on keeping the economy strong. The current recession was clearly caused mostly by the Fed needlessly raising rates too far too fast; now they're suddenly shifting gears because they realized too late their mistake.

        Sure there were plenty of underlying problems there as well, many the fault of insufficient regulation, but the Feds heavy handed monetary policy, jacking rates up over 5%, clearly contributed.

  •  A little too chicken little (1+ / 0-)
    Recommended by:
    shigeru

    The fed was left with virtually no choice here.  The GDP number forced their hand (and it is likely that it gets revised down).  The fed knows it cannot fight the inflation we are experiencing due to foreign countries developing and bad ethanol policy and thus must try to protect growth.  AS we go down we will take the world with us, which will knock off some inflation, but without asset/wage inflation, there is little for the fed to fight.  

    •  No, the inflation is due mostly to US dollar (1+ / 0-)
      Recommended by:
      Cory Bantic

      decline (take a look over the last five years - over 50% of the commodity rise disappears if you price in Euros). The problem is that fed funds cuts have very little impact on the US economy any more - it has much more impact on the US equity markets.

      Democracy is the only form of government wherein the people receive the government they deserve.

      by tjlord on Wed Jan 30, 2008 at 12:11:28 PM PST

      [ Parent ]

      •  The yield curve means bond traders expect (5+ / 0-)

        the Fed to ultimately cut to 2%.  So far treasuries haven't slid (and I mean all the way back to their first rate cut in August).  So it supports my thesis that there will be a "respite" in the economy later this year, as the rate cuts take hold.

        Iirc, oil and gold are also up, albeit not as dramatically, in yen and euro terms.  That suggests it is indeed a commodity story, not primarily a currency story.

        I think colleague who is absent on a tropical cruise put it correctly when he said the message conveyed by the Fed is, "We are Wall Street's bitch."  Yep.

        Cheers.

        "When the going gets tough, the tough get 'too big to fail'."

        by New Deal democrat on Wed Jan 30, 2008 at 12:29:14 PM PST

        [ Parent ]

        •  That was the title I discarded from yesterday's (2+ / 0-)
          Recommended by:
          New Deal democrat, Snarcalita

          diary as a little too harsh - but it will look lovely on Ben's new leather collar.

          Democracy is the only form of government wherein the people receive the government they deserve.

          by tjlord on Wed Jan 30, 2008 at 12:39:45 PM PST

          [ Parent ]

        •  Listen to the man! (1+ / 0-)
          Recommended by:
          tjlord

          New Deal Democrat knows what he's talking about here.

          I've seen enough diaries pointing to Oil and Agricultural prices and wrongly blaming the Fed.   Our big problem here isn't monetary policy,  it's fiscal policy.  We need a new New Deal.   Keynesian economics is alive and well, whether  we chose to recognize it or not.

  •  Print more money (0+ / 0-)

    The Fed is so political.. sure there are  problems, but only time will clean them up.. The banking system is in the shambles becuase of cheap money from the Greenspan years, they all started doing things beyond making 'solid' loans to goose their balance sheets.  Bubbles should be broken before they become too large but no one wants to pull the punch bowl away, that is not politically correct..

    My opinion is that rates should have been held steady and let the system clean itself up..

    Lower interest rates aren't going to help the average Joe or Jane on Main Street.. The only one who benefits here is Wall Street..  Wall Street knows if they build a bubble big enough, the Fed will always bail them out.. When was the last time banks lowered their credit card rates..  and what do they pay on checking accounts..

    My other gripe is what about everyone who has tried to be conservative and invest in savings accounts or money market funds, what are their rewards for being prudent and cautious.. Zero benefits.. This country should be encouraging savings not penalizing people who save..  

    Inflation is under control, don't believe the spin out of Washington or the MSM.. We all need to eat and keep our homes heated, I haven't seen any relief on that side recently.. but I keep hearing oh the core rate of inflation is tame..

     

  •  Eh, they were dead long before then. (1+ / 0-)
    Recommended by:
    tjlord

    I don't see any new entitlement programs making it through in the next four years, much less universal health care.

    •  Probably just my hopes speaking n/t (0+ / 0-)

      Democracy is the only form of government wherein the people receive the government they deserve.

      by tjlord on Wed Jan 30, 2008 at 12:20:16 PM PST

      [ Parent ]

    •  Mebbe. (3+ / 0-)
      Recommended by:
      acerimusdux, scobbydube, tjlord

      Mebbe, OTOH, the PTB will get it through their thick heads that the Medicare expenses are going to break the bank -- both the government AND the private sector -- unless we do something to get a handle on medical costs across the board.  And a universal single-payer system with some RATIONAL means of rationing treatment (i.e., by hard data on cost-benefit ratios) is really the only way to do that.  As we are now, we have young mothers without prenatal care producing kids with birth defects that could have been prevented by a good vitamin supplement and will cost the community for their entire lives, while subsidized prescription insurance pays for eighty-year-olds to take Viagra along with their nitro.  Something's gotta give.

  •  MBIA not participating in the rally? (2+ / 0-)
    Recommended by:
    tjlord, Downpuppy

    Yes, MBIA is down 9% and falling. Is that the smell of a short-lived rally? Back to the reality of downgrades?
    http://finance.yahoo.com/...

    By the way, I thought the markets already "anticipated" or "priced in" the rate cuts via the sharp rise in equities from two days earlier. "Well, the Fed met our expectations so... let's buy!" Ah, but GDP was worse than expected; 0.6%, only half the prediction. A rally, still. I'm guessing it's a bear market rally, though. Too much technical damage has been done. The DOW broke the support to complete a clean head-and-shoulrders pattern and then broke the support from last February's global sell-off. I don't see stocks going much higher in the weeks ahead unless things really turn around. This month has been filled with one awful economic report after the another.

    "To be a poor man is hard, but to be a poor race in a land of dollars is the very bottom of hardships." ~W.E.B. DuBois [-7.12, -5.95] as of 09/2007

    by rovertheoctopus on Wed Jan 30, 2008 at 12:19:05 PM PST

  •  It's called Welfare Capitalism, funny how (5+ / 0-)

    Ronald Reagan never quite saw the "Welfare Queens" that rode in limousines to their Wall Street day jobs...I guess u only see what u want, huh?

  •  Bernanke's problem (2+ / 0-)
    Recommended by:
    New Deal democrat, tjlord

    Every financial crisis from Latin American debt in 1982 to the junk bond collapse of the late 80s to LTCM in 98 to the popping of the dotcom bubble in 2000 has been treated by the Fed with the same medicine: cut rates.

    So far, it has worked.  In 1982, Citibank (and thus the  entire banking system) was deep in the hole with bad Latin America debt.  Any honest accounting would have told us they were bankrupt.  But a little playing with the numbers and lower borrowing costs for the bank, it survived and prospered.  So did the banks every time their imprudent lending has come to bite them in the ass.  The Fed has come to their rescue.

    Things are a bit different now.  For one thing, inflation is growing.  Commodity prices have skyrocketed.  Look at oil, copper, wheat.  China, which had been the engine of global deflation is beginning to to show signs of inflation itself.  Greenspan had an easier ride.In his day,  globalization was fundamentaly a deflationary phenomenon.  That may well be changing.

    But even more worrying for Bernanke is our dependence on foreigners to fund our debt.  We are getting caught in a situation familiar to third world finance ministers.   REmember Thailand in 1997.  Their economy was going into recession (as ours is).  The obvious answer was to cut rates. But cutting rates put pressure to devalue the bhat.  Speculators made a fortune and dollar denominated debt in Thailand skyrocketed.

    The difference, of course, is our debt is denominated in our own currency. Still, Bernanke has a tough line to walk.  Does he continue to cut rates to avoid a recession or does he keep rates high to keep foreign confidence in the dollar.

    Bernanke, unlike Greenspan, is not just a tool of the financial interests.  He used to be one of the foremost scholars of the causes of the Great Depression. He is doing what he can to avoid a liquidity crunch that could spiral into a huge depression.  Unfortunately he has much less room to maneuver than Greenspan did.  

  •  The History of the Fed (1+ / 0-)
    Recommended by:
    scobbydube

    To really grasp how the financial system under the Fed is a creation of the ruling elite under control of the ruling elite for the ruling elite read Henry C. K. Liu's recent article in Asia Times Online. This has been an ongoing populist issue since the founding of banking in the U.S.

    A Failure in Central Banking by Henry C. K. Liu

    The House of Morgan then [pre-Fed] held the power of deciding which banks should survive and which ones should fail and, by extension, deciding which sector of the economy should prosper and which should shrink. The same power today belongs to the Fed, whose policies have favored the financial sector at the expense of the industrial sector. At least the House of Morgan then used private money for its predatory schemes of controlling the money supply for its own narrow benefit. The Fed now uses public money to bail out the private banks that own the central bank in the name of preventing market failure.

    Live unity, celebrate diversity.

    by tjfxh on Wed Jan 30, 2008 at 12:50:47 PM PST

  •  I've already said this once (3+ / 0-)
    Recommended by:
    scobbydube, Amory Blaine, shigeru

    today, but hey, why not?

    Sovereign default is not the end of the world.  In small countries, it means the IMF comes in and reposseses the water supply, but here?  We ARE the IMF.  Or more particularly, Wall Street is.

    According to Henry Liu (http://henryckliu.com), a commentator I think has his ducks in a row, 40% of U.S. treasury debt at this time is held internationally -- but that means, that 60% is held by our own wealthy investor class.  Of COURSE they don't want you to think that it's possible to just thumb your nose at your creditors and walk away (like Argentina did).  But what would happen?  They couldn't exactly repossess the White House.  A lot of the extremely wealthy in this country might lose a good deal of money they use to live without working.  If the U.S. defaulted on its bonds ... or just unilaterally changed the terms a bit ... then foreign elites and national banks might stop buying them, and we might not be able to hire Chinese peasants at $1 a day to make the goods that our workers used to produce, so our consumer goods might have to suddenly be made at home again, which would mean higher prices (we'd be paying those anyway due to deflated dollar value), but higher wages since American workers would be needed since they would be the only ones willing to accept dollars.  Jeez.  We only have a population of 300 million of whom realistically 10% of the workforce is either unemployed, underemployed, or seeking more training because they can't get a job with their current skills.  You think we might be able to get a few of them to work?  

    I'm not saying I don't personally prefer hard currency and tight banking controls.  But you really can't practice one without the other.  As long as we're going to let banks and corporate accountants play Wild West with the money supply without oversight, we'll have to do something to prop up the system when they screw up -- you can guarantee they'll screw up.  Inflation isn't the only solution by a long shot, but it's the one that the chimps in charge are willing to use because it forces the entire world to pay the costs of their sins instead of sticking the price on those who ran up the charges.  I wouldn't worry too much about the government's credit rating.  The sad fact is, there is no bankruptcy law among nations; there are only guns and bombs.  And the U.S. still has more of those than the rest of the world combined.

    •  inflation is the way to default on your debts. (1+ / 0-)
      Recommended by:
      tjlord

      Since our govt debt is denominated in dollars, the way to lessen the debt is depreciate the dollar.  The way we've been printing them lately, inflation is growing more likely.

      Of course, that means foreigners will stop lending us money to buy their consumer goods but at least we won't have to pay them back for the party we just had.

      Unlike Argentina, Thailand, etc. we won't have to pay back our debt by exporting more than we import, we will just have to live within our means.  That is the advantage of having debt denominated in your own currency.

      •  The problem is that with the flight (0+ / 0-)

        of capital and jobs this becomes harder and harder to do. Also, if the US defaults, we probably increase hugely the working capital requirements for credit for American based firms, making them less competitive.

        Democracy is the only form of government wherein the people receive the government they deserve.

        by tjlord on Wed Jan 30, 2008 at 01:26:23 PM PST

        [ Parent ]

        •  the US is 25% of the world economy (0+ / 0-)

          We may not be the industrial powerhouse we were 50 years ago.  We may not be the raw materials producer we were 100 years ago but in todays economy, our ability to consume is not to be scoffed at.

          Don't get me wrong,  I am deeply uncomfortable that the US has had a trade deficit for the past 25 years, that the only industries in which we have a trade surplus are entertainment and jet aircraft, but in todays world economy,  the US plays a vital role: we are the consumer of last resort.

          The world needs our buying power and oddly enough this may at this point be our greatest strength. The world cannot ignore, the world needs our market.

          By the way, I don't think there is much likelihood of any formal US govt default on our debt.  We don't have to: we can inflate our way out of it.  Yes that will mean higher nominal interest rates but not necessarily higher real inflation adjusted rates.

          And, if our goal is to make our economy more globally competitive, then investment in education, infrastructure, etc is essential.

          •  But we inflate out way out of this and (0+ / 0-)

            conversely, deflate the dollar we drive investment out of the US. The concept of the US as a haven for investment was valid through the late 80's because there was no other place to absorb capital like the US. Now, the US is not even the most preferred investment location.

            I think those who think we can inflate out overlook that Colombia (yes, the cocaine country) Bolsa traded the same total dollar volume per day as the NYSE in 1925. It was the investment into the US that made the spread now - investment that frequently came at the expense of other economies. We don't have that leverage anymore.

            Democracy is the only form of government wherein the people receive the government they deserve.

            by tjlord on Wed Jan 30, 2008 at 02:40:07 PM PST

            [ Parent ]

  •  How do other countries do it? (1+ / 0-)
    Recommended by:
    tjlord

    Oh yeah they don't through trillions a year down the black hole of military adventurism.

    Bring the troops home. Get out of Iraq, reduce other middle east forces and reduce troop presence elsewhere. Above all stop expanding US adventurism. We can't afford it.

    "Nations, like individuals, are punished for their transgressions." U.S.Grant

    by shigeru on Wed Jan 30, 2008 at 12:59:25 PM PST

    •  I am sure the Fed will say that in their (1+ / 0-)
      Recommended by:
      shigeru

      next report to Congress - NOT. (Though it is the correct answer for this week's quiz).

      Democracy is the only form of government wherein the people receive the government they deserve.

      by tjlord on Wed Jan 30, 2008 at 01:03:07 PM PST

      [ Parent ]

      •  Of course they won't. (0+ / 0-)

        The purpose of all the troops overseas is to protect the investments of the wealthy class. But bringing a good portion of the troops home and increasing taxes on the wealthy will more than pay for a health plan and/or investments in renewable energy.

        It is also interesting that in countries such as UK that have privatized their social security system they have still maintained a public social security system and have a national health plan. I had read recently on this site that the UK's benefits from the privatizing social security are much less than anticipated and public expenditures on old age pensions have increased well beyond what was planned for. In addition the average worker has not realized the benefits of the superannuation and is in effect taxed twice as super contributions are mandatory.

        The only people who have made out well are the select private companies who handle the investments. And the wealthy who have seen their equity increase.

        We have to take our country back, regardless of the cost. Do we have the will to do so? Do we have a potential leader with the will to organize this?

        "Nations, like individuals, are punished for their transgressions." U.S.Grant

        by shigeru on Wed Jan 30, 2008 at 01:13:57 PM PST

        [ Parent ]

    •  They also save more than they spend n/t (1+ / 0-)
      Recommended by:
      shigeru
  •  The game isn't over yet. (1+ / 0-)
    Recommended by:
    tjlord

    This Fed funds rate cut was the Berlin Wall to a lot of expected progressive actions in 2009. I'm so mad I could break something.

    There are only two solutions to affordability for housing, but also involving necessities like food and oil. The first is asset deflation of about 30%, which would be ruinous to the economy and perhaps spark a depression. This would be politically disastrous for the ruling elite, since it would likely spark a populist backlash that would make the New Deal look conservative.

    The other option is 20-30% inflation. While reflating would be ruinous in other ways, it would not be as bad politically as a depression. Look for the Fed to reflate by about 30%, and figure some way to get part of that to the middle class so that they can buy but some of those bargain-priced McMansions.

    Can they do it? I suspect, not without tanking the dollar and causing more dislocations, like a huge commodity bubble. Eventually, the markets are going to sort this out and it ain't gonna be pretty. When that happens, looks for a sucessful populist political insurrection -- but only if the US is still a democracy. This will unfold in the period '08-'12.

    Live unity, celebrate diversity.

    by tjfxh on Wed Jan 30, 2008 at 01:02:59 PM PST

  •  I disagree on the last point (2+ / 0-)
    Recommended by:
    New Deal democrat, Amory Blaine

    I don't think this will kill progressive reform.  I think it will help push more to the realization that it is needed.

    It is clear the economy needs a stimulus.  There are really three ways to do that:

    1. Cut interest rates (Monetary Policy)
    1. Cut Taxes (Fiscal Policy Option A)
    1. Increase Spending (Fiscal Policy Option B)

    What we really need, and some are too ideologically blind to recognize, is option 3.

    The Fed right now is between a rock and a hard place.  Once you reach the point where cutting short term rates raises long term rates, monetary stimulus pretty much stops working.  It's not really the fault of monetary policy that they are in this spot, though, years of bad fiscal policy has forced them into it.  The Fed's only option was to let the recession happen sooner.  The Fed additionally bears a good deal of responsibility for its lack of effective regulation, but it's monetary policy hasn't been unreasonable given the bad options they've had.  In any case, if you're right that long term rates are rising in response, option one will be quickly ruled out.

    That brings us to Fiscal Option A. The problem here is that tax cuts are going primarily to wealthy Americans, and not only aren't they spending that much of it, adding much to consumption, when they save it it isn't really being invested in America. What this means is more excess savings to flow into more asset bubbles, and more unproductive financial assets. Most of the investment in actual capital assets will occur overseas, not creating jobs here. This might provide some help for global stability, but not enough to really make a big difference. But it does very little to reverse the US slump. Increasing deficits will cause those weakening credit ratings you mentioned, and possibly pressure for further spending cuts which will cause even more stagnation.

    That leaves us with fiscal option B - finally investing in America again.  This is the only real way out of this mess. Massive government spending on productive investments in our future, not trillion dollar wars overseas. Education and health care are two key areas where investment would be productive. Transportation,   communications, and energy  infrastructure are others. Most of these help increase productivity. The economic benefits of national health care are less direct--it actually helps make US business more competitive in a global economy. And,  health care reform can actually lower overall costs for health care.

    Option B may also frighten some credit agencies, because it also requires more borrowing. But, long term rates are fairly low now. We're still able to borrow fairly cheaply in order to finance our investment in America.  And, we can always raise taxes a bit down the road. A stronger economy means less tax increases would be needed, and with everyone better off, those taxes would be easier to pay.  Of course, we'd also have the option of cutting out some of our more wasteful spending instead (like much of the military budget), if that were politically feasible. And finally, some depreciation of the dollar would also be a good thing for US manufacturing, and lower skilled jobs, because it makes US goods more competitive both at home and abroad.

  •  JFK wanted to get rid of the Fed. (0+ / 0-)

    We all know how that story ended.

    St. Ronnie was an asshole.

    by manwithnoname on Wed Jan 30, 2008 at 01:10:40 PM PST

  •  The Stock Market is being propped up by (1+ / 0-)
    Recommended by:
    tjlord

    the Fed and the Financial industry. Fund mamagers are buying stock to keep the enormous financial sector bubble from collapsing. When it goes it will go with a huge bang. As the economy slows, less real cash will enter the market and fund managers will be tapped out propping up the current situation. The expectation of an improving market due to Fed rate cuts will evaporate.

    A fair DJIA would be just under 6,000 if you figure inflation of 5.7% and a close of just under 1000 in 1965. However, in 1965 we had plenty of energy reserves and were at the cusp of a big technology growth and didn't have to face a myriad of current crisis, and the Vietnam war was not taking a huge chunk of the federal budget yet. I would not be surprised to see the DJIA lose 60% of its current value.

    •  The Dow is also propped up by a falling dollar (0+ / 0-)

      about 50% of Dow component earnings are due to currency adjustment of overseas funds. The Dow would be nearer your number if the dollar were at parity to the Euro - you tell me the impact of Dow component earnings dropping to -20% next year?

      Democracy is the only form of government wherein the people receive the government they deserve.

      by tjlord on Wed Jan 30, 2008 at 01:36:30 PM PST

      [ Parent ]

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