This is a simple rant - again - against the Fed cutting interest rates to "support the economy". Here is the problem:
The US dollar tanks every time the Fed cuts rates - especially if the European Central Bank (ECB) does not. Let's suppose, as the market is projecting, the US dollar drops 5% next year.
I borrow money from a US bank at 6%. Money is fungible - I can take it anywhere. So I can lend it in the US or use it to fuel the European or Chinese economy. Math below the fold:
So, let's lend it in the US:
I lend $100 dollars. At the end of the year I get $6 interest (we're doing real simple interest here). I have $106.
So, let's compare lending it to Europe:
I borrow $100. I buy 66.25 Euros (today's exchange rate) and lend it at 6%. At the end of a year, I have 70.225 Euros. The dollar has dropped 5%. I now sell my Euros for $111.
Hmmm, where does the money go?
That is the problem, the Fed rate cutting is dropping the dollar at a rate that makes it uneconomic to lend money in the US. Wonder why interest rates are going up to 11% - because that is what it takes to attract money to the US. And if you are worried it will drop faster you have to charge even more. The Fed is inflating the US to finance the rest of the global economy - does this make any sense?