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Tuesday, September 18, 2007

 

bernanke cuts 50bps


i'm appalled. i watched this morning as marc faber on bloomberg jokingly compared the american dollar to the zimbabwe dollar, and noted that the correct move for a central bank actually interested in fighting inflation would be to raise rates, not cut them -- and it seems shockingly appropriate. one cannot rule out a reflation and indeed aggravation of the debt bubble with ben bernanke in charge. the currency may go undefended, but debtors will be encouraged at even the very slightest inkling of weakness. it's utterly no wonder the united states has become the most geared, engineered, leveraged economy in the history of western civilization over the last twenty years.

it's just more greenspan in the end. the fed is slave to wall street.

UPDATE: i'm really quite angry and upset about this move, so calming down is first priority. but having come down a bit, what can be said about what's happened here?

in the face of all-time highs in commodities and metals, oil, and record lows in the dollar -- the fed cuts rates. and not incrementally, but by 50 bips! what does that say?

either 1) bernanke's fed has set a new low in irresponsibility and government subservience to investment banking; or 2) they have seen deep economic deterioration in the last six weeks (since their last meeting) -- deep enough to make them cut in the face of inflation that has been rising from already discomfiting levels. indeed, nouriel roubini thinks 50bps is too little, too late.

maybe it's both. but what certain is (to overuse a common metaphor) the medicine for the alcoholic with a hangover is apparently going to be a glass of bourbon. the american economy is going to test the limits of foreign investors, who have lost money in the united states since the 2002 market bottom thanks to a steadily depreciating dollar wiping out dollar investment gains. why anyone would invest in the united states just now is totally beyond me.

UPDATE: quantum fund co-founder jim rogers mocks the inflationary american central banking scheme, as does marc faber. both point out that the concept of a central bank is the stability of the currency, a goal that the fed has seemingly abandoned -- and call on investors to sell dollars and treasuries and take shelter in yen and swiss francs.

faber mentioned paul warburg, a fed governor during the early 20th c, and his regret over the permissiveness of the fed (which he helped to create) toward market gearing and engineering in the years leading up to the depression. the suggestion is that such deep deflationary events are a consequence of overleveraging and follow from that, and not policy mistakes in handling the bubble in the aftermath (which may be, after all, essentially unavoidable).

UPDATE: on 'testing the limits of foreign investors' -- who hold a majority of outstanding american debt -- file this ft poll and associated british editorials. i tend to value exterior thinking, as it is normally very difficult to see the shape of the fishbowl when you're inside it. and the exterior thinking is that the federal reserve may be slightly mad.

The Fed’s action comes at a cost. It will cement a perception that the Fed cuts rates in response to market crises and so encourage speculation. It also risks the Fed’s credibility as an inflation fighter. In its statement the Fed says that “it will continue to monitor inflation developments carefully”. The Fed had better hope that bond investors and wage negotiators trust it.

One of the greatest dangers is that loose monetary policy undermines the integrity of the dollar. The US trade deficit is financed by foreign investors who are willing to hold US bonds and assets, and if they fear that inflation will destroy their value, they will sell. The 50bp cut turns a dollar rout from very unlikely to just about possible.

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