Prime Cuts of Freshly Ground U.S. Dollars

I want a hippopotamus for Christmas.

Why? Because I’m currently stuck watching our economy. Our disgusting, filthy, disease-ridden, unteachable-and-unwilling-to-learn economy. So, if I’m going to stare at a dirty, fat, dangerous consumption machine, I would at least prefer to have people lined up and paying to see it.

Chopping away at a valuable economic weapon

The Fed cut rates again. The market goes up 359 points. Millions cheer. Only hundreds know what this will actually mean for the economy. I’m not even sure that I’m one of them.

Unfortunately, as far as the rate cut’s apparent influence on the advancement in markets on Tuesday, one has little to do with the other, in my opinion – though I’m sure Ben Bernanke and friends will be patting themselves on their collective backs. No one gets credit for pissing into Niagara Falls the way they do. Way to go, Ben. You’ve got it all figured out.

Dear Ben,

If you cut rates at the top of this recent rally in order to push us over the ever-important 900 level, you have pretty much failed. The great rally we experienced at the swift hand of your economic machete has been lost in two days. We’re back where we started, except with one less bullet in the chamber, and from a technical perspective we’re looking at possibly re-testing some lows. Thanks for nothing.

Did you ever get a bad haircut, so you get it cut again? Then that looks horrible, so you keep cutting, and eventually decide to just shave it all off? Yep, that’s where we’re at. Hope the economy likes bald guys.

Here’s my problem (and I realize I’m not lonely in this contention): now that we’ve cut rates to between 0 and 0.25% (the average seems to be around 0.18%), which is negative if you factor inflation into the picture, we officially have exhausted that strategy. We can’t do it again. In fact, it’s tough to determine which is worse – that we no longer have the safety net of an option to cut rates, or the looming reality that rates can only go up from here. Ask Japan what that was like.

It’s the season of caring, but no one does

I’ve mentioned this previously, but the fact of the matter is that people just don’t care. And that’s a nice, censored way of putting it.

If banks and other lenders weren’t borrowing at 1%, does anyone really think that they’re going to borrow at 0.25%? The issue we’re dealing with is confidence in credit, not interest rate spreads. People are afraid to lend, and others afraid to borrow. This rate cut will not do a damn thing besides possibly provide a little extra liquidity to the financial markets.

Sure, you can make the argument that it’s a psychological move. Lower rates because that will encourage and promote business growth. Well, I contend that lowering rates to zero could do the opposite. The last card has been dealt. Our hand is about to be shown, and there’s nothing anyone can do but bluff. The market doesn’t like uncertainty, and what’s more uncertain than our fate if we have no more arrows left in the quill? And to be sure, the last arrow we shot at the freight train is not going to instantly do what it takes to make everyone happy, which is pulling the Dow back up to 12,000.

I’ll give my two cents… before it costs me a dollar

Something that is being overlooked by everyone except financial experts is the fact that what’s been happening lately will essentially beat down our dollar to a point that we haven’t seen in a while. Well, a few months anyway.

For example, the Euro has already advanced to just over $1.42, and I don’t see it stopping short of $1.50. To be honest, the real reason for the recent rally in the dollar was the idea that the United States financial system was viewed with more confidence than Europe. Essentially, the “least dangerous” place to leave your money. However, the ever-increasing assaults of negative headlines and economic numbers ground that rally to a halt.

Now we’re looking at a reversal.

Let’s think of some things that are bad for the dollar: low interest rates, a huge budget deficit, and a lack of confidence in every aspect of our financial system.

Wow, good thing none of those scenarios are taking place. Couple these incidents with the fact that nearly every other economically significant country has a higher benchmark interest rate than we do, and you have dozens of more attractive places to hold your money.

Let me first say that there is a bright side to a falling dollar – our products become more competitive on the international market. Our stuff is cheaper, they buy more of it. In our ever-expanding global economy, the value of that dollar is more important than ever. Not only does it affect international business and investments, but it affects us domestically as well – such as the airlines. It’s bad enough that flight costs have risen in recent years, but put on top of that the fact that once we get to our international destination the dollars we have aren’t worth what they used to be, and you have a very unattractive travel business.

The examples don’t end there, but I would like to mention a much more important, glaring downside – the fact that there will be an epidemic of withdrawals as foreign investors dump US debt, such as treasury bonds. Should this occur, it spells bad news for our bottomless bailout funds.

Catching a falling knife is one thing. Throwing them back up in the air is quite another. I’m going shopping this week, and hopefully I can find some good deals on common sense… goodness knows that our financial leaders haven’t bought it all out.

Disclosure: No positions.

Comments

[Steven Hansen:]

"The Fed cut rates again. The market goes up 359 points. Millions cheer. Only hundreds know what this will actually mean for the economy. I’m not even sure that I’m one of them."

John, i am not sure anyone knows what it will mean to the economy - including the fed.

2008 Dec 22 05:18 AM

[Asbytec:]

Man, the volatility has got my head spinning. Oil is $35 one day, $43 the next. The markets didn't react to OPEC's cut, now they might be. Or is it hope for GM and a recovery? We rallied on Fed days, then blew away those gains by the close of business the following Friday.

The dollar soared, then fell...the euro fell then soared. Now they're, "trading in broad ranges." The Phil Peso is trading inversely to the dollar index. The dollar falls, again, so does the peso and the pound. But not the euro nor the yen.

Nope, this is not usual downturn. It's firmly in the banking sector and Fed measures haven't cleared the log jam. We have (at least the threat of) deflation and hyperinflation. Time to sit back, put our feet us, take a Valium, and hope the spinning stops sometime soon. Maybe after Christmas we'll have some direction...like down. Or up.

2008 Dec 22 07:50 AM