Emergency Fed Rate Cut!!!

The Fed has just cut interest rates, today, to 3.5% in response to a tanking domestic and global stock market! Always remember that actions do not manifest without reactions, however. That’s a rule of thumb ignored by our nation’s political and economic leaders and a culture hell bent on maximizing the present, but at the expense of the future. The future has now arrived. The present is now that once distant future where the physics of reactionary energy, called consequence, was accruing and conserving. The buck now stops here and all of us living today will assume the consequence of profligate past behavior by government, citizens and economic entities who won points by adding to the present by subtracting from the future. We applauded them and their win-win propaganda which suggested that there were no negative consequences to be had.

Now comes the moment of reckoning and the Fed was forced to make a drastic cut in Fed Funds Rate. Remember, just last spring when the Fed was saying that all was well, by its forecast? Well, that is what they told everyone, whether they believed this or not is debatable, however. They backed their rhetoric up by their non action in the face of a deflating housing market, which they said would not spill over and negatively impact the general economy. Yeah right! Thus, it should be fairly obvious that the Fed has highly educated idiots or they are lying through their teeth or the economy is out of control and hence unmanageable by traditional methods, or all of the above. My guess (hypothesis, if you will, shared by many) is that the economy is out of control, in a bad way, and that the Fed is lying in order to control consumer psychology via the Markets.

The most powerful economic stimulant for the economy is consumers having an optimistic outlook for the future politically, economically, socially, culturally and morally, but primarily economically. Therefore, in order to keep the economy buoyant, the economy is being artificially stimulated by optimistic propaganda from leaders, with the collusion of mainstream media, who realize that economics has a large self fulfilling prophecy component to it. In other words, citizens/consumers thinking things are bad results in things being bad while citizens/consumers thinking things are good results in things being good. That is due to collective optimism or pessimism being tied so strongly to consumer consumption, which drives production, opportunity and the economy. Most of the Wall Street economic analyst you hear in the media are overly bullish, as a strategy to create a self fulfilling prophecy.

The effect of collective optimism or pessimism having been noted, the issue is what end of the spectrum does realism map to? Realism may naturally produce optimism or pessimism as a human response to the event. The times we are entering now are such that realism (of all the ominous indicators) should naturally produce pessimism and thus in turn pessimism will result in a loss of confidence, which in turn will remove the final pillar that is keeping the economy out of deep recession, if not depression. It is my belief that the stock market is the last symbol of wealth that is strongly tied to consumer confidence, housing being the other, but it has collapsed. Consequently, confidence levels will follow the direction of the stock market very closely and that is why the Fed’s action seems almost exclusively geared to influence the direction of the stock market.

Remember what I said in the beginning, however, in that every action creates a reaction. So let’s look at this rate cut briefly and its consequences. In the very near term, the cut will be an immediate boost to reverse the stock sell off and markets decline. In the long term however, the dollar will be debased further and prices/inflation will rise considerably. The reason being is that essentially, the Fed is paying bank money to borrow money, so they can lend it and consumers can spend it. The REAL interest being charged is the Fed Fund rate minus the rate of inflation. Officially the inflation rate is running around 3.5% so if interest rates are 3.5% as well, that mean the loan is at zero interest. However, REAL inflation is actually much higher than 3.5%, as everyone can feel that it is. It’s probably around 7% on the low end. Thus, if that is true, then the Fed is paying borrowers 3.5% interest to borrow the banks money. The consequence is that the economy will be flooded with liquidity and hyperinflation will ensue.

That said, banks are not charging you and I those rates, just other banks needing to borrow cash to remain solvent. However, the people getting fixed rate loans at 7% or less are actually getting loans at no cost, if not being paid an interest from the transaction, given the true rate of inflation. This behavior is hyper inflationary given that it creates more debt/money without an equal increase in production or income. Our consumer and government income/production to debt ratio is such that our credit rating is in the free fall. Our collective FICO score has likely gone from over 700 to about 620, the demarcation point of poor credit and hence lenders backing off due to risk. That is a problem for our nation given that foreign nations are financing our consumption through lending us money, which they will stop doing because our income to debt ratio makes the risk to great.

We have become a Sub Prime nation.

Stay tuned.