Tuesday, September 18, 2007

Rate Cut Euphoria Scares Me

I am not kidding.

To those Americans living solely between the oceans and the borders the rate cut was good news. In fact the Dow rallied to a multi-month high.

Yippee!!!!

How can this be a bad thing?

Well, as regular readers will know, I am concerned with the state of the dollar. My simple point is that a weak dollar is a symptom of a weak economy.

Let me see if I explain. The USA is running budgetary deficits. That means that every day the US Government uses other countries money to pay it's bills. This Government treats China and Dubai the way many people treat Visa and Mastercard.

This is how it works. The US spends billions of dollars more than it collects in taxes and fees. In order to pay for that spending the government goes to China and Dubai (and others but those two are currently the main purchasers) and says, "Please purchase our bonds at 4ish% interest so that we can keep spending".

As long as there are buyers of debt at these prices the economy is safe; but, if those countries decide to buy even a little bit less than needed, the US government would be force to either immediately reduce spending (not likely), raise taxes (not on Dubya's watch) or raise the rate on the bond to make it more attractive (hurting home buyers and generally slowing the economy but perhaps avoiding a catastrophic economic event).

By lowering the rate (as happened today) the government is making those all important debt instruments less attractive. And what happened to the dollar today, when the rate was decreased and the Dow jumped? It fell --again.

I laughed out loud while listening to the Glenn Beck Show in CNN today. He had an admitted doomsday economist on that suggested if all goes wrong the dollar could see a drop in its valuation of as much as 50% !!!

Guess what? It has already happened.

In January 2002 one greenback was worth 1.61 Canadian dollars; today the close was 1.0146!!!

Does this make sense to you? What it means is that anything purchase from outside the walls of Bushdom is now forty percent more expensive than it would be if it were purchase with pre-Dubya dollars. People, this includes oil. Yes, Oil! The quirky result of the massive military spending (largely the reason for the current deficits) is that by paying for it with debt we have increased the price of the commodity that was at the core of the action: oil.

Am I making sense?

Let me lay out a likely bad case scenario. While the USA is lowering the interest offered on its debt instruments, countries such as Canada that do not run deficits and have little risk of dollar devaluation are keeping their interest rates stable. So Dubai and China can get over 5% from a Canada that is paying down its debt and is a good bet to not default by devaluing or they can get around 4% from the US. So, Dubai and China buy a bit less American debt. This is not unlike what Daddy Bush faced after his, "No new taxes" speech. Remember that?

So, to summarize. The US dollar is plummeting. US debt instruments are less attractive to those who would be bailing the Bushies out. And spending is up.

Folks, this is frightening.

And unless we have an administration that is willing to reduce spending to equal the record tax and fee revenue (here) that Bush has collected the outlook is terrifying.

Forget recession, this is a recipe for a depression. Now, that is depressing and frightening.

Arrggghhhh!!!!!

Time for a plymouth and a nap.

For a related rant click here.

1 comment:

jongleur said...

Face it, so long as most Americans can look at more dollars in their portfolios, they'll ignore the fact that those dollars buy less today than they did before. They'll overlook the fact that their children will be burdened with trying to buy into housing markets where the same house has more than doubled in price in the last five years, while incomes have remained stationary. They'll look at dramatic one-day $350 (3%) rises in the DOW, while their money is earning 4.5% annually in a CD, barely keeping up with inflation.

We've become a nation beguiled by illusions of wealth fostered in the media, while we go about saddling our children with a crushing burden of poverty. And hardly anybody can be found who cares.