April 30, 2008
In a couple of hours, we’ll soon find out how low the Fed will go in their attempt to inflate their way out of the current subprime/housing market/financial sector mess that we are currently mired in. Last March 18th, the Federal Reserve cleverly manufactured a downturn in the commodities sector off of a 0.75% rate cut to the Feds Fund rate after futures markets had shown their hand by forecasting the probability of a 1.00% or greater cut at 100%. The market then illogically interpreted this less than expected rate cut as a sure sign that the Feds must have fighting inflation as their new priority despite its clear willingness to sacrifice the dollar for the past several months. So what will it do this time around?
Well, there really is no sense in making a prediction because who knows what they will do? I don’t and neither does the futures market. However, what they do will clearly outline their thought processes about the future. Could they have saved the additional 0.25% rate cut that everyone expected in March for this rate cut so they can surprise everyone again with a deeper than expected rate cut this time that will undoubtedly continue to feed this stock market rally? If so, then we will see that their policy direction remains unaltered and the desperation to prop up stock markets at the dollar’s expense. Will they cut 0.25% as everyone expects? If so, then they still will have chosen to forego fighting rising prices that directly result from dollar debasement, despite any continued rhetoric about grave concern regarding inflation. Or will they pause and do nothing or even shock the world with a slight interest rate increase? If so then the focus will have turned towards fighting inflation and saving the dollar.
The reality still remains, however, that if the Feds cut interest rates again later this afternoon as expected and feed a continuing rally in U.S. markets, the rally is largely irrelevant because of the great lengths of monetary inflation that have already been imposed upon the economy to provide the current levels of market stability. To fully understand this concept, merely read my article here of How Increased Paper Wealth Can Translate into Lower Standards of Living.
[tags]monetary inflation, dollar debasement, increasing prices[/tags]