Saturday, September 29, 2007

Feds cut their benchmark interest rates by 0.5% in September

This month is really interesting to see how the central banks function.I have written a post before on why the Feds should not cut their interest rates. I was quite disappointed when they cut by 50 basis points. Why is this so?

Simply put, cutting the rates would leave to a devaluation of the USD, and majority of all the transactions in the world is dominated in ... ... USD. I'm not an economics major, but putting it simply, demand and supply being constant, currency loses value, therefore price increase. Now the Feds have cut their interest rates, inflation will go up across the board for the WORLD, simply because most transactions are denominated in USD. Look at the price of oil and you can see the effects. Just because of that cut in the interest rates, I think the price of oil will hover average around USD70 per barrel instead.

It seems to me that the US is warning the world. Play fairly, otherwise, I will make sure everyone loses. Why is this so?
  1. USD currency loses strength
  2. Inflation goes up higher for the rest of the world due to the world's dependencies on USD
  3. The rest of the world's currencies strengthen to combat inflation
  4. US Companies find it less attractive to invest in other countries
  5. US Companies invests back into US, instead of other countries
  6. Other countries hit by the double whammy of higher inflation, and lesser investments
Again, let me say that I do not major in economics, but this is a logical conclusion I can gather from what's happening. Everyone loses in this case, including the US. I sure hope that they maintain the 4.75% rate for at least a year. China and India should stop being in denial and take concrete steps in reigning in their growth, and ensuring their trade surplus is reasonable. Pollution is going up too fast, global warming is here. Food crops harvests are getting lower.

Just imagine... USD loses value, price goes up. Crop harvests yields are lower, price goes up too. These are essential goods. Hyperinflation coming? This is not impossible, and there's no running away from it if that path is taken.

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