Willie its like talking to a wall. Even Basehead of all people is starting to realize the implications.
Simply put tell me the countries in history who have gone down the tubes because of a strong currency. Now how many countries do you want me to name who shit the bed because of a weak one. Again, if it is a good thing, why don't we just devalue the hell out of it. Explain!! At what point does it become a bad thing? In your world, never. Come out of the dark side. Maybe the best article I've seen on this lately is posted below. Read it twice and tell me this guy has no clue. And for everyone else. Worth reading. C'mon Willie, I'll be waiting for a clear concise response for when I get home tonight, working late so give me some time.
Page 1 of 2
US rate cuts: Like a blow to the head
By Julian Delasantellis
Zhou Xiaochuan, the governor of the Bank of China, must sympathize with the plight of poor Raoul, the waiter whose good service is rewarded with a brick to the back of his head.
In a 2004 episode of the US cable network series
The Sopranos , New Jersey mafia boss Tony Soprano takes the senior leadership of his crime family to an expensive dinner at a casino restaurant in Atlantic City, New Jersey.
There they enjoy multiple rounds of the best cuts of steak, lobster and the finest beverages; it is Tony's nephew and heir apparent, the sobriety-, impulse-control-, fidelity- and literary-talent-
<SCRIPT language=JavaScript type=text/javascript><!-- if (!document.phpAds_used) document.phpAds_used = ','; phpAds_random = new String (Math.random()); phpAds_random = phpAds_random.substring(2,11); document.write ("<" + "script language='JavaScript' type='text/javascript' src=""); document.write ("http://goldsea.com/GAAN/adjs.php?n= " + phpAds_random); document.write("&what=zone:117&block=1"); document.write ("&exclude=" + document.phpAds_used); if (document.referrer) document.write ("&referer=" + escape(document.referrer)); document.write (""><" + "/script>");//--></SCRIPT><SCRIPT language=JavaScript src="http://goldsea.com/GAAN/adjs.php?n= 650137508&what=zone:117&block=1&exclude=,&referer=http%3A//boards.prudentbear.com/bbs_read.asp%3Fmid%3D561881%26tid%3D561881%26fid%3D1%26start%3D301%26sr%3D1%26sb%3D1%26snsa%3DA" type=text/javascript></SCRIPT><NOSCRIPT>
</NOSCRIPT>
challenged would-be part-time Hollywood screenwriter and full-time thug Christopher Moltisanti who gets stuck with the US$1,184 check.
Christopher is none too happy with this situation; he is particularly enraged that his fellow
goomba Paulie "Walnuts" Gualtieri sent over an expensive bottle of Cristal to two young ladies he classified as "skanks" at an adjoining table. He leaves a $16 tip, for an even $1,200. The waiter, Raoul, is none too pleased with this, and he comes out to the parking lot to complain to Christopher about his stinginess.
There was no problem with his service; he feels he deserves more. Standard American tipping protocol calls for gratuities to amount to about 15% of the check, which, in this case, would have called for a $177.60 tip.
Christopher is in no mood for interlocution. As in most scenes in
The Sopranos up to and including solemn religious observations, the situation rapidly descends to exchanges of rank obscenities. As Raoul turns away to return to work, Christopher throws a brick that hits the waiter in the head. As Raoul writhes on the ground, unconscious in an epileptic-type fit, for good measure, Paulie comes over, shoots and kills him.
I bet that, in the middle of the night Beijing time, after he became aware of the results of Tuesday's meetings of the US Federal Reserve Board, Zhou Xiaochuan, the man in charge of China's one and a half trillion dollars of foreign exchange reserves, sympathized with the plight of poor Raoul. After all, in deploying its foreign exchange reserves to buy US Treasury securities to keep US interest rates low, and by not converting its US dollar export proceeds into other currencies, China has served the US well.
And the thanks he gets is Fed chief Ben Bernanke hitting him on the head with a brick.
In an extraordinary meeting of the United States Federal Reserve on Tuesday, the board shocked the financial world (very much including me) by announcing interest rate cuts far more extensive than previously expected. The expectation was that the cuts would have been limited to just a single 0.25-percentage-point (25 basis point) cut in the benchmark Federal Funds target rate; instead, the Fed reduced the target rate 50 basis points, along with a second 50 basis point cut (the first was on August 17) in a less commonly reported but possibly more important rate that the Federal Reserve also controls, the Federal Reserve discount rate.
This is a complete rejection of the policy of former Fed chief Alan Greenspan of slow and gradual interest rate changes so as to assure the markets that they will not be continually surprised by unexpected Federal Reserve actions, a policy that Bernanke had been maintaining during the previous 19 months of his tenure.
The contrast between Tuesday's meeting result and the sunny optimism of the previous Fed meeting on August 7 is breathtaking; it is far and away the most ominous portent of the future prospects of the US economy since the current "subprime crisis" broke into the market's consciousness earlier this year. Comparing the results of the August meeting with Tuesday's is like going to the doctor wanting to have a hangnail removed and having the physician start his conversation by asking how you feel about cremation.
Clearly, this is an indication that the Fed feels that the surface calm that has returned to world equity markets since the discount rate cut is illusory. Contributing to this must be the actions by the Bank of England to once again bail out the troubled Newcastle-based Northern Rock bank. A crisis that began in the overheated condominium markets of southern California and Florida has spread across the globe.
The fact that the Fed chose to lower both the funds and discount rates is indicative of the uniquely serious nature of this crisis.
As I explained in my August 21 Asia Times Online article,
When the big guns fail, call in China, the discount rate and the Federal Funds rate are two very separate monetary policy instruments. The funds rate (lowered on Tuesday, for the first time in four years, to 4.75%) is customarily the lower of the two; it governs the interest paid by big banks when they initiate short-term lending and borrowing between each other.
The Federal Reserve sets a "target" point for this rate; when they think that the economy is growing too fast, threatening inflation, they raise the target, as they did 17 times between 2004 and 2006. Likewise, when they are fearful of an economic slowdown, they lower the target, as they did on Tuesday. The Fed effects these target rate changes through either buying or selling Treasury securities in its portfolio, to either provide or drain sufficient liquidity from the system to move the market rate to the target rate.
The discount rate is always meant to be higher than the funds rate. This is the rate at which the Federal Reserve will directly lend to banks shut out of the private Federal funds market due to concerns about their soundness; it is higher than the Federal Funds rate because the Fed wants to be available, but not easy. Lowering the Fed Funds rate is the preferred policy choice when the problem the Fed wants to address is feeling that there is generalized economic weakness.
Discount window borrowing is considered the most effective tool for times such as now, when certain banks and other financial institutions are being denied access to Federal funds loans because of fears of their connection with the subprime market. However, the Fed had already lowered the discount rate 50 basis points on August 17, to 5.75%. If they had lowered it another 50 basis points without lowering the funds target, the funds target would have been even with the discount rate, at 5.25%. So what we really saw on Tuesday was another discount rate cut masked by a Federal Funds target rate cut.
To me, the most remarkable thing about these events is that they demonstrate the breathtaking disregard that US economic policy makers have regarding the value and fate of their own national currency. Richard Nixon-era secretary of the treasury John Connolly, speaking to European economic officials, once said that the US dollar was "our currency, but your problem". The country could get away with that back in the early 1970s, when the US was the world's biggest lender; now that this situation is reversed, and the country must borrow $2-3 billion from foreigners each and every day just to feed its overconsumption addiction.
The market reaction to this Fed move was about as expected as the day's sunrise - a sharp fall in the US dollar. The greenback finally breached the record 1.4 level versus the euro; it has now fallen 15% against the euro since early 2006, 63% since early 2001.
Still, none of this had any effect on the drunken bacchanalia that erupted on Wall Street following the announcement. The Dow Jones Industrial Average soared 336 points, 2.51%, to 13,739.
US rate cuts: Like a blow to the head
By Julian Delasantellis
CNBC's Maria Bartiromo was so gushingly giddy in her coverage of the rally that you would have thought that Starbucks had opened a coffee stand in her electroshock therapy suite.
Shares of broker/dealer industry companies had a particularly fine afternoon; Goldman Sachs rose 7%. If you accept the thesis from my article of this past Monday, September 17,
A rate cut with a shoeshine and a smile that Federal Reserve chiefs are, in reality, nothing but glorified salesman for the US financial services
<SCRIPT language=JavaScript type=text/javascript><!-- if (!document.phpAds_used) document.phpAds_used = ','; phpAds_random = new String (Math.random()); phpAds_random = phpAds_random.substring(2,11); document.write ("<" + "script language='JavaScript' type='text/javascript' src=""); document.write ("http://goldsea.com/GAAN/adjs.php?n= " + phpAds_random);document.write("&what=zone:117&block=1"); document.write ("&exclude=" + document.phpAds_used); if (document.referrer) document.write ("&referer=" + escape(document.referrer)); document.write (""><" + "/script>");//--> </SCRIPT><SCRIPT language=JavaScript src="http://goldsea.com/GAAN/adjs.php?n= 370871050&what=zone:117&block=1&exclude=,&referer=http%3A//www.atimes.com/atimes/Global_Economy/II20Dj01.html" type=text/javascript></SCRIPT><NOSCRIPT>
</NOSCRIPT>
industry, then Tuesday saw a particularly glowing employee evaluation placed in Bernanke's file.
Very few other countries have ever been able to make such whoopee as their national currencies are being debased. In 1981, newly elected French socialist president Francois Mitterrand had to abandon his campaign promises for an ambitious social equality program when currency traders started to sell the franc hard against the West German mark.
In 1993, when US labor secretary Robert Reich urged an expansive social welfare/jobs reflationary fiscal program; newly elected president Bill Clinton nixed this idea when treasury secretary Robert Rubin advised the president that this would cause both the US dollar and bond prices to fall. When their currencies were hit by speculative attacks, the countries most affected by the 1997 East Asian financial crisis, primarily Thailand, Indonesia and South Korea, were forced to make painful cuts in their national social welfare spending.
But it seems that the US is never forced to face such dolorous consequences as its currency weakens. Its policymakers initiate policies that they know full well will weaken the US dollar, and they just don't care. It's almost as if the nation can pay for goods with checks it knows the other party will never cash; if you could do this, you'd probably be living pretty large too.
This is particularly true in the case of China. China's foreign exchange reserves are now approaching the trillion and a half dollar level, and this massive wad of cash is mostly kept as US dollars. China has earned this treasure through being the gleaming supermall for the shop-till-you-drop obsession that has swept the US, and to a lesser extent the rest of the Western world, this decade.
What Ben Bernanke is saying with his sharp interest rate cuts, and what the nation is affirming its approval of with the orgiastic stock market response that followed, is that it continues to hold no other value higher than the pleasure to be attained through its own excess consumption. In depreciating the value of the currency it uses to pay China for its goods, the US is telling China that it has no intention of paying China the full value for what it buys from it; that would be unacceptable, it would mean that there would be less money to buy even more stuff.
Of course, China does not have to continue to put up with this. It could stop accepting the funny money dollars, the depreciating greenbacks with Mickey Mouse's picture on the face instead of George Washington's. China could convert its foreign exchange reserves into other currencies by selling its dollars. As this would severely reduce the demand for US Treasuries in which China parks its reserves, US interest rates would have to rise sharply to re-attract the securities demand lost from China, and there would be little or nothing that Bernanke, Treasury Secretary Henry Paulson, President George W Bush, or even the US's first infallible-by-decree army general staff officer, the Blessed Holy Father General St David Petraeus, could do about it.
This would not be an easy thing for China to do, so the US feels China will not do it. If China actually did try to publicly sell all or a large part of its dollar portfolio the prices of the dollar assets remaining in the portfolio would undoubtedly fall sharply; China could lose a lot more than it gained. Still, Bernanke has just told China that, come hell or high water, he fully intends to filch away the value of their reserves. Maybe China could decide that it's a choice between losing a lot of money, fast, by selling its dollars, or losing a lot more, slowly, by keeping its dollars.
Like pulling off a Band-Aid, it probably hurts less to do it fast. Or, China could do it smart, slow and gradual; that's the way China likes to manage change. There are some indications that this is exactly what is happening. From a level of over $160 billion a year in 2006, Tuesday's US Treasury Department's Treasury International Capital (TIC) report, released a few hours before the Fed meeting and so thus totally ignored, showed that foreign (like the Chinese central bank) buying of US government securities actually turned negative in July. (I wrote about the implications of TIC data in my March 24, 2006 ATol article,
US living on borrowed time - and money).
China probably is already diversifying away from the US dollar, but among all the cacophonous noise of the glorious roiling tsunami of inanity that is US public life, the actual signal information is being missed.
There were a few disquieting responses to the Fed move. Crude oil continued its recent record breaking rise, topping $82 a barrel. This market knows that, unlike China, the members of the Organization of Petroleum Exporting Countries (OPEC) long ago made clear that they would not accept depreciating dollars in exchange for their non-renewable export assets; oil prices go up as the US dollar goes down. China seems to be learning from OPEC's example.
The most interesting aspect of Tuesday's market responses to the Fed cuts may be the most massively under-reported - the fact that the only one of the Dow 30 stocks that did not rally on the news was, curiously enough, Boeing. Boeing got some bad news on Tuesday with some press questions regarding the potential crash survivability of its new 787 Dreamliner, but, in a market move like Tuesday's, even that type of report is usually ignored. The market wisdom for rally days like Tuesday is that these are times when "even the [scatological term] floats to the top".
I see the Boeing stock price divergence as more of an indication that, with Boeing so dependent on Chinese airline demand, the company may be in big trouble if China really does act to reduce its economic relationship and dependence on the US.
On an episode of the old 1970s CBS-TV situation comedy
The Mary Tyler Moore Show, it once was suggested in the fictional television newsroom where the show was set that, since the previous night's newscast had done so well in the ratings, they should get out the script and broadcast it again - why mess with success?
In that spirit, since this Federal Reserve move has apparently gone over so well, (with the only constituency that really matters in the US, upper and upper middle class investors) there will probably be more cuts at the next Fed meeting in late October should there be further bad subprime or economic news, which there undoubtedly will be.
How long will the nation get away with the debasement of its own currency and the defrauding of its lenders? I have no idea. I find it most amazing that, in its actions, the nation is ignoring the very principle at the heart of the subprime crisis the Federal Reserve's actions are trying to remedy. To their own misery, the subprime borrowers have learnt the lesson that the nation has yet to learn. You can't forever live in a house, or in a consumer lifestyle, that you cannot afford.
