Why the agressive cut? The FED is Pro Inflation.

Why has the FED mad such an aggressive rate cut?
Well, here is my theory…. It is not just about the economy having trouble or reassuring the markets.
The FED is actually PRO INFLATION!
Yes that is correct. They want inflation.
Why do they want this? Well the answer is simple Americans are in a load of debt and what is the best way to make debt disappear? Well it is to devalue that debt. It is basic common sense that the best time to borrow money is in high inflation and the best time to save is in low inflation environments….
Unfortunately, this change in policy really hurts the sensible people who have been saving instead of being reckless and borrowing too much.
At a 4% inflation rate (which I think the US is definitely heading for) a 100,000 debt in 5 years is worth only 81,537 in real terms as it has been devalued at 4% per year….
And that ladies and gentlemen is how the FED is going to get the American consumer out of trouble, not through any economic stimulation, but by pure devaluation of the debt they hold!
Unfortunately, this is also coming to the UK. Once the government realises there is too much debt the BoE will be told that they only need to write a letter to the government when inflation hits 5%.

The only problem with this is that inflation will also cause the currency to further devalue and if it goes too far the USD could lose its attractiveness to be the main currency for trading of oil etc. If that happened then the consequences would be much worse in my view.


Paul

hmm... interesting point....

The view on the rate cut this week is starting to lean toward the Fed panicking in the face of the market drop. That wasn't helped at all by their statement yesterday that they weren't aware of the SocGen situation when they made the move.

Basically, the market is fast losing faith in the Fed, if it hasn't already. It's interesting to ponder the implications of that.

I think the FED has been seen as Wall Street's bi*ch for a while.... Greenspan was and Bernanke has followed suit.
I had hopes he wouldn't.
The US needs a 3% base rate like a hole in the head.... unless what I suggest the FED are doing is true.

Hmm

Trader333 said:

The only problem with this is that inflation will also cause the currency to further devalue and if it goes too far the USD could lose its attractiveness to be the main currency for trading of oil etc. If that happened then the consequences would be much worse in my view.


Paul

Click to expand...

Interesting point, Paul. And valid. But someone cynical and paranoid such as myself would say that that is what the military is for!
But the other thing is this: the US is being bailed out by selling it's debt to foreign banks etc. So these guys' investments will also lose value with inflation - unless they continue to invest in the US. They can't all just dump their debt, because there wouldn't be anyone to buy it! In other words, the US worked out many years ago that you CAN have an empire with an imperial tax - you just call that tax 'inflation'.

And as far as any threat to the USD being the world's currency reserve, I did read somewhere that there simply isn't enough of any other currency in the world for it to become the new reserve, so the danger here is somewhat small.

Then again, maybe the Fed are just a one-trick pony and don't know what else to do in response to a slowing economy. If rate-cuts don't work, maybe they could just drop money from helicopters :idea: