The Dividend Pirate

The Fed cut interest rates by 1.25% to save the economy from regression. By cutting rates they are again artificially generating money out of thin air and whenever they do that you are basically debasing the dollar. Below I am pasting excerpts from an article on “US killing the dollar” I read on rediff.com,

“What could surprise many is the fact that the US Fed’s prescription to reduce interest rates, ostensibly to tackle the prospect of a recession might well turn out to be its Waterloo. Put bluntly, the US faces as much of a risk of a recession after this rate cut as it did before.

Breather for (sub-prime) borrowers?

Ostensibly this cut is aimed at alleviating the worst housing recession in the US since 1991 and ease the pressure on the economy. The situation is so appalling that some US lawmakers had even called for cheaper borrowing costs for the benefit of the average Americans.

And this cut is aimed at providing succor to all those stakeholders — borrowers and lenders — who were party to this credit extravaganza for the past several years. It may be noted that it is this credit expansion in the US that acted as a de-facto compressor for the above mentioned engine of global economic growth.

And it is not a problem that pertains only to sub-prime borrowers, as is commonly believed. As many credit card, car and consumer loans too are beginning to turn bad, the US financial sector is facing a crisis of an unprecedented magnitude.

Consequently, with many banks and financial institutions facing prospects of going belly up, the Fed had no other option but to cut interest rates. For, if it hadn’t effected a rate-cut, it would have triggered a severe crisis within the US financial sector over the next few months and might have led to the collapse of many financial institutions.

But will it solve the problem?

Apparently, by cutting interest rates the US Fed expects to stimulate consumption, crucially lower mortgage payments, and in the process trigger a recovery in the US economy. Be that as it may, top economists — including Noble Laureate Joseph Stiglitz — point out to the futility of this exercise saying that this cut in interest rates will have little impact on the overall scenario.

According to them, it is a case of too little and too late — akin to applying pain balm when chemotherapy was the need of the hour.

Even as the interest rate cuts are carried out experts believe that US Fed chairman Ben Bernanke may be open to the charge of creating ‘moral hazard.’ After all, in sum and substance, the act of the Fed is rewarding all those who were party to reckless borrowings and lending.”

This is exactly what I don’t get. The sub-prime borrowers bought houses they knew they could not afford. The mortgage companies gave away these sub-prime mortgages without evaluating risks and now the government is helping the mortgage and reckless borrowers by lowering interest rates. It sounds very noble but in the end it is coming out of the pockets of people who try to save money.

“As US lowers its interest rates dramatically, economists are worried that it could find that global capital is moving away to other countries which offer higher rates of interest simply on account of arbitrage opportunities. This could mean appreciation of currencies across continents and depreciation of the US dollar. As the dollar depreciates against other currencies, goods from other countries would become costlier in the US, leading to inflationary pressures within the US economy.

According Allan Meltzer, a Fed historian, the Fed “put all of its chips on the prospect of a possible recession, and very little on the possibility of inflation.” And should the US be visited by a bout of inflation, as predicted, the Fed would have no other option but to once again increase interest rates. And that could be an unmitigated disaster.”

As a result of the debasing of the dollar, inflation is going to rise. We are soon going to see the cost of milk, vegetables, gas and everything else go up drastically(after the elections obviously). To see a few examples of rising inflation costs, read this post, http://www.livingoffdividends.com/2008/01/28/more-inflation-magic/

So what can we do to not only survive the effects of a weak dollar but take advantage from it. I will be writing a post on that in my next article.

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