it was with some amusement that i read yesterday that the Fed were expected to make a massive cut in interest rates. Massive cuts can be made when there’s something to cut. When rates are 3% there isn’t a long way to go. The eventual .75% cut left rates at 2.25%. Expectations are now that, by the end of the summer, rates will be 1%. Soon they’ll be paying you to take out a loan. All this happened in Japan in the nineties and it did nothing to resurrect their economy in the short term.
In the last couple of years everyone has known that the bubble would burst, but no one knew when. People acted as though nothing would happen. Now everyone is “shocked” at the extent. Today a bunch of sheisters tried to take down HBOS. Who knows what bank may be next. It’s pretty clear that the Bank of England cannot support another large bank failure. People I know were today ensuring that they had no more than £35k in any one account (the government guarantee limit). Ironically most of the cash was flowing into Northern Rock, since they are the only bank whose total deposits are guaranteed.
If you have a bubble, and it bursts, blowing in more air is not going to help. The US (and other economies) are consuming beyond their means. The US borrows $3billion each and every day to finance its deficit. A correction (recession) is a necessity. Artificially holding this off is going to make matters worse, not better. And it could get a lot worse. What would happen if the dollar collapsed? A dutch film examines the issue. In the film a US economist says:
all of a sudden a lot of people in China, who are riding bicycles, are going to find that now they’re going to be able to afford automobiles. Maybe they’ll send some of the bicycles over here because we won’t be able to drive these SUVs anymore.
What is delicious about all this is that steadily all of the power has transered to a silent partner, China. Their participation, in bailing out the US, is what’s holding up the facade. Right now they’re saying very little to upset anyone. But one decision could end it all. For a long time there has been speculation that China sees its inevitable victory in economic, rather than military, conflict. They’ve held fire and can now see the whites of the enemy’s eyes. It’s hard to believe that they have not considered this very carefully. Will they, won’t they?
Perhaps the olympics are going to be far more significant than anyone could foresee. What better stage could there be? The Chinese like the grand gesture. It could be the party of the century.
