Praying for Interest Rate Cuts

If you're sincerely worried about too many people getting jobs, we respectfully suggest you lighten up a bit.
--Alan Abelson in Barron's

The received wisdom is that the market swooned on Friday because the participants decided that there was a sufficient amount of good economic news to permit the Federal Reserve to keep interest rates where they are.

Interest rates are the price of money.  So this translates into the Federal Reserve keeping the supply of money where it is.

In addition, the Chairman of the Federal Reserve is famous for his focus on and determination to prevent deflation.

So, we can summarize.  Deflation is out of the question because:

A) Bernanke will never let it happen, and

B) It is only a matter of time before the Fed opens the monetary spigot

And nothing else matters:

The fact that the real estate market is imploding.

The fact that China holds a trillion dollars of our debt.

The fact that we are embroiled in a war for oil costing a billion dollars a day.

Allow me to close by asking the, perhaps theoretical, question: do the Chinese care about United States interest rates?

Why should they?

First, they directly affect income on the dollar-denominated debt they hold. Second, US interest rates control the value of the dollars they hold. So, even if Mr. Bernanke is tempted to cut US interest rates, his hand may be stayed by the Middle Kingdom. When you're in debt up to your eyeballs, you sometimes have to kowtow [http://en.wikipedia.org/wiki/Kowtow] to your creditors.

There's more...

The Fed -- Jekyll Island Monster

© by Stephen Neitzke, 2006

In November 1910, seven wealthy men left the Northeastern US on trains to do some duckhunting on an island off Brunswick, Georgia. They carried all their duckhunting gear in plain sight, so that any snooping reporter could see that they were going duckhunting.  And reporters really snooped in those days.  The Reform Era muckrakers were still at their 1890s-1912 peak, producing exposés that still startled everybody.

On arrival, the duckhunters moved into a posh resort owned by JP Morgan -- on Jekyll Island.

In later years, at least one of the men admitted that he had never shot a duck, and never intended to. Another of the men later punned that the duckhunting was "a blind".

There's more...

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