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.

Tags: china, deflation, Economy, Federal Reserve (all tags)

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