Tuesday, December 16, 2008

Another Fed cut; Conference Board demands stimulus

In the last hour or so The Fed has taken the unprecedented step of declaring it it will not have a set rate for American banks to charge each other -- noting the target hasn't even been hit as of late -- but rather setting a target range for the funds rate: anywhere from 0 to ¼%. The Fed also said today that they are going to be taking pretty aggressive steps to jump start the economy but warned that rates could be stuck at low levels for quite some time to come. The statement of Bernacke and Co. is here, but it's worth noting that the greenback which had been at about $1.25 against the Euro just a couple of weeks ago fell three cents on the news within seconds from $1.37 to about $1.40. Simply Ben also lost about a full cent against the loonie.

This new rate is a cut of up to 5¼% since September of last year when the economy showed signs of slowing down. One has to wonder if negative interest rates are next -- they have them in Japan right now. If one reads the statement, it reads like a desperate plea for more time and almost begging to keep its independence from the White House. If Barack Obama is planning something really interventionist, he's being awfully coy about it right now. He'd better come up with something -- when the annual inflation rate drops 2.6% in just a month (from 3.7% to 1.1%) there's a big problem.

It may sound almost perverse to say this, but I think Americans will realize just how worthless their currency is once their beloved game board cash drops to 2:1 against the Euro. It can happen (it troughed at around $1.61 earlier this year). Only then will there be a real revolution -- not against the government but against the corporations.

Meanwhile, the Conference Board of Canada, usually friends of Harper and Co., is pleading for a massive stimulus package here, in the neighbourhood of $13 billion. That's pretty modest compared to the multiple jump start attempts in the States, but the board said what most of us have known for months -- monetary policy can only go so far.

We in Ontario know that Jim Flaherty is a ship on his own course and pretty much doesn't care much about the opinions of people either on the left or on the right. So I'd tell the ConBo not to hold its breath.

But if he would take a piece of unsolicited advice, I would tell Flaherty to follow what Martin and Goodale did before him and further increase our reserves in Euros (we already have more in that currency than in the US dollar); and to fast-track the pending "free trade plus more" agreement with the EU. In the present environment, we definitely can no longer view anyone from Washington as being our economic salvation -- and for what it's worth, I think Europeans have more in common with us in terms of social values than Americans ever will.

The worldwide cooperation to prevent a total meltdown is certainly better than the kill each other's throats approach of the 1930s, but at some point the cooperation will end -- and it will be the Americans, not the Europeans, who first cut bait.

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