Phorgy Phynance

Would a rate cut really help?

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What is the Fed going to do on September 18?

With the latest news coming from the NFP report, I think even the staunchest opponents to a rate cut are starting to capitulate. Except me!

I still think the Fed should hold tight and resist the pressure to lower the rate. Sure, that would likely lead to a recession, but the alternative is worse in my opinion. In fact, I don’t even think recessions are all that bad. They are “normal”. What is not normal is flooding the markets with cash every time there is some expectation of a slowing economy. For the past 7 years, that has worked out because China, India, and other nations were able to absorb inflation as they exported deflation.

Things are different now. China is no longer exporting deflation as they begin to deal with their own inflationary pressures. Meanwhile, Europe continues to see inflationary pressures. I’m not too surprised the ECB decided not to raise rates in light of liquidity fears, but think they’re doing a good job keeping the focus on inflation.

Lowering the rates now will not necessarily help, as Roubini so eloquently pointed out, this is not merely a liquidity crisis, but a credit/solvency event as well. Throwing money at a turning credit cycle will only delay the inevitable. Ask Japan about that.

Recessions are not always bad and I, for one, would welcome the strength of leadership it would take to accept that. The longer term risks that would be exacerbated by a rate cut should be weighed heavily. Bernanke has navigated in such a way that I can only admire so far, but a rate cut now would be quite disappointing to me. Economic Darwinism is the only way to longer term prosperity. Complacency has been the downfall of more than one empire and we risk going further down that road. Pain is the best teacher. Ok. That is enough with the cliches for now 🙂

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Written by Eric

September 9, 2007 at 12:56 pm

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