Fed Cuts

In case you missed it, the Fed cut it's key rate:

Fed cuts rates by a half percentage point

Bold reduction in fed funds aimed to forestall disruption in markets, economy

WASHINGTON (MarketWatch) -- In a surprisingly strong move, the Federal Reserve unanimously voted to cut its overnight interest rate target by a half percentage point to 4.75% Tuesday, citing turmoil in financial markets as a threat to economic growth.

"The forest fires in the economy had been spreading rapidly in the July-August period, and the Fed has recognized that it is going to take more than just a few buckets of water to bring this situation back under control," said Brian Bethune, U.S. economist at Global Insight.

U.S. stock markets rallied on the first cut in the federal funds rate in more than four years. Financial markets and analysts had been expecting a smaller quarter-point cut.

What does this mean? Will you get a better rate now? Will you be ale to stave off high prices with a low low rate?

According to Bankrate.com, maybe not:

Mortgage rates lower, too? Not so fast

Whenever the Fed cuts the federal funds rate, customers call mortgage lenders, eagerly expecting to take advantage of a drop in mortgage rates. By the time these phone calls are over, customers frequently feel disappointed and even suspicious. It just doesn't seem right. Why would banks raise mortgage rates while the Fed is cutting rates?

Things aren't that simple (or that sinister). Mortgage rates go up and down according to investors' expectations of long-term inflation. Simply put: If investors think inflation will accelerate, mortgage rates (and other long-term interest rates) rise.

So, is long term inflation a problem?

Gold hits 28-year high after dlr sinks to record lows

and

Oil prices rise above $82 a barrel


Let us see what the dollar is actually doing:

Loonie's rise latest sign of our dollar's fall

The American dollar is tumbling around the world.

On Thursday it reached parity with the Canadian dollar for the first time in 30 years and hit its lowest level yet against the euro, also dipping relative to the British pound and hitting a nine-year low against the Indian rupee.

Parity means one Canadian dollar buys one U.S. dollar, so a bottle of maple syrup could cost an American as much in Toronto as it does in New York.

So with gold shooting up, oil making a new high and the dollar falling off the cliff, I'd say we might have long term inflation. One way to tell, let us look back to Bankrate.com:

Mortgage rates rise slightly

The Federal Reserve cut interest rates this week. So naturally, mortgage rates went along for the ride, right?

Wrong.

The benchmark 30-year fixed-rate mortgage rose 4 basis points, to 6.32 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of one percentage point.

So what has Ben wrought on us? Higher inflation and not necessarily lower interest rates that won't help the falling knife of the housing crash steam rolling away.

But there is more, international consequences are growing.

China threatens 'nuclear option' of dollar sales

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

and


Fears of dollar collapse as Saudis take fright

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

Ben Bernanke has placed the dollar in a dangerous situation, say analysts

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

and

Iran to replace dollar with euro

The Iranian central bank is to convert the state's foreign dollar assets into euros and use the euro for foreign transactions.

"The government has ordered the central bank to replace the dollar with the euro to limit the problems of the executive organs in commercial transactions," Gholam Hossein Elham, a government spokesman, said on
Monday.

"We will also employ this change for Iranian assets [in dollars] held abroad."

Elham said that Iran's budget would in future be calculated in euros.

"Until now the budget has been calculated according to revenues in dollars but this calculation will now change," he said.

Can you see where this is going? I might be getting a little a head of a Chicago RE blog here, but the macro motions must be understood. The Butterfly Wing Theory is in full play. You might not have noticed the guy that lied about his income and had many ugly marks on his credit that over paid for a 1000 sq ft ranch in Norwood Park. But if multiplied by the hundreds, or thousands, or millions more such fools, you cannot help but notice a breeze. The problem is that now everyone holding a US$ is coming down with a cold.

Thanks, Ben!