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Monday, January 17, 2022

The Interest Rate Cut

By Andrew Robbins

 CSMS Magazine Staff WriterIt is widely anticipated the Federal Reserve will cut the Federal Funds Discount Rate this week. On the surface, an interest rate cut sounds good for consumers. Yet, it is the prolonged easy credit that resulted in the current housing crisis.But was there a housing crisis, or was Wall Street crying wolf? Countrywide Financial, the leading mortgage lender, expects to return to profitability this quarter.Lowering the rate of interest for borrowed money encourages debt and consumer spending. Buy goods made in China or Japan and the stock market is happy.The Asian trade imbalance flooded their governments with U.S. dollars. The solution was to invest those dollars by purchasing U.S. Treasury Debt. In fact, foreign government purchases of U.S. government debt acted to lower our domestic interest rate.In effect, China and Japan financed the U.S. wars in Afghanistan and Iraq.            Now global purchasing power of the U.S. dollar is falling. Lowering the domestic interest rate undermines the dollar’s global purchasing power when compared to other currencies.Many commodities trade in U.S. dollars. Oil is one of those commodities. As the value of the dollar falls, oil-producing countries must raise prices accordingly to compensate for the devalued currency. As the Federal Reserve lowers the interest rate, we should expect to pay higher gasoline prices.Most of us like to eat and drive. Higher fuel prices translate into inflation and overall higher cost for goods and services.Seventy million baby boomers are approaching retirement. Many of their retirement nest eggs are dependent on stock appreciation. Anticipate Wall Street to influence the Federal Reserve. However, government intervention that ignores inflation combined with a stock market that is propped-up with worthless dollars is worrisome.Note: Andrew Robbins is the author of It Took My Breath Away: One Man’s Experience May Save Your Life.

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