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Old 01-18-2008, 09:19 PM   #21
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The Dow is down what, 15% or so? A little early to start talking about closing the garage door and starting your car.
Absolutely agree. I'm 4 years from even THINKING of panicking.
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Old 01-19-2008, 08:06 AM   #22
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1.5 % interest rate cut? Are you crazy?
Probably


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This is the box we - and the FED - find ourselves in. Economy heading into, or already in, recession. Inflation running at +4% consumer, +6% producer. (Consumer will catch up with producer, or else producer eventually stops producing and goes out of business.) And don't give me that "core" bs - thats just a cover the FED can use as an excuse - temporarily. Obviously food and energy matter - probably more than anything else - on the US consumers ability to be able to continue to consume.

All of this with 1 euro buying $1.46?
What we are risking is a complete freeze of our banking system. This is far more important than the actual cost in dollars of my next trip to Europe. Inflation also won't be a problem if our banking system stops working. We can then worry about a far greater evil - deflation.

The Fed has screwed up big time. I don't disagree with your borrow and spend rant. However, we can't solve the problems with an economic breakdown. If it starts happening, the politicos will start to get involved in the "solution" which is almost certain to be worse then a quick drop by 1.5% followed by a series of increases as the system unfreezes.
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Old 01-19-2008, 08:47 AM   #23
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Probably




What we are risking is a complete freeze of our banking system. This is far more important than the actual cost in dollars of my next trip to Europe. Inflation also won't be a problem if our banking system stops working. We can then worry about a far greater evil - deflation.

The Fed has screwed up big time. I don't disagree with your borrow and spend rant. However, we can't solve the problems with an economic breakdown. If it starts happening, the politicos will start to get involved in the "solution" which is almost certain to be worse then a quick drop by 1.5% followed by a series of increases as the system unfreezes.
Agreed that the banking system is on the verge of completely freezing. We all know its because the banks loaned billions and billions of dollars to people who couldn't afford it, and now can't pay it back. The write downs have already started, will continue, and now we have bond insurers on the verge of going under, which means a whole new round of bad debt to be added to banks balance sheets.

A lowered interest rate still doesn't mean the banks will start lending again. The 100 basis point cut to this point sure doesn't seem to have had much of an effect - either on lending or stabilizing the markets. I think the FEDs ability to solve this crisis may be greatly exaggerated. Yes, they can lower rates. And then lower them again. And again.

The Japanese central bank did just that in the 1990s. All the way to 0. It didn't pull them out of their economic morass - and their central bank effectively became irrelevant to affect any further changes.

And a true dollar crisis is a lot more than just a more costly trip to Europe. Remember all that oil we have to pump into our giant SUVs to sit in line for a Starbucks coffee? - we pay for that in dollars. If the FED cuts significantly, and sends the dollar tumbling, everything we import is going to cost a lot more. There is a real risk of a 1970s re-do. When the FED had to push interest rates to 21% to combat 12% inflation.

I'm not sure what the best course of action is, but I believe the FED will act cautiously in an attempt to balance the faltering economy and letting the inflation genie out of the bottle. They are walking the proverbial high-wire, with no easy answers.

Whichever way they go, I believe the equity markets have a great deal farther to fall, and its going to take a good deal of time for us to work through this.

Lets just hope its not as long as it was (is) in Japan...
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Old 01-19-2008, 12:07 PM   #24
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Deflation is indeed a terrible situation for the economy in general, but is also probably the only thing that would help savers. The alternative is a rate of inflation always a bit ahead of interest rate returns.

The Fed will not stop at a hundred&fifty basis points.
Greenspan didn't five years ago.
And they will be just as slow to increase as inflation rises.

Bernanke claims we're not in recession yet, in effect, things are not so bad.
Yet he practicly pleads for governmental stimulus because things ARE getting very bad.
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Old 01-19-2008, 12:17 PM   #25
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Speaking of Bernanke, take a look at the pictures towards the end of this weeks John Mauldin's weekly e-letter. As he states, this is not a happy man.

Stuck between a rock and a hard place...
Attached Files
File Type: pdf mwo011808.pdf (119.1 KB, 27 views)
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Old 01-19-2008, 11:04 PM   #26
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And don't give me that "core" bs - thats just a cover the FED can use as an excuse - temporarily. Obviously food and energy matter - probably more than anything else - on the US consumers ability to be able to continue to consume.
I don't believe that the FED is saying that energy and food don't matter.

The reason they break out the "core" inflation is to weed out the 'noise' and look at the things that are (relatively) more controlled by the FED's actions.

If we get a string of cold spells that kills the orange crop and a ton of other produce in Florida, the FED can raise rates all it wants to - it won't result in more oranges appearing, and only pure supply and demand in the marketplace will impact the selling price of OJ and lettuce, regardless of what interest rates are at. Same thing with good weather producing a bumper crop of [insert favorite vegetable] - interest rates have relatively little impact on impacting buying behavior of businesses and consumers in the agriculture markets when forces beyond the control of the gov't/FED are at play.

Likewise, if there is uncertainty and nervousness about Iran launching WWIII or a good chance of a new dictator taking the helm at an oil-rich African country, the FED can play around with rates all it wants to - it won't hardly change the picture of what Iran might do/some other political disaster. The FED's actions will impact food and energy moreso over the long-term, but not nearly as much short-term. However, the FED's actions will impact both short-term and long-term decisions in most other areas of the economy.

By taking out the two large factors that have relatively lower impact by the FED, they can see what the segments are doing that they have more control over. If the overall inflation rate is 3%, with food/energy going up 10%/year, but "core" (all other) is flat, the FED will act much differently than if the overall inflation rate were 3%, but with food/energy up 1% and all others up 6%.
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Old 01-20-2008, 01:47 AM   #27
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I never really thought about it, but now I wonder just how many retirees--early and otherwise--really will be forced to go back to work by the dwindling returns from their retiement savings and investments.

So far, DW and I have not felt the impact that many people have. We are getting by on our social security here in the Philippines, but we are feeling the effects of the defecated--I mean depreciated--dollar. My 401(k) which is still a nest egg has taken a big hit over the past couple weeks. inflation here is becoming more pronounced as the prices of staples are suddenly and rapidly increasing. But all in all, I think that we're better off living here, for now anyway. There's no way we could live in the States on just our SS.
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