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2 US rate cuts: Like a blow to the
head By Julian Delasantellis
CNBC's Maria Bartiromo was so
gushingly giddy in her coverage of the rally that
you would have thought that Starbucks had opened a
coffee stand in her electroshock therapy suite.
Shares of broker/dealer industry companies
had a particularly fine afternoon; Goldman Sachs
rose 7%. If you accept the thesis from my article
of this past Monday, September 17, A rate cut with a shoeshine and a
smile that Federal Reserve chiefs are,
in reality, nothing but glorified salesman for the
US financial services
industry, then Tuesday saw a
particularly glowing employee evaluation placed in
Bernanke's file.
Very few other countries
have ever been able to make such whoopee as their
national currencies are being debased. In 1981,
newly elected French socialist president Francois
Mitterrand had to abandon his campaign promises for
an ambitious social equality program when currency
traders started to sell the franc hard against the
West German mark.
In 1993, when US labor
secretary Robert Reich urged an expansive social
welfare/jobs reflationary fiscal program; newly
elected president Bill Clinton nixed this idea
when treasury secretary Robert Rubin advised the
president that this would cause both the US dollar
and bond prices to fall. When their currencies
were hit by speculative attacks, the countries
most affected by the 1997 East Asian financial
crisis, primarily Thailand, Indonesia and South
Korea, were forced to make painful cuts in their
national social welfare spending.
But it
seems that the US is never forced to face such
dolorous consequences as its currency weakens. Its
policymakers initiate policies that they know full
well will weaken the US dollar, and they just
don't care. It's almost as if the nation can pay
for goods with checks it knows the other party
will never cash; if you could do this, you'd
probably be living pretty large too.
This
is particularly true in the case of China. China's
foreign exchange reserves are now approaching the
trillion and a half dollar level, and this massive
wad of cash is mostly kept as US dollars. China
has earned this treasure through being the
gleaming supermall for the shop-till-you-drop
obsession that has swept the US, and to a lesser
extent the rest of the Western world, this decade.
What Ben Bernanke is saying with his sharp
interest rate cuts, and what the nation is
affirming its approval of with the orgiastic stock
market response that followed, is that it
continues to hold no other value higher than the
pleasure to be attained through its own excess
consumption. In depreciating the value of the
currency it uses to pay China for its goods, the
US is telling China that it has no intention of
paying China the full value for what it buys from
it; that would be unacceptable, it would mean that
there would be less money to buy even more stuff.
Of course, China does not
have to continue to put up with this. It could
stop accepting the funny money dollars,
the depreciating greenbacks with Mickey Mouse's picture on the
face instead of George Washington's. China
could convert its foreign exchange reserves into
other currencies by selling its dollars. As this
would severely reduce the demand for US Treasuries in which China
parks its reserves, US interest rates would have to rise
sharply to re-attract the securities demand lost
from China, and there would be little or nothing
that Bernanke, Treasury Secretary Henry Paulson,
President George W Bush, or even the US's first
infallible-by-decree army general staff officer,
the Blessed Holy Father General St David Petraeus,
could do about it.
This
would not be an easy thing for China to do, so
the US feels China will not do it. If China
actually did try to publicly sell all or a large
part of its dollar portfolio the prices
of the dollar assets remaining in the
portfolio would undoubtedly fall sharply; China could lose a lot
more than it gained. Still, Bernanke has just
told China that, come hell or high water, he
fully intends to filch away the value of
their reserves. Maybe China could decide that it's
a choice between losing a lot of money, fast, by
selling its dollars, or losing a lot more, slowly, by keeping its
dollars.
Like pulling off a Band-Aid,
it probably hurts less to do it fast. Or, China
could do it smart, slow and gradual; that's the
way China likes to manage change. There are some
indications that this is exactly what is
happening. From a level of over $160 billion a
year in 2006, Tuesday's US Treasury Department's
Treasury International Capital (TIC) report,
released a few hours before the Fed meeting and so
thus totally ignored, showed that foreign (like
the Chinese central bank) buying of US government
securities actually turned negative in July. (I wrote about the implications of TIC
data in my March 24, 2006 ATol article, US living on borrowed time - and
money).
China probably is already
diversifying away from the US dollar, but among
all the cacophonous noise of the glorious roiling
tsunami of inanity that is US public life, the
actual signal information is being missed.
There were a few disquieting responses to the
Fed move. Crude oil continued its recent record
breaking rise, topping $82 a barrel. This market
knows that, unlike China, the members of
the Organization of Petroleum Exporting Countries
(OPEC) long ago made clear that they would not accept
depreciating dollars in exchange for their
non-renewable export assets; oil prices go up as
the US dollar goes down. China seems to be
learning from OPEC's example.
The most interesting aspect of
Tuesday's market responses to the Fed cuts may be
the most massively under-reported - the fact that the only
one of the Dow 30 stocks that did not rally on
the news was, curiously enough, Boeing. Boeing got
some bad news on Tuesday with some press
questions regarding the potential crash survivability of
its new 787 Dreamliner, but, in a market
move like Tuesday's, even that type of report is
usually ignored. The market wisdom for rally days like
Tuesday is that these are times when "even the
[scatological term] floats to the top".
I see
the Boeing stock price divergence as more of an
indication that, with Boeing so dependent on
Chinese airline demand, the company may be in big
trouble if China really does act to reduce its
economic relationship and dependence on the US.
On an episode of the old 1970s CBS-TV
situation comedy The Mary Tyler Moore Show,
it once was suggested in the fictional television
newsroom where the show was set that, since the
previous night's newscast had done so well in the
ratings, they should get out the script and
broadcast it again - why mess with success?
In that spirit, since this Federal Reserve
move has apparently gone over so well, (with the
only constituency that really matters in the US,
upper and upper middle class investors) there will
probably be more cuts at the next Fed meeting in
late October should there be further bad subprime
or economic news, which there undoubtedly will be.
How long will the nation get away with the
debasement of its own currency and the defrauding
of its lenders? I have no idea. I find it most
amazing that, in its actions, the nation is
ignoring the very principle at the heart of the
subprime crisis the Federal Reserve's actions are
trying to remedy. To their own misery, the
subprime borrowers have learnt the lesson that the
nation has yet to learn. You can't forever live in
a house, or in a consumer lifestyle, that you
cannot afford.
Julian
Delasantellis is a management consultant,
private investor and educator in international
business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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