I'm interested to know what you all think will be the short term result of the Fed's cutting the interest rate even further.
Most bloggers will respond by discussing monetary issues (obviously). I consider this my weak point and will step aside on that issue and allow room for more-able economists to answer that question.
However, I would like to comment on the effects rate-cuts can exhibit on international relations.
The dollars' value will continue to fall. Europe, particularly Sarkozy, warned that if this continued, there would be a political response. In other words, certain countries in Europe would impose trade barriers. A recession is quite possible for the U.S., and to combine this situation with protectionism would make matters much worse. Remember the Smoot-Hawley Tariff . . .
I figure that the leaders of the EU, China and Japan would be really steamed by now. Their countries are holding BILLIONS in currency and assets in US dollars. The drop in relative value of the US dollar has cause them to lose a lot of real wealth. Further cuts will only stimulate them further. Sarkozy is just giving the US a warning that his socialist folks are gearing up for a trade war given the short term reduction in relative value of the US dollar.
As for the short term effects: They will not be as great as the Fed expects them to be and they will cause short term inflation. Just look at the price of gold, oil and copper. They continue to climb as the Fed creates credit out of thin air. Of course the long term effects are disasterous. The US consumers are have a real reduction in wealth as prices of goods increase.
When priced in gold, the Dow is down 25% for the year. http://www.youtube.com/watch?v=7SCJt2hY6b4&sdig=1
Forsmant:When priced in gold, the Dow is down 25% for the year. http://www.youtube.com/watch?v=7SCJt2hY6b4&sdig=1