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The Federal Reserve bank cut
interest rates again yesterday and, of course, Wall Street cheered. After all,
consumer spending now accounts for over 70 percent of real gross domestic
product and they want to keep that gravy train rolling. But unfortunately, it's
not that simple. The Real Story is that for every action there is an equal and
opposite reaction, or, in this case, a consequence.
We are living in historic times. We've recently set four major new financial
records and, despite what you're hearing from self-serving financial experts who
want you to buy their stocks or take out new loans, they're all related.
First, the housing market continues to fall apart. Home foreclosures in the
third quarter are up one hundred percent over last year. Meanwhile, home prices
fell another five percent in August in the ten largest U.S. cities -- that's the
biggest drop in 16 years. We've now had 8 straight months of falling home
prices.
All of that has resulted in fear. Fear of banks defaulting; fear of
unemployment, and fear that millions of more people will lose their homes. It's
that fear that drove the rate cut yesterday, but unfortunately, whenever the
government tries to solve a problem, they create another one -- and this time
was no different.
Cutting interest rates makes money cheaper. Cheaper money makes people buy more
stuff, which means there are too many dollars chasing too few goods. The result
is not only the possibility for massive inflation, but also a U.S. dollar that's
in a virtual freefall. It hit an all-time record low against the Euro today --
that's record number two -- and it's now down forty percent; FORTY PERCENT, in
just seven years. To people in Europe, your dollar is literally now worth sixty
cents.
And that brings us to oil, which traded at over $96 today -- another all time
record high. A lot of people don't understand this relationship, but when the
dollar falls, the price of things we import -- which, look around, is almost
everything -- goes up. Oil is no exception. Oil that used to cost a dollar now
costs at least a dollar forty because of our falling dollar.
And, finally, record number four is gold. It's now near $800 dollars an ounce, a
multi-decade record high, because investors are fleeing the falling dollar.
I told you earlier that government intervention like yesterday's Fed rate cut
always has a consequence. That consequence is the loss of confidence in America
by the rest of the world. They see our mounting debt, the talk of higher taxes
and more spending, and they are running away and putting their money elsewhere.
That only drives the dollar lower; oil prices higher, and the Fed into a state
of panic, which starts the whole damn cycle all over again.
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