Suprise USA interest rate cut - 0.75% outside of timetable

[tristanperry]

Hey all,
It's just been announced that the Fed has cut interest rates 0.75%.

Whilst it may lessen the chance of a US recession (or indeed make the recession's effects less damaging), share markets Worldwide haven't moved much as a result of this.

According to FT.com, it's also being speculated by some that a further 0.5% cut is on its way next week. This is pretty much unprecedented, so it's pretty interesting to watch IMHO (I say pretty much unprecedented because interest rates were last cut by a large amount - i.e. 0.75% - in 1984, although the interest rates then were over 10%).

Thoughs/comments?
Tristan

 

[Theo]

Comments?

London is freaking expensive My trip there cost a fortune.

Recession fears bring a boost for the economy in the same sense that a forest fire consuming a portion of it triggers the sprouting of new life.

The rate cut won't do much to stimulate the US economy, however it's a clear indication that other markets will follow suit. The real estate market bubble bursting will expand much faster globally and at a much faster rate. Europeans much fasten their belts; in the US it's been a much smoother slowdown.

At this time, the unreasonably strong pound can buy more US property, so come on Brits invest while you can

 

[tonyk2000]

Since there is a limited space to cut interest rates... I wonder what would they do later... Now 3.5%, so they may cut it a few more times only during 2008... and it'll become close to zero... So it is a temp. solution anyway

 

[tristanperry]

Lol at the London comment (true, though!)

And very nice points - I hadn't thought of things like that. Yep, we're surely in for a bumpy ride - although I hope what you say is true about the long term effect being positive

As for the unreasonably strong pound... I like it that way (In my rather biased view )

 

[H2FC]

Lower rates will help the banking and investing sector recover faster from their big losses due to the housing crash....which they caused in the first place by their uncontrolled greed. Blame Greenspan for that too....the feds should have known what would happen when they cut rates so low and left them there for so long. I hope that doesn't happen again....Once they see signs of recovery they must start raising the rates a little to protect the greedy from themselves.....and to protect the economy.

 

[Theo]

So far stocks seem to be rebounding from the pre-market trading losses.

 

[financialtraffic]

The true underlying issue in my opinion, at least in the U.S., is that the general population spends more than they earn. We've become a society of net zero savers. If you are lucky enough to have grandparents who have been around a long time, talk to them about how they did things in their day.

They worked, they saved and they spent reasonable amounts on their car(s) and house. People forget that not too long ago you had to put 20 percent (or more) down in cash to buy a house and get any sort of favorable financing.

And housing is just a part of the problem. Consumers who are leveraged are often just a few weeks or months away from being insolvent. Most never stop and think about how they would pay their bills if they or their partner lost their job.

To make matters worse, companies who get cheap money are often depending on consumers to pay them back and because consumers like to spend money that's out of sight and out of mind they are likely to ramp up spending when money is easy to get and they tend to stop only when it's too late - which causes a whole boom and bust cycle for both consumers and corporations.

I believe a recession and a mild depression would do the economy a whole lot of good over the long term. Only then would consumers be forced to start looking at and counting their pennies.

 

[Theo]

Here's where the money goes to.

 

[tonyk2000]

A few more points:
1) It is not a secret that a lot of dominpurchases are financed with credit $$$. Furthermore, a lot of big buyers are simply parking domains (like cardiology.com sold last year, now parked and whois shows that the purchase was financed by Domain Capital). Will all this continue? I'm not sure.

2) Quote from a reputable source (a known futurist Gordon-Michael Scallion):
Quote Begin
"Once President Bush announced his stimulus plan, a signal was sent to the world’s financial institutions that more economic bad news was coming from the U.S., including a potential slow down.

... you know that I have been warning about a coming recession, but what I can now add now is the severity of it. Recent visions have shown me a 20-30% drop in markets such as the Dow, in other words, a crash, though over several weeks. February will be a melt-down month.

While the housing and mortgage markets have played a roll in the decline of financial markets, there will be more stress for this market in February as the housing market declines further, especially new construction. This will trigger other failures in the industry, probably bankruptcies, such as insurance companies and mortgage lending institutions.

The stimulus package proposed by President Bush will do little, if anything, to correct this country’s economic condition. It is designed to encourage personal spending, which is just the opposite of what needs to occur. The U.S. is a nation of debt, personal and governmental because of our tendencies to spend more than we have. Remember my warnings over recent years that personal debt, especially credit card debt, will one day bring the U.S. economy down. That day has come, and the next phase will be increased unemployment.

What we need now is to increase jobs and manufacturing output, not buy and sell more stuff from China. A stimulus package geared toward rebuilding our failing infrastructure of bridges and roads could be a good start and would create tens of thousands of jobs and stimulate output for industries such as our steel, chemical, and raw materials industries."
(Quote end)

 

[sashas]

I've been in the US for about an year, and I come from a culture where credit cards and loans were looked down upon, even as long as 3 years back (India).
Now that I'm finally going back, there is one thing I've seen about America: that too much money just makes you poor.

I'm leaving the US partly because I couldn't take the all controling, constant hammering of consumption and advertising everywhere. You couldn't walk two blocks without seeing a billboard somewhere or the other. And I thought freedom meant complete freedom, even freedom of thought and choice. But with so much corporate control over everything from news to baby food, there are too many external factors influencing you.

I don't have a credit card, and I don't plan to get one anytime soon. My father has lived 65 years of his life without a credit card or even a debit card, and he has lived a good and happy life.
Why do you even need a credit card? Why do you need to buy that dumb thing they show you on QVC when you know you probably won't use it more than twice in your entire life? I've never been able to understand this desperate urge to consume and consume more and more.

 

[H2FC]

The best stimulus package in my opinion would be one to help move us from a dirty oil and coal energy economy to a clean renewable energy economy. When we get away from depending on fossil fuels and damaging our planet and our health by using them we will all be much better off....in more ways than possible to list here.

That would be a real, true, beneficial and lasting stimulus package imho....and it is doable.

 

[Theo]

Buying domains on credit? I'd rather shoot myself in the leg.

I use credit cards as the means to pay, not to finance. I have zero credit debt and a top credit score. One should not finance domain purchases with a credit card unless they can pay them off within 6 months.

 

[draggar]

Why do you even need a credit card? Why do you need to buy that dumb thing they show you on QVC when you know you probably won't use it more than twice in your entire life? I've never been able to understand this desperate urge to consume and consume more and more.

Easy, to buy things you want but can't afford, the cornerstone of a capitalist economy run by banks and lawyers (and insurance companies).

I use credit cards as the means to pay, not to finance. I have zero credit debt and a top credit score. One should not finance domain purchases with a credit card unless they can pay them off within 6 months.

I can pay off the domains in a month, that's not the problem. The problem is the rest of the credit card debt. :lol::sigh2::sigh2::sigh2:

 

[sashas]

what we need is some good ol cash to make a comeback.

I've seen people shying away from paying by cash at good restaurants. Since when did cash become a "lower-class" method of payment?

 

[draggar]

The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, to 3.5 percent from 4.25 percent

From CNN - that's a good one to cut.

Of course, credit card companies will need months to "upgrade" their systems to accomidate the new cut (while they can incorperate a new increase in a milisecond).

 

[whitebark]

The true underlying issue in my opinion, at least in the U.S., is that the general population spends more than they earn. We've become a society of net zero savers. If you are lucky enough to have grandparents who have been around a long time, talk to them about how they did things in their day.

They worked, they saved and they spent reasonable amounts on their car(s) and house. People forget that not too long ago you had to put 20 percent (or more) down in cash to buy a house and get any sort of favorable financing.

And housing is just a part of the problem. Consumers who are leveraged are often just a few weeks or months away from being insolvent. Most never stop and think about how they would pay their bills if they or their partner lost their job.

To make matters worse, companies who get cheap money are often depending on consumers to pay them back and because consumers like to spend money that's out of sight and out of mind they are likely to ramp up spending when money is easy to get and they tend to stop only when it's too late - which causes a whole boom and bust cycle for both consumers and corporations.

I believe a recession and a mild depression would do the economy a whole lot of good over the long term. Only then would consumers be forced to start looking at and counting their pennies.

Well put - and now if only if the states and federal government would take a hint as well and stop spending more than they have. The tax-cut uber alles approach of the current governments is not sustainable. Either cut back on spending, or raise taxes to meet monetary demand.

I can only imagine what level of every federally raised dollar goes to just service the interest on the US national debt. Now multiply that at the state and local level as well. The US is swimming in debt - maybe even beyond their giant economy's means to pull out.

Use of the fiat dollar is coming to its inevitable end. There is far more debt than there is actual money to pay it back. Every time they print more money it is created as debt w/interest due, which only compounds the problem.

 

[jasdon11]

Comments?

London is freaking expensive My trip there cost a fortune.

Recession fears bring a boost for the economy in the same sense that a forest fire consuming a portion of it triggers the sprouting of new life.

The rate cut won't do much to stimulate the US economy, however it's a clear indication that other markets will follow suit. The real estate market bubble bursting will expand much faster globally and at a much faster rate. Europeans much fasten their belts; in the US it's been a much smoother slowdown.

At this time, the unreasonably strong pound can buy more US property, so come on Brits invest while you can

I agree that the rate cut won't stimulate / save the economy; too far gone - but invest in US property; you gotta be kiddin'!

Even if GBP/USD corrects back 10-15%, it wouldn't account for what real estate is going to drop IMO. And that correction won't happen until the BOE start knocking points off their interest rate.

 

[draggar]

FYI - New home sales and first mortgage applications rose in December (this was reported last week).

 

[Theo]

I agree that the rate cut won't stimulate / save the economy; too far gone - but invest in US property; you gotta be kiddin'!

Even if GBP/USD corrects back 10-15%, it wouldn't account for what real estate is going to drop IMO. And that correction won't happen until the BOE start knocking points off their interest rate.

I live in an area that's filled with British expatriates and you'd be surprised how well they're doing after investing in local businesses and land.

 

[sashas]

As far as real estate goes, India has been growing VERY strong. There is an amazing demand for infrastructure.