Wednesday, March 19, 2008

Feds are beating a dead horse!

Like a clockwork, the Feds have reduced their lending rate by 75 basis points, as expected by the market. Sometimes I wonder why do they need to go through all the meetings since the rates since to be decided by the market anyway. It serves no purpose. Market demand this, and they give in to it.

Everyone says inflation is secondary to the economy. From a business point of view, I would say control inflation, and the economy will rise because it will be cheaper to do your business. Some say I'm a contrarian, or even idealistic. However, I'm just simply looking at things from a business point of view.

With higher inflation, it becomes a game of who can sustain the most losses. Sure, you lower the borrowing rate so people can borrow, but it makes no difference. The game changes... Its no longer differentiation of business by service level and innovation, but sustainability of the business and maintaining the minimal service level. To me, it seems like it will become a vicious cycle. Previously customers might get a certain product, with a couple of freebies thrown in. Now, they get the product only, and it costs higher. If I'm the customer, I will never buy it if I'm not in great need of it.

Economics fundamentally is all about businesses. Its not all about numbers and economic theories. Even the theories are also based on a hypothetical world where everything is bright and beautiful.

With these kind of cuts, I would say the tipping point has come. Demand will slow. Growth will retard. The bubbles growing now in the commodities area will burst due to the sudden realisation of the change in demand. USD will lose its place as the reserve currency causing it to further dive. Only the bare essential sectors will have any hope now. That would include transport, telecommunications, food and beverage, health and utilities. The countries now will suddenly think that exciting their domestic consumption is no longer a bad idea. Interest rates will start to dive to excite consumers to spend.

Of course this is just a hypothetical conclusion I have made. But judging from the way the Feds react, I'm really worried that this will come, and the dreaded S word. Stagflation.

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