A Drastic Move

This week was very interesting in the financial world. On Monday, the markets were closed in the US because of Martin Luther King, Jr. day; however, stock markets worldwide sank drastically amid concerns about the overall health of the US economy and a pending recession. The current credit crunch as result of last August's sub-prime mortgage meltdown makes the matters worse. These concerns heightened this week due to declining corporate profits and the worse housing report on record. For the first time on record, year-over-year housing prices dropped 13% against 2007 prices. This caused the Federal Reserve to take a drastic step.

Before trading opened on Tuesday, the Fed slashed interest rates three quarters of a percent or 75 basis points. The federal funds rate now is 3.5% and the discount rate was lowered to 4.0%. This was the largest rate drop in 24 years. This move came 8 days before their next scheduled meeting suggesting that they are responding to a problem that couldn't wait. Immediate stimulus to the economy is needed to prevent the market from going into a free-fall.

The last time the Fed cut interest rates in between meetings was the week after Sept. 11, 2001. More rate cuts are expected next week as well. Additional credit is needed to prop up the sagging economy. As I have been pointing out for months particularly the week of Thanksgiving, this is a dangerous game the Fed is playing. As they lower interest rates, they are undercutting the value of the dollar and running a risk of much higher inflation, even hyperinflation.

The sudden influx of credit will spur on inflation because companies have more money to do business. Because of the losses sustain last year by the sub-prime mortgage fiasco and the rising cost of oil, companies will charge more on their goods and services to make up for the losses. Thus, consumers goods will cost more and more. On the other side, foreign investors will less likely be willing to put their money in t-bills, treasury notes, and other US government securities. The value of the dollar will go down. Now, the consumers are hit with a double whammy of goods costing more and the value of the dollar going down. Thus, consumer buying power is diminished.

So you can see the Fed is taking some drastic action to risk these consequences. They see that if the economy doesn't pick up speed quickly, a drastic recession and even a depression could start. A period of depression and hyperinflation simultaneously is the worse of all economic situations - less money available and the cost of goods going increasingly higher. This continuing yo-yo effect is beginning to spin out of control. I have been warning about these consequences for months.

Gold and silver also responded this week with their continued upward trend. Gold rose to $911 per ounce and silver closed at $16.46 per ounce. This is up from $881.20 and $16.14 respectively. During periods of economic instability, investors have repeated retreated to precious metals to preserve the value of their assets. The US dollar index again fell this week to 75.93 from 76.39 last week. This means the value of the dollar fell against a weighted average of the other major world currencies.

Think of these matters in these terms - how long can your family continue to spend money it doesn't have before your belongings become repossessed? This is what the country is headed for. This is also affecting the global economy as well.

If you are interested in checking out your available options on how best to deal with the situation, please contact me at the email address below.

"Give careful thought to your ways. You have planted much, but have harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it." Haggai 1:5,6 (NIV)

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Email: DeltaInspire@panama-vo.com