Central Banks Market Tinkering & The Unintendended Consequences

Bloomberg reported that the major central banks decided to lower rates all together by 0.5% in order to help the credit markets:

Oct. 8 (Bloomberg) -- The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point.

Is this going to help the markets recover? No.
Is this a good thing for the economy? No.
Is this a good news for your savings and your currency? No.

Why isn't it going to help the markets?

Well, to understand this, you need to read again the quote above. Who is missing there? We have the US, EuroZone, Sweden and Canada. One major bank is missing, and it is Japan. Japan's rate is already at 0.5%, so they won't decrease it to 0.0% (hopefully!!). But what happened with a "surprise" rate cut (which I had forcasted this week-end) is that it created a massive short-squeeze on the Yen, with the hundred of billions of USD and EUR invested by borrowers of JPY. This led the Yen to rise 10% against the USD in a couple of minutes only! The USD crashed from about 106-107 Yen to 99!

The unintended consequence of market tinkering is that the yen-carry-trade will have to unfold and lead to a massive delveraging that is going to cost a lot to many players and investors and further sunk the markets.

Why isn't it a good thing for the economy?

Because the economy is already chocking due to too much credit and the unability of the market players and consumers to pay back. This is not going to help people borrow more. This is not going to help the banks neither, since the effective Fed Funds rates was already 0.0% as I mentioned yesterday.

People who couldn't pay back their mortgages won't be able to do so thanks to a 0.5% decrease rate.

Why isn't it a good thing for your currency?

Inflation will be unleashed (if it wasn't already). Gold is up 40$ an ounce.



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