Will another round of Fed Rate Cut help?

Dow closed below 11000 for the first time since July 15th 2008. However the stock market rebounded hard on July 16th 2008, closed well above 11000 at 11239. So Dow only stay below 11000 for a day.

You might ask when is the first time Dow closed and stay below 11000? The answer is July of 2006 where Dow stay below for 2 weeks.

As i wrote this article, Dow future at minus 39, rebounded from minus more than 100 earlier. The reason is simple, another round of rate cut. The fed funds future shows tremendous hike in people bet federal reserve will cut its key rate to 1.75 from a mere 5% few days ago to more than 75% today. Even the percentage of fed rate cut to 1.50 is higher than unchanged at 2.00.

So here's the one million question: will a fed rate cut really help?

Here's what we all read in the economic book: the interest rate is the cost of borrowing. When economy is at a bad situation, central bank of a country will does what we called an expansionary policy, which is lower the interest rate and increase the money supply. The lower interest rate mean lower borrowing cost will make people borrow money to invest in various location such as spend it as household consumption, use it for business or invest in stock market, etc.

I know that is boring so here's the interesting part: the monetary policy only will work when the economy is performing at normal situation, meaning the only problem occurred is economy slowdown, there are no inflation problem, government and all the people debt level are at normal level, the business environment is perfect for investment etc.

But the problem now, the inflation rate of US is very high due to high energy prices, the debt level of us government and American is at all time high and the business environment of US is well, messy and "inhabitable".

So here is the problem you will face when fed cut the interest rate: the lower borrowing cost will make American borrow more money hence their debt level will go so high and they won't afford to pay back, they spend the money and make the US inflation rate become even higher and they invest in business and stock market and loss it as the business environment in US is horrible. So you will end up with debt all over your waist, the inflation rate is so high until even a bread cost you 3 millions dollar and you will loss all the money you borrow to buy shares etc.

And that's exactly happened to US since Ben Bernanke first cut the rate last September from 5.25 to 4.75. American people are poorer and poorer. We always talk about the housing market slump, the sub prime mortgages problem but do you know a big bubble called credit card market is about to bust. American spend so much more money than what they can afford and got themselves in big credit card debt problem. Some said US credit card debt reach 100 trillion dollar. Imagine that 100 trillion dollar worth of money out of economy, what will happen?

So now the fed rate already cut to 2.00% and yet they wanna cut it again. I hope Ben Bernanke knows what he is doing but really, he is pushing the America economy to hell. Jim Rogers said before fed should not keep cutting interest rate. When the economy is poison and bacteria is inside, let the economy heal itself, don't give it disturb it as fed will only make US economy closer to hell.

So this is what you should do: if you have position, this is your opportunity to sell it. Market will react positively (stupidly) towards speculation that fed will cut rate. Sell it and sleep well after that. If you do not have any position, don't ever touch it except you think you are a dare devil. Keep you money safe and cash is king. Risk management is more important than ever.