Fed Cuts Rates: Global Stagflation Stage II

The Federal Reserve cut rates by half a percent today.

Central banks around the world Wednesday cut interest rates amid mounting losses in financial markets, as the credit crunch continued to seize up lending.

The Federal Reserve lowered its federal funds rate a half a point to 1.50 percent. It also lowered its discount rate as well. The Fed, whose decision was unanimous, last cut rates a quarter point in April.

Central banks in the UK, European Union, Switzerland and elsewhere participated in the move.

At 1.5%, the Fed Funds Rate is only half a percent higher than it was when Alan Greenspan dropped them to 1% during 2002-2003. (A move that I believe was the catalyst for the crisis of today) The Fed is the latest in what appears to be a new global central bank effort to drop rates as low as possible. The Australian central bank made an even more stunning move a day and a half ago.

Australia's central bank stunned investors with its biggest interest rate cut in 16 years on Tuesday, lifting Asian markets on speculation other central banks would follow suit in a possibly coordinated move to combat the global credit crisis.

The 1 percentage point reduction in the Reserve Bank of Australia's benchmark cash rate to 6.0 percent was twice the size analysts had expected and the biggest single cut since May 1992 as the authority attempts to insulate the country's banks, households and firms from a meltdown in global financial markets.

So, here is what the set up is. With the recent $700 billion bailout, we have set in motion what will likely be a global bailout addiction. The Brits have unveiled their own bailout package. European central governments are already talking about coordinating their own bailout package. Since banks all over the world got in on the mortgage bonds, governments all over the world will likely need to bail them out. As such, countries all around the world will run massive deficits. At the same time, central banks are now running into rate cut addiction. Obscenely low global short term rates at the same time there are massive deficits globally is a recipe for for global inflation.

Of course, all of these bailouts and rate cuts will have to work. If they don't, we are running head first into a global recession. Global recession at the same time there is global inflation is global stagflation.