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The Federal Reserve today (Dec. 16), essentially admitted it is fighting a depression, not a recession. The central bank dropped the federal funds rate, the interest that banks charge each other, to a range of zero to 1/4th of 1 percent, an all-time low. It had been 1 percent. The stock market had been expecting a 1/2 percent cut. Like drunks on Skid Row reacting to five barrels of wine rolling in from heaven, the stock market rejoiced, as it almost always does when more liquidity is dumped into the system. And the Fed said it will take other steps to pour liquidity into the system beyond the amazingly low rates. Shortly after noon, the Dow Jones Industrial Average was up more than 300 points. Investors were ignoring the meaning of such a radical move: the Fed said that consumer spending, business investment and industrial production have declined and the overall economy has "weakened further." In fact, the consumer price index fell 1.7 percent in November to the lowest level since 1932. The Fed fears deflation, or depression, but won't say it. All this liquidity may create another bubble, but how does one know what kind of a bubble? Stocks? Real estate? If the Fed succeeds in thwarting deflation, very high inflation is almost certain to break out as a result of this liquidity binge.

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Comments

JohnnyVegas Dec. 16, 2008 @ 1:30 p.m.

Hank Paulson and the other idiots who are in charge are wrecking the country.

Tell me this= if interest rates which were sitting at 1% were not doing the trick, what on earth makes anyone think that lowering the rate another half a pecent is going to do jack sheet?????????

Is that half a percent on the already historic lows going to suddenly change the nation???? NO, of course it's not.

We need to sit back and ride this one out-and along the way develope a strategy/policy for keeping MANUFACTURING JOBS here in the states.

Please, I cannot wait until January 20, 2009 comes and we get this country headed in the right direction-which is ANYWHERE besides the current direction.

A country that produces no goods will be a third world country in due course and we have provn that.

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SanDiegan Dec. 16, 2008 @ 4:57 p.m.

Right again JohnnyV - and in the meantime the guy who got hit with the shoe is going to preserve his legacy using the remainiing giveaway $$$$$$ in the TARP fiasco to "loan" it unconditionally to the incompetent auto makers and their Union bosses - gut then, remember "our economy is fundamentally sound!

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Don Bauder Dec. 16, 2008 @ 5:26 p.m.

Response to post #1: Short term interest rates were already around zero when the Fed acted today. Banks weren't lending to each other. The Fed is doing other things such as buying long term bonds to get long term interest rates down. Will it do any good? What the Fed and Treasury have done thus far have hardly done much good. Best, Don Bauder

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Don Bauder Dec. 16, 2008 @ 5:28 p.m.

Response to post #2: Have you seen the U-tube which shows the Iraqi reporter hurling the shoe at Bush, who ducks, then showing Moe of the Three Stooges hurling a pie at Curly and hitting the market perfectly? Best, Don Bauder

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valueinvestingisdead Dec. 16, 2008 @ 8:34 p.m.

Next Bubble? Gold and Silver...you heard it here first. All of a sudden, everyone will realize currencies are worthless.

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Don Bauder Dec. 16, 2008 @ 9:32 p.m.

Response to post #5: Commodities were in a bubble that has burst. But gold and silver may be the exception. Best, Don Bauder

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Fred Williams Dec. 17, 2008 @ 8:36 a.m.

The race is on: Inflation vs. Deflation

Since the Bush team is pushing for inflation, I'm betting deflation wins.

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Don Bauder Dec. 17, 2008 @ 9:14 a.m.

Response to post #7: Obama may throw more money at the fight against deflation than Bush did ($10 trillion to date). Best, Don Bauder

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Anon92107 Dec. 18, 2008 @ 5 a.m.

Just keep an eye on the currency exchange rates Don, they are as big an indicator as any on how much more the rest of the world will tolerate the decline and fall of American Capitalism.

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Don Bauder Dec. 18, 2008 @ 7:03 a.m.

Response to post #9: The dollar is on the decline again. That is hardly surprising with zero short term interest rates, artificial lowering of long rates, and more massive bailout packages. Best, Don Bauder

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