Facing the Consequences

November 1, 2007 - 3:00 ET

The Federal Reserve bank cut interest rates again yesterday and, of course, Wall Street cheered. After all, consumer spending now accounts for over 70 percent of real gross domestic product and they want to keep that gravy train rolling. But unfortunately, it's not that simple. The Real Story is that for every action there is an equal and opposite reaction, or, in this case, a consequence.

We are living in historic times. We've recently set four major new financial records and, despite what you're hearing from self-serving financial experts who want you to buy their stocks or take out new loans, they're all related.

First, the housing market continues to fall apart. Home foreclosures in the third quarter are up one hundred percent over last year. Meanwhile, home prices fell another five percent in August in the ten largest U.S. cities -- that's the biggest drop in 16 years. We've now had 8 straight months of falling home prices.

All of that has resulted in fear. Fear of banks defaulting; fear of unemployment, and fear that millions of more people will lose their homes. It's that fear that drove the rate cut yesterday, but unfortunately, whenever the government tries to solve a problem, they create another one -- and this time was no different.

Cutting interest rates makes money cheaper. Cheaper money makes people buy more stuff, which means there are too many dollars chasing too few goods. The result is not only the possibility for massive inflation, but also a U.S. dollar that's in a virtual freefall. It hit an all-time record low against the Euro today -- that's record number two -- and it's now down forty percent; FORTY PERCENT, in just seven years. To people in Europe, your dollar is literally now worth sixty cents.

And that brings us to oil, which traded at over $96 today -- another all time record high. A lot of people don't understand this relationship, but when the dollar falls, the price of things we import -- which, look around, is almost everything -- goes up. Oil is no exception. Oil that used to cost a dollar now costs at least a dollar forty because of our falling dollar.

And, finally, record number four is gold. It's now near $800 dollars an ounce, a multi-decade record high, because investors are fleeing the falling dollar.

I told you earlier that government intervention like yesterday's Fed rate cut always has a consequence. That consequence is the loss of confidence in America by the rest of the world. They see our mounting debt, the talk of higher taxes and more spending, and they are running away and putting their money elsewhere. That only drives the dollar lower; oil prices higher, and the Fed into a state of panic, which starts the whole damn cycle all over again.