The problem with rate cuts is that it will probably devalue the dollar as foreigners find more attractive options elsewhere. Other FCBs are raising interest rates. When foreign investors are faced with lower rates in the US, coupled with a recession and IMF warnings about the deep recession, and they see higher rates and better fiscal restraint in Europe, I think they will start moving their money into euros. Italy moved a chunk of dollars to British pounds recently, and China has been talking about diversitying for some time now.
Once money moves out of the US, the long bonds are going to be cheaper, raising interest rates even more. It’s only a matter of time before the conservative foreign investors leave our country: I’m talking about insurance companies and pension funds. China’s FCB will be the last to pull out, but let’s remember that other countries have been publicly talking about getting out of the dollar. Gee, if the US lowers interest rates, the dollar is going to take a serious tumble. I should post this on Roubini’s blog, to see what he says.
