The Big US Rate Cut

In today's newsletter we cover the implications of a Federal Reserve Rate cut and the Indian government's recent proposal to ban e-cigarettes.

The Backstory

On September 11th 2019, Donald Trump opened his twitter account and put this out on the public domain, for the whole world to see.

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN…The USA should always be paying the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”

Yes, that’s right. Donald Trump called decision-makers at the US Federal Reserve (read as the US Central Bank), boneheads.

Sigh!!!

The Real Story

When the US Central Bank cuts rates, it’s a day to celebrate. Well.. maybe not for everyone, but it is a pretty eventful day for most people. Borrowing money becomes cheaper. People can spend on stuff that they don’t need. And the economy gets a good kick out of this whole thing.

However, as the chairman of the US Central Bank, Jay Powell recently noted- “A cut in interest is like an insurance”. It’s only meant to be used in desperate times and it doesn’t seem as if the US economy is exactly in ruins right now.

Unemployment levels in the US are at record lows, growth has been decent and despite the odd trouble with the trade war, the US economy is doing alright. So why this verbal tirade now? Why is Donald Trump so agitated?

That is an excellent question.

See, when you’re a president of the United States trying to win a re-election, your concerns are restricted to the more immediate future.

Think of it this way. Right now almost every investor in the US believes that the economy needs a booster shot, especially with all this talk about an impending recession. So even though there isn’t an actual crisis at hand, people are convinced that a catastrophe is imminent.

And what do you do in such desperate times? You cut interest rates.

Considering that there is almost unanimous consensus that the US Central bank will cut rates, investors are anchored to this expectation. And if the expectation does not materialise, there will be pandemonium in the streets.

Investors will panic, the selling mantra will take centre stage and the will of the people will be broken. Nobody wants that to happen. Especially not Donald Trump.

And so it makes perfect sense for him to keep pushing his agenda, even if low interest rates were more catastrophic in the long run.

As the great economist, John Maynard Keynes once said, “In the long run we are all dead.”

So might as well focus on the short term, no?

Oh btw, the implication of a cut in interest rates is going to be far-reaching and the ripples will reach Indian shores eventually. Once people realise that they can’t make as much interest income with US governments bonds, they might as well choose to bring some of that money to India.

And most people think that this will improve sentiments back home.

So yeah, what do you think? Fancy a rate cut?

No more E-Cigarettes for you

Also, in other news, the government has now issued a ban on the sale and marketing of e-cigarettes.

For the vaping enthusiasts, this came as a serious blow, especially because of their strongly held belief that e-cigarettes are a healthier alternative to the good old stuff.

The government believes that they have enough evidence to say that e-cigarettes are not all that safe and that we must condemn the scourge of e-cigarettes for all eternity.

Caught in between the two parties are the conspiracy theorists, like us. What if this is a clever little ploy by the government to give ITC a free hand. After all, the government does in fact own about 8% of the cigarette maker. Could it be that the tobacco lobby is well and alive, pulling the strings from the underground?

Well, we don’t know. You tell us.

Anyway, that’s it from us for today. We will see you tomorrow. Until then.. Oh wait!!!

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