That article also explained that in the light of the negative savings rate, annual trade deficits of $800 billion, a propensity to borrow and consume by the US consumer, negative real interests and the housing bubble, a recession was indeed a necessity to correct the economic imbalances.

In other words, a recession is a cure to the above problems as economic excesses get cleaned in a downturn. The consumers also usually choose to save during a recession, lending greater investment capital to the economy when it emerges from the recession.

To add to the above issues, in spite of the mythical strong-dollar policy advocated by the US Treasury Secretary, Mr Henry Paulson, the dollar has been losing value against all other major currencies in the last few years. For these reasons, a rate cut at this stage would serve no meaningful purpose, but would merely postpone the recession by a few months, while at the same time exacerbating the imbalances.

It should be pointed out, at this stage, that when housing asset prices were on the way up, the standard Fed response was that it was not its policy to bother about asset prices. But what the Fed Chief, Mr Ben Bernanke, did as a response to the collapsing housing asset prices was to respond with a 50 per cent rate cut.

The ostensible reason given by the Fed was that this rate cut would stabilise the housing markets and restore economic growth. But as this article will point out, this rate cut is actually going to deepen the housing collapse (albeit with a brief pause), create much greater inflation and ensure that the eventual recession would be far more deep and painful than it would otherwise have been.

The bubble prices in the US housing market were essentially a function of three factors — lax lending standards, low teaser rates on adjustable rate mortgages (Arms) and consumer speculative behaviour. With the downturn, all the three factors have all but vanished and so to imagine that the bubble prices could somehow be maintained in the absence of the props holding it up is wishful thinking.

A study of the California housing market showed that housing prices have to come down by 50-75 per cent before affordability returns to the consumer under normal lending standards.

So there is nothing that a rate cut can do to prevent a collapse of the housing prices. Besides, what a cut in the short-term interest rates could do is to cause the long-term interest rates to increase, as investors have less of an incentive to hold onto the dollars.

We already saw that in the immediate aftermath of the Fed decision and this trend would only accelerate in the months ahead. So the Fed rate cut in short-term debt could ironically lead to an increase in the cost of long-term debt in the housing market.

Just as the housing bubble had props that were holding up the prices, the housing bubble itself was a prop for the US economy. Consumption, which accounts for more than 70 per cent of US GDP, had increasingly been financed by equity extractions from the inflated value of the houses.

Also, a majority of Arms (an estimated 75 per cent of sub-prime loans and 40 per cent of all loans) are resetting from the initial teaser rates of 2 per cent to higher levels over the next six months. These resets are expected to increase the mortgage payments by 50-150 per cent. So, in the absence of home equity extractions, that had been the latest credit card, and with an increasing portion of the incomes getting devoted to mortgage payments, there is no way the US consumer can continue to indulge in a reckless spending binge.

Besides, the Fed expectations of moderating inflation are belied by the actual numbers. With crude oil and gold (monthly-averaged) prices quoting at all-time high prices, for the Fed to maintain its position that inflation is benign defies reality. These commodity prices and imported consumer goods are going to buoyed by the rate cut in the dollar, and the ensuing inflation is going to hurt growth even more.

We saw with the previous popping up of the Nasdaq bubble that the Fed-induced reinflation did little to prop the bubble that has been burst. All that excess money supply flowed into real estate sector that has artificially propped up the economy in the last few years. But this time around, the reinflation is going to directly flow into commodity prices and hence hurt growth.

Thus, not only is the recession in the US economy inevitable, but this is going to be accompanied by highly inflationary conditions of increasing food, energy and consumer prices. We had earlier stated that the Dollar Index could easily lose 50 per cent of its value and go to 40 from the current level of 80 over the next five years. In the light of the recent actions by the Fed, five years may not be required for our predictions to come true — it could well happen even within the next couple of years.

In some sense, the current rate cut reminds us of the actions of Captain Edward Smith of the Titanic that had been hit by the iceberg. The rate cut makes as much sense and would have the same effect as Capt Smith’s action of reassuring the passengers that all was well and encouraging them to continue to party. The party, unfortunately, is over and all that we see ahead is an extended hangover.

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