IMPEACH BUSH

The Federal Reserve did just as expected last week when it slashed U.S. interest rates by half a point. The effect on the dollar was immediate and substantial, while gold reacted to the dollar - as it always does - and has now been driven to highs not seen for decades.

But aside from the Fed's rate cut, another interesting development from last week is that the U.S. government debt limit now looks set to be increased to $9.815 trillion. Treasury Secretary Henry Paulson has said that he expects the federal government to reach its $8.965 trillion statutory debt limit on October 1, and accordingly he has urged the Senate to ratify the $850 billion increase, which it will most likely do.

U.S. national debt has almost doubled since the start of George W. Bush's first term as president. A lot of people will be looking to blame Bush and his brand of big government conservatism, as well as the unpopular war in Iraq, for the downtrend in the value of the dollar - on which attention has been strongly refocused in the wake of the recent rate cut.

But those criticisms are wide of the mark, whatever one's opinion of the war and of Bush generally. The dollar was overvalued before George Bush became president, and in any case, the primary driver for the currency's depreciation is America's elephantine trade deficit and the lessening willingness of overseas investors to go on funding it. That doesn't mean that such a massive sovereign debt level isn't dollar bearish - it is, but it isn't the main factor.

A global economic rebalancing has been inevitable since things got significantly out of kilter in the aftermath of the Second World War. As Europe and East Asia lay in ruins, the only intact industrial concentration in the world was North America, and this allowed the U.S. economy to steal a march on its overseas competition. But this advantage has now dissipated - as it was always bound to - and with it has gone the dollar's status as the sole global reserve currency.

U.S. economic strength is still real, but it is no longer unparalleled, and the U.S. economy has lost the upper hand in many areas. Americans shouldn't feel wronged or threatened; this had to happen eventually. But at the same time it is obvious that things will never be the same again.

And things are likely to get pretty bad for a while once the dollar's slide turns into a rout, as at some point it will; such is the nature of markets. There was always the possibility that the sub-prime mortgage crisis and associated economic damage – leading to last week's rate cut - would be the trigger, but that hasn't happened so far.

However, there is a strong likelihood that the Fed's rate cutting isn't over. It has already shown that it values recession avoidance over inflation fighting, at least for the moment, and will be ready to cut rates again.

Last week's cut constitutes a pretty potent shot in the arm for the U.S. economy, but will take time to work its way through the machinery, which may force Fed into a further cut sooner rather than later so as to err on the side of caution. Or else it may become clear quite soon that one cut will not be enough. Either way, the result will be an extension of the dollar selloff.