Tuesday, September 18, 2007


The Fed followed the script today, with gusto, and as a result the currency of the realm is once again fixed on a catastrophic course. The Fed administered a surprise half point reduction of the fed funds rate, and the same for the discount rate. The criminals of Wall Street rejoiced their stay of execution and sent shares crashing upwards. Their stay won't last though, and when the commutation is reversed, as it must be, it will make what occurred in the stock market a mere month ago look like the proverbial Sunday stroll.

A strong hint of the ugliness that lies ahead occurred in the dollar pit as the greenback was hammered lower on news of the rate cut. Going forward it will be beaten down even more savagely than heretofore as the upshot of a precipitously falling dollar will likely result in capital flight from the U.S. That's right, foreigners and foreign governments, who, to put it mildly, have been shafted over and over in myriad ways for years, are going to say "no mas" to any substantial investments in dodgy dollar denominated assets. Today's action in the bond market, a market which dwarfs equities, evidenced long rates staying put, and in some cases even moving higher. The bond market, which has an I.Q. of 130 compared to the equity market's double digit I.Q., gets it. And It is screaming that interest rates at the long end will ineluctably head higher and higher and higher as they must to attract foreign capital that is just now running for the exits. Make no mistake, the ever increasing cost of capital going forward will be massively deflationary as business and government alike starve for the lack of funds available to conduct their affairs. So the Fed's action is for naught except for temporary albeit wild partying. In the meantime, while we wait for the bull to finally croak, you and I will be paying a lot more for absolutely anything that is imported, which is pretty much everything.

As a banker client of mine recently observed, once governments embark on an inflationary course to relieve indebtedness, it is fiendishly difficult to control. Just so. So as unthinkable as it is to imagine financial conditions here in Freedom's Land becoming as dire as, say, Argentina circa the 1980s, or Zimbabwe today, or perhaps the most infamous case of hyper-inflation ever recorded, 1920s Weimar Germany, we should not kid ourselves that we are so special as to be exempt from the sort of future where wheel barrels full of money are required, literally, to put (a loaf of) bread on the table.

1 comment:

DED said...

"But we're Americans. That can't happen to us. We're #1."

You know that's what 90% of America is thinking.

I agree with you. Horrible move by Bernanke.