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Subject:  Re: Implications of Fed pause Date:  8/10/2006  10:41 PM
Author:  imdajunkman Number:  17788 of 36324


In an article entitled “Inflation or Deflation in 2007?” (linked below), Gary North argues that “inflation” is a monetary phenomenon, and it needs to be distinguished from prices increases, which us ordinary people, who aren't trained as economists, confuse with inflation. He argues that Bernanke is fighting a two-front war. Publicly and overtly, he is raising interst rates, but quietly, behind the scenes, he is decreasing the money supply, and that is the reason why we are seeing some of the effects attributed to overt FOMC policies.

“When, on August 8, the FOMC left the rate alone, the Board said it was because price inflation is becoming less of a problem. There is a reason for this: the FED's monetary policies in 2006, which have tightened money.”

I cannot pretend to understand the article. But it concludes this way:

Bernanke's FED has lowered the rhetoric against price inflation, while pursuing policies that will call price inflation to a halt and then produce price deflation within two years. But the cost of maintaining this policy will be a long recession and rising unemployment.

I don't think Bernanke or his fellow Board members are willing to pay this price. Congress would demand a reversal, which is beyond Congress's legal authority to enforce, but is well within Congress's ability to create exceedingly bad publicity for the FED, which bureaucrats never want to endure.

So the upshot seems to be that nobody knows what's going to happen and that predictions, and two dollars, will buy you a cup of coffee, which isn't to say that us ordinary investors don't have to make decisions in the meanwhile. But nobody is making our job easier as CO2 levels go up and bombs rain down in what is shaping up to be a “perfect storm” of environmental and geo-political catastrophes that will be both inflationary and recessionary, leaving the Fed with the need to fight them both, and future generations to pay the bill.

What am I doing? In the absence of evidence otherwise and in the absence of compeling opportunities, I'm continuing to dump money into the short end of the yield curve, because I don't share Wall Street's optimism for stock future earnings. Things haven't yet hit enough of a bottom to purge prior excesses. And which time frame is being talked about has to be specified. A good case can be made the secular trend of interest rates is downward. The very short-term trend is clearly upward as the most recent T-Bill auctions suggest. The ST trend is a topping pattern: the Fed is pausing and looks to be stopping. Medium-term, the bet has to be that rates go a lot higher due to deficit spending. Trying to sort out what's happening and position oneself properly is enough to make a guy (or gal) dizzy. So one makes a guess and covers one's six.


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