Trying to read the Fed's next rate move has been financial sport for many years. With large amounts of money at stake, it can prove tough, especially now, when the Fed is playing its cards particularly close.

Fed Chairman Ben Bernanke just testified to the Joint Economic Committee of Congress. To me, he looked particularly haggard.

So what, you may ask? Well, many years of experience both in finance and politics have taught me the often crucial importance of body language in the accurate assessment of political and financial public pronouncements.

Ben Bernanke has a studious, professorial demeanor. He normally looks far more nervous under the public gaze, than did his two predecessors, Paul Volcker and Alan Greenspan. Nothing wrong or significant in that.

Furthermore, it is clear to most observers that our Fed is under pressure.

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Notwithstanding, I felt that poor Ben Bernanke looked particularly stressed this morning. Indeed, facing some encouragingly tough questions, from the likes of Ron Paul, he looked decidedly rattled.

[Regarding Ron Paul, I am often asked whom I think will win the Republican primary or the final Presidential election. My view is that none of the candidates are yet even touching, let alone gripping, the hearts of most Americans. I feel that history may show that the eventual winner is not yet clear. When I watch Ron Paul, I feel that sentiment more strongly.]

Ben Bernanke is undoubtedly smart and exudes both integrity and patriotism. I feel very sorry for him, because I believe that, for the past year, he has increasingly recognized what a sour lemon he was handed on accepting the Fed chairmanship.

Poor Ben Bernanke has major hostile forces bearing down upon him. He is serving under a government that, as Alan Greenspan says, has "sacrificed [Republican] principle[s] for power."

The first and by far the most important principal sacrificed was the truth.

The official cooking of our inflation figures to the downside by the U.S. government represents what I have long called the Great Inflation Lie. It reduces government payments for interest and social security. It also boosts our apparent GDP, by reducing the inflation measures used to compute real (inflation-adjusted) economic growth.

[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]

The cooking process was taken to a culinary art-form under President Clinton. Amazingly, it has continued under President Bush.

Inflation is seen and openly admitted by other important nations and groupings, such as the European Union, whose currency, the euro, is now the most widely circulated currency in the world in terms of everyday, physical transactions.

Indeed, the euro is now challenging the U.S. dollar as the world's key reserve currency. Not bad for a purely "political" currency with neither a single economy nor even a single government!

Currency dealers see the relative inflation caused by the decline in our dollar and are selling — big time.

Meanwhile, our U.S.Treasury talks a strong dollar while it does absolutely nothing, either by intervention or by reforming its profligate policies, to halt the dollar's plunge. It even has the hypocritical audacity to criticize China for its perceived competitive devaluation!

Remember, each percentage point drop in our dollar robs — yes, robs — every man woman and child in America by one percent of their hard-earned, after-tax wealth — not just travelers or those who buy imported goods.

Today, many U.S.-made products include foreign inputs. Even chocolate and bread are made from commodities traded in Chicago but priced internationally. Make no mistake, devaluing our dollar is robbing us all.

Furthermore, while a degraded currency boosts exports in the short-term history shows clearly that, in the longer-term, it devastates the balance of payments and imports inflation, big time.

Bernanke is doubtlessly well aware of these potential long-term woes and has been deeply concerned about inflation. He sees the true inflation figures before they are cooked by our government!

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Who can honestly say that the expenses of the average American (including heating oil, gasoline, food, health and insurance) have risen by the official 2 percent since last year?

It would be laughable if it were not such a brutal, covert robbery of every loyal American!

Bernanke pleaded today that monetary growth, measured by "MZM," was not too bad. But he knows that the broader, internationally recognized measure of inflation (M3) is — strangely — no longer published by the Fed.

He also knows that the banks and the massive derivatives markets allow for a huge increase in liquidity above the monetary base.

Bernanke knows that to fight inflation and to defend our dollar, interest rates should be hiked.

However, the explosion of the subprime market, of which we have long warned, has already had a distinctly adverse effect upon both the availability and the price of credit.

We wonder, with AAA credit mortgages now selling at 0.75 percent, what is the fair value of the off-balance-sheet assets containing so-called "toxic waste" — subprime and fraudulent mortgages — held by banks and by the investment banks? How will a recognition of "fair" value of those assets affect their capital ratios?

At long last, it is clear that others share our concern.

Other factors — such as job growth (showing growth limited to government and temporary hiring), GDP in contraction (even based on a mere 2 percent deflator), consumer confidence, and now, year-on-year, same-store retail sales — all appear to indicate that we are either already in or perilously close to recession.

On Oct. 31, the Federal Reserve Open Market Committee (FOMC) concluded that inflationary and recessionary forces were in balance!

I believe that the "true" statistics now show that we have both increasing inflation and recession. That adds up to the worst of economic ills—stagflation, of which we have long warned.

Stagflation is insidious because the cure for inflation — higher interest rates — encourages further recession, and vice-versa.

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In the 1980s it took the integrity, conviction and courage of people such as President Reagan and former Fed Chairman Paul Volcker to cure stagflation.

I had the honor of meeting them both. They were men of unusual caliber. Both had the rare political, economic, and financial nerve to hike rates to double digits for a sustained period of time. Great pain had to be endured for the greater good.

In contrast, our government is taking the easy way out. How often, as our economy and stock markets have headed towards meltdown, have we heard from our government that our economy is strong, that they want a strong dollar, and that there is plenty of liquidity to overcome a credit crisis?

That last statement is not only misleading but implies a certain detachment from reality. It was excessive liquidity that caused our problem, which is now morphing from a credit crisis into a financial crisis of confidence.

Bernanke faces stagflation. He must be very concerned that expectations of both inflation and recession have risen, which affects not just the market but the whole economy. What will or even should he do?

It's like watching a cat on a chair and being asked which paw it will move first. No one knows, but we do know that the cat will get out of the chair.

Furthermore, the FOMC is just that, a committee! It is made up of both hawks and doves. Ben Bernake must achieve majority agreement, in painful and most uncertain times.

So, I do not know what the FOMC will do at its December meeting.

But, I do feel strongly that history will repeat itself, particularly under our present government. The extreme pain of curing inflation (far higher interest rates) will take second place to the far less painful cure of recession (lower rates).

Here, I agree with Bill Gross of Pimco. The Fed will be forced to lower real rates to 1 percent or less to bring us out of the highly leveraged recession we now face.

Even then, it will take some 12 to 18 months for the lower rates to exert their full beneficial effect.

Sadly, however, the Fed is already way behind the curve.

However, I think major Fed rate cuts are now in the cards.

When, I do not know, but it appears that both currency dealers and bond investors agree that rates will fall, as the dollar continues in downward spiral and short-term Treasuries rise in price.

Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
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