Citing that it had seen unconvincing evidence of a slight moderation in the inflation rate, the Fed left its key rate unchanged at 5.25 percent.
In our opinion, fear ruled the Fed decision.
The world of speculation has been given yet another pain-relieving injection of aspirin.
So, surprise, surprise, both bulls and bears on Wall Street were satisfied.
[Editor's Note:12 Ways to Recession Proof Your Portfolio]
The Fed's decision kept all "fat cat" speculators happy. But the rising cost of reality has merely been postponed and is probably rising fast, not just for us Americans, but for people all over the world.
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For rest assured, a dollar collapse will bring about a financial panic from which few people in the world will be fully insulated.
The Fed's dual political mandate, unique among leading, competing central banks — to control inflation and at the same time to encourage economic growth — faced the Fed with its first real test of nerve since Bob Bernanke took over as Chairman.
The Fed faced some major domestic political/economic problems. They included: falling capital good orders; falling consumer confidence; falling estimates of corporate profitability; nervous financial markets; a possible subprime led melt-down in the "stealth risk" derivatives market; and a looming Presidential election, on one hand.
All the time, financial markets continue to rise, fed by massive liquidity.
On the other hand, the Fed faced some far more serious, but politically less visible long-term ("stealth") problems. They included: a super weak dollar; rising money supply (chart 1) (M2, rising at 6 percent, and privately computed M3); stubbornly high inflation (even on a "cooked" basis); and perhaps, most concerning of all, falling foreign purchases of U.S. Treasuries.
It appears to us that the FOMC turned its head away conveniently from the massive looming problems of the "real" economy and bowed to the political threats of the more visible democratic problems, each loaded with political implications.
Fed Chairman Bernanke says he is concerned about inflation. Recently, he expressed a wish to focus on the more realistic "headline" (including food and oil) measure of inflation.
Bernanke's inflation concerns may have enabled him to maintain at least some tough anti-inflation "talk" in the FOMC statement.
But why, if he really is deeply concerned about inflation, did he allow his FOMC to run from the fire of international reality?
What concerns us most is when one looks at the CPI calculated as it was before the Clinton era and compares it to the current, official "cooked" CPI figure.
Excellent work has been done on this subject (see chart 2) by John Williams' "Shadow Government Statistics," which conducts, "Analysis Behind and Beyond Government Economic Reporting." It is well worth a read.
This analysis shows a CPI (calculated on the official criteria existing in the pre-Clinton era). It shadows faithfully the movements of the post-Clinton CPI, but at a current rate of a whopping 6 percent, (more reflective of the inflation rate we all feel in our own wallets) rather than the politically "officially cooked" 2.3 percent CPI!
With 6 percent inflation (calculated on the pre-Clinton basis), the Fed rate of 5.25 percent actually represents a negative rate of 0.75 percent. Worse still, it is supported by an almost exponential increase in the money supply.
[Editor's Note:Big Government Lies Exposed. Go Here Now.]
Little wonder that it pays to borrow to the hilt and that there is always plenty of money to lend. Leading to a continued boom in many asset prices.
How, in this "real" world, can holding the Fed rate at a real negative rate of 0.75 percent be considered remotely responsible, by anyone other than our domestic politicians and greed-driven speculators?
To us, it is a deeply saddening picture that we, as normal investors, must now face.
We wonder if he was aware of it, whether Bernanke showed this pre-Clinton inflation rate to his FOMC. Why wouldn't he, if he truly is an anti-inflation hawk?
In our opinion the pre-Clinton CPI calculation is the more truthful. It also ties in almost perfectly with the actual inflation we believe most of our readers feel in their "real-life" wallets.
Finally, pre-Clinton CPI ties in almost exactly with the lower limit of the inflation rate reported when Barron's interviewed Rudolph-Riad Younes, co-manager of Julius Baer International Equity Fund (with an average growth of 17.5 percent for the past five years). Younes said that if only housing were included in the make up of the CPI the index would be between 7 percent and 10 percent.
We should also add that the central bankers of other major economies have seen inflation rising around the world.
As they have only a single mandate (to control inflation) placed upon them by their parliaments, they can act in a more forthright manner. They have done so by raising their interest rates, adding further enormous downward pressure on the U.S. dollar, thus fueling yet further inflationary pressures; albeit still largely hidden as the "stealth inflation" that now stalks us here at home.
In light of this, we ask, "Why is it that only our American central bank miraculously sees inflation so low?" We suggest it is because they somehow believe their own "cooked" CPI. The bond market also appears, judging by the narrow TIPS spread, to believe, or want to believe it.
[Editor's Note:12 Ways to Recession Proof Your Portfolio]
We therefore understand that it is therefore easier for the FOMC to hide from reality.
But why do the FOMC continue to turn their heads away?
Clearly, the adverse "political effects" of raising U.S. interest rates to a level more reflective of truth and reality appears too great, in the short term. Sadly, in modern democracies, it is the short term that rules.
The Bush-Bernanke days are clearly very different to those of Reagan-Volcker.
Of course we could be wrong in our analysis. But if so, why do so many international investors agree with us, as reflected in the historically low level of the dollar?
On the basis of this empirical evidence from a free currency market, we feel we are correct.
We are most disappointed therefore that, in its first real test of nerve under Chairman Bob Bernanke, our Fed has appeared to run away.
In the face of the major political, economic, and financial challenges now facing America, we believe that "Fear at the Fed" bodes ill for the future of capitalism in our great nation.
Stagflation now looms ominously.
Editor's note:
Big Government Lies Exposed. Go Here Now.
The Mother of All Financial Disasters
Bernanke Reveals `Fiscal Crisis` Ahead
12 Ways to Recession Proof Your Portfolio
