Fed Frozen By Sight of an Economic Time Bomb
Today's Financial Times headline reads, "Ford chief calls for Fed push on growth."
According to CNBC, some 90 percent of economists polled forecast a rate cut. The clamor has reached fever pitch.
Many observers, including Stephen Roach, former chief economist of Morgan Stanley, feel the Fed is asleep at the switch.
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We sympathize with that view, but we now question whether the Fed is "asleep" or "frozen" — frozen in fear — at the fearsome sight of an economic time bomb?
Whereas the credit markets are largely frozen by what they don't know about the ultimate liabilities within the derivatives markets, we believe the Fed could be frozen by fear of what it does know!
Most would agree that our Fed has superior access to information.
We believe that Ben Bernanke sees not just one, but four, mammoth risks: Stealth inflation; a credit crunch; looming recession, and the possibility of a catastrophic run on the U.S. dollar.
First, stealth inflation.
[Editor's Note:Big Government Lies Exposed. Go Here Now.]
As our readers know, we and our sister publication Financial Intelligence Report, have long warned of what we call the "Great Inflation Lie".
We have consistently pointed to the official "cooking" of the consumer price index (CPI), by the Department of Commerce. This happened particularly during the Clinton Presidency.
According to Alternative Government Statistics, who publish the CPI, calculated on a pre-Clinton basis, our current inflation rate is a whopping 6 percent plus!
This is some three times the official rate of some 2 percent and nearer the "real" rate we all feel in our pockets.
In our opinion, the "Great Inflation Lie" rests at the heart of our present economic and financial ills and we see them as very severe.
Poor Ben Bernanke inherited the "Great Inflation Lie". We believe he sees all too clearly the economic and financial time bomb that went with it.
That is why, when in the face of a clamor for lower rates and afraid of inducing a recession, he has kept rates on hold and talked tough on inflation.
Falsifying the true inflation rate, allowed the Greenspan Fed to cut rates so low that he handed over a Fed funds rate (5.25 percent) that now stands at 0.75 percent BELOW the "real" inflation rate of some 6 percent!
This allowed the banks to borrow at below inflation and to begin a reckless lending spree to lower and lower credits for higher and higher reward and increasing profits and personal bonuses.
Add to this the extraordinary leverage of the derivatives market (some $500 trillion — yes trillion) and the extreme leverage (up to 54 times) of the hedge funds and you have the massive credit debacle that now faces our economy and financial markets.
The recent asset boom, of which housing was just a part, was financed not just by excessive liquidity, but by cheap liquidity. In essence, it was a giant pyramiding operation, based on sand.
So now, the credit crunch.
As we warned our readers, the erosion of just a small portion of the foundation (sub-prime) has caused the building to tilt. The occupants (financial markets) are now frozen in fear (credit crunch).
We are not alone in seeing this. Investors and central banks around the world have sold our U.S. dollar like gangbusters, sending it to historic lows, with 40 percent depreciation against the far-from-secure euro, in just five years!
Most people will realize that financial things have gotten pretty bad when a top Swiss banker (normally as quiet and low profile as a gnome) lashes out as Ambrose Evans- Pritchard reported three days ago in the Telegraph.
Apparently, Jean-Pierre Roth, president of the Swiss National Bank said, "We're certainly not at the end of the story. There are question marks surrounding the development of the American economy. Something unbelievable happened. People who had neither income nor capital got credit with very attractive conditions. Now reality is striking back."
Even today, when we are already witnessing the first phase of the credit crunch most of the "cheerleaders in politics on Wall Street and in mainline media would have us believe that we are witnessing the short term "re-pricing" of credit.
We believe the truth is starkly different. We feel we are only just beginning to see the long-term "counting of the cost" of years of reckless lending and investing.
Furthermore, one of the unique and most toxic elements in the current crisis is that great and time-consuming efforts now have to be made first to identify exactly where the ultimate liabilities lie.
The complexity of modern derivatives have both diversified and disguised risk so well, that even prime financial institutions are loath to lend to each other.
We feel that, severe as it is, the current credit crunch would represent merely an absorbable shock to a healthy economy.
But is our economy truly strong?
[Editor's Note:The Mother of All Financial Disasters. Act Now.]
As CNBC reports this morning, "Most economists see the fundamentals of our economy as still strong."
We disagree profoundly.
The problem is that most data quoted by the bulls of Wall Street and its related media, is "lagging" data, such as the GDP, retail sales, and unemployment.
At MoneyNews.com and at FIR, we look hard at what we see are "leading" indicators, such as, new building permits (chart 1) and starts; average work week; overtime hours; non-defense capital goods orders (chart 2) etc.
We believe that we are already in a recession and that further delays in cutting rates could lead to worse than recession.
Finally, defense of our dollar.
We believe that Bernanke actually wants to cut rates, but he knows that if he does, our dollar could go into freefall and that could prove catastrophic to our financial system.
So what is the Fed to do?
We are beginning to be persuaded that the Fed has little alternative to what it is already doing, namely:
Hold the Fed rate at 5.25 percent in the hope of keeping the dollar relatively stable.
Talk soft to keep stock and bond markets happy and avoid panic.
Meanwhile, pump in liquidity to stop the financial system from grinding to a halt.
Force the discount rate down to lower the "effective rate" to member banks, at least.
Consider widening the discount window to 30 days and even temporarily, relaxing the collateral rules to encourage a return to confidence.
If the banks are still too scared to lend, "other means" must be used to force the liquidity into the economy to avoid a debilitating recession
I suspect increasingly that the recent $2 billion Bank of America convertible, preferred loan to Countrywide Financial was covertly engineered or "encouraged" by the Fed as part of these "other means" and that there could be more.
If I am correct, the implications are awesome. For it would confirm our worst fear: That our Fed is over a barrel — the barrel of the "Great Inflation Lie", about which we have long warned.
Our concern is that, as nervous stock markets and a growing number of economists look for a cut in rates, our Fed is frozen in fear of a run on our dollar and may disappoint.
On the other hand, as market and now political pressures mount for the Fed to cut rates, the Fed could be forced, against its better judgment to cut rates.
So there we have it. As we see it, our situation is so bad that, both a cut and a non-cut appear equally able to engender a financial panic.
[Editor's Note:Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.[
We have great sympathy for Ben Bernanke. He inherited the basic problem and has done his utmost to avoid making a decision — a decision where to hold the much publicized Fed target rate, while lowering the effective discount rate and holding the liquidity pump open could be best, in the short-run at least.
However, we fear that reality will soon dawn.
We hope our Fed can open the curtains slowly enough for markets and our economy to adjust calmly and so avoid a catastrophic panic.
As far as our readers are concerned, we re-iterate our belief that cash could soon move from being a king to become an emperor.
If it does, the price of gold could skyrocket on the aftermath.
Editor's note:
Big Government Lies Exposed. Go Here Now.
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
The Mother of All Financial Disasters. Act Now.
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