Fed Tiptoes Thru The Tulips
Mike "Mish" Shedlock
Dec 12, 2007
With the December
FOMC Statement I sense the Fed does not realize what they
are facing in terms of asset and monetary deflation.
"Incoming information
suggests that economic growth is slowing, reflecting the intensification
of the housing correction and some softening in business and
consumer spending. Moreover, strains in financial markets have
increased in recent weeks. Today's action, combined with the
policy actions taken earlier, should help promote moderate growth
over time.
Readings on core inflation
have improved modestly this year, but elevated energy and commodity
prices, among other factors, may put upward pressure on inflation.
In this context, the Committee judges that some inflation risks
remain, and it will continue to monitor inflation developments
carefully.
Recent developments, including
the deterioration in financial market conditions, have increased
the uncertainty surrounding the outlook for economic growth and
inflation. The Committee will continue to assess the effects
of financial and other developments on economic prospects and
will act as needed to foster price stability and sustainable
economic growth.
The risk of inflation is extremely
overstated.
None of the above have remotely
anything to do with inflation. Furthermore, given that the Fed
cut both the Fed Fund Rate and the Discount Rate by only 25 basis
points, the odds are very high that that Libor Spread makes a
new high tomorrow.
Fed Almost Gets It Right
Nonetheless I agree 100% with
Professor Zucchi who stated:
"This one is gonna hurt...
Boom Boom almost did the right
thing. Had it spared us the pandering 1/4 point begged for by
financial speculators, he would have finally shown the kind of
stones that will be needed to guide us out of the current mess.
Equities do not like it one bit, as well they shouldn't; the
wimpy move is likely to worsen the credit environment and the
financial markets as a whole could be in for a year-end pasting.
So why do I suggest the Fed did the almost right thing?
Because one cannot devalue
its way out of a gigantic pile of debt. Companies, many companies,
need to fail, go away forever, and allow those who have a business
existing to once again prosper not on the back of borrowed money,
but on the strength of real demand, rather than demand generated
by a need to circulate make belief money.
Had the Fed figured this out
in 2001, by 2003 we would likely have forgotten the then recession.
Instead it decided to try to fool everyone into believing that
we could borrow our way into a permanent plateau of prosperity.
Professor Zucchi has this correct.
Unfortunately, I expect the
Fed to continue to tiptoe through the tulips on the way down,
just as they tiptoed to 17 consecutive rate hikes, never willing
to end the gravy train of the housing bubble.
I am unwilling to give Bernanke
any credit here because I suspect the only reason he is not cutting
more aggressively here is to save his surprises for later and/or
he simply does not understand the situation at hand. He has already
shown a propensity to surprise, with a discount rate cut during
options expiry week.
I just just heard Bill Gross
quoted on Bloomberg: "The Fed does not understand the gravity
of the situation". I agree. But if credit markets continue
to act poorly, there will be more surprise discount rate cuts
and surprise rate cuts as well. Bernanke does not have "kind
of stones" it will take to let the market play out by itself.
The asset deflation train Japanese
style has left the station. Bernanke is driving. How long it
takes to get to the destination depends in part on how many detours
Bernanke takes along the way.
Dec 11, 2007
Mike Shedlock / Mish
email: Mish
http://globaleconomicanalysis.blogspot.com/2007/09/is-gold-safe-place-to-hide.html
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