The Fed has no Cred

April 30, 2008

Of course I’m not referring to credit, the Fed has plenty of trees, but they are completely void of credibility. Bernanke didn’t see the subprime mess coming so why should I care how long he thinks it will continue to ravage the American economy? He’s not exactly an impartial observer.

Every rational analysis has concluded the banks must suffer at least $1 trillion of write downs before we can even contemplate a bottom; by all estimates we’re barely a quarter of the way there. The financial sector will be in pain for the foreseeable future — that means years — but the Fed will help them re-capitalize by exchanging real dollars for monopoly money and you will suffer from higher prices when those new dollars begin to circulate… what more do you need to know?

I fully expect Uncle Ben to continue publishing fraudulent inflation statistics and talk tough when the camera is on. He will continue trying to “surprise” the street with his hawkish doublespeak hoping the Wall Street lemmings will rally back to king dollar… but ultimately any short term recovery will be yet another sucker rally. With a massive and expanding trade deficit the economy is leaking like a sieve; it will require a monstrous injection to revive the stumbling giant and unfortunately this last double dose may just kill the patient.

Nobody should pay any attention to the Fed, they are irrelevant. Everybody knows the banks are insolvent and the American economy must purge the excesses. That must coincide with a massive economic contraction and a massive devaluation of the US dollar. There is no escaping it, hope is not an investment strategy. There are only two solutions, one is reduced consumption and the other is genuine economic growth — neither of which can be stimulated by reckless inflation.

Get over it.