Who wants to be in the shoes of the Federal Open Market Committee [FOMC] on Wednesday? Escalating market pressure for a rate cut collide with a horrible inflation outlook as exploding oil prices start pushing commodities higher. Will there be enough hawks defending at least stable rates, or will the doves led by Nanny Benny cave in to panicking markets and do the worst of all by cutting rates further?
Chances are the FOMC will do nothing in a situation that would require a rate hike if fighting inflation is still a predominant concern which can be doubted in the face of the housing and mortgage bust.
Alan Greenspan once called gold a very reliable inflation indicator. A study that proves gold's high correlation with inflation can be found here. As the oldest currency in the world has jumped to $795 in Asian trading on Monday, it appears the world is headed for markedly higher prices soon. Oil's ascent above $93 is poised to add to the spin of the inflation spiral that can be seen so clearly in basically all commodities. Been to your baker lately?
Americans are destined to get the worst of it all, thanks to a Federal Reserve dollar plunging to record lows against the Euro on a daily basis.
Rollercoasting financial markets still indicate that the credit crunch - what happened to the "savings glut" of 2005? - is only worsening as banks hold back their funds in fear that their interbank counterparties go bust overnight. All attempts to prop up markets with SIVs should be seen as what they are: Vain efforts to pump up unsupportable prices. Where do all these billions come from? Certainly not out of the vaults of rich investors but created with Ben Bernanke's electronic printing press. Banks trying to play in the darkroom to hide the disaster run the risk of getting rimmed.
Cutting rates can be a very deceiving medicine that may work well in the short term. It will lessen the burden of debtors whose adjustable mortgages are set for a hike this fall. But it will not change the fundamentals that have been created by a 7-year streak of reckless deficit policies accompanied by a crumbling US infrastructure and major political and economic shifts around the globe.
The whole mess was created by too much credit. Extending it further will be monetary suicide resulting in sky high inflation.