Today, with the revelation of the latest, most dramatic scheme yet to contain the unfolding real estate/banking system slow-motion crash, Treasury Secretary Paulson has gotten us a 'thinkin. We return, once again, to our start point. All along, in considering the options available to the government in the event that the credit bubble should burst, we have seen two basic options only. Neither option, in its PURE FORM, is serviceable. Consequently, some combination of the two is likely. However, whatever melange ultimately emerges, the government, and the FED specifically, which must act as the instrument of the government's will, is playing with fire. Since, with the passage of every day, it seems increasingly clear that the credit bubble either has burst, or is very close to bursting -- a perception, we will admit, which is being fanned by growing signs of panic in Washington -- we must confront the exceedingly distasteful task of assessing the government's options. As noted above, these boil down to 2:
Option one, in its pure form, would be unacceptable to the American public, and would jeopardize the position of the American elite. Consequently, those in power, and those with dominant influence over those who occupy the official seats of authority will, we believe, print enough money to contain the deflationary downturn to within modified Japanese-style limits. The problem, however, is containing this printing press money production within carefully delimited parameters. With each ratchet up in the increased flow of liquidity, bond investors and the generality of creditors will increase the interest they demand for renewing/maintaining their loans. This parallel upward ratcheting of rates (produced by the mounting sale of bonds by the investors and creditors who hold them) has the potential to produce an unstoppable spiral, which can culminate in a classic, Weimar-style printing press inflation. Such an inflation would essentially destroy the foundations of the American and global economies in the frantic effort to preempt a deflationary depression. All of the assurances and promises in the world, made by presidents, cabinet members, Congressmen, Federal Reserve chairs and former chairs -- will NOT STEM A RISING TIDE OF ANXIETY AMONG BONDHOLDERS AND OTHER CREDITORS. As the apprehensions of this group rises, their SELLING OF BONDS WILL ACCELERATE CONCOMITANTLY. Each wave of selling, and the accompanying rise in market rates which is an arithmetical CERTAINTY, nullifies the printing press liquidity production of the central bank. This necessitates a more rapid production of paper currency to overcome the bond market veto, which in turn produces a more intense veto by said market (via accelerated bond market sell-offs and accompanying rises in market rates). We have little doubt that the bond market will begin sending warning signals as soon as it judges that the FED is producing too much liquidity for its taste. IF THE FED IGNORES BOND MARKET WARNINGS, AS IT HAS IN THE PAST, we may find ourselves on the express train to BANANA REPUBLIC STATUS, with our currency worth considerably less than toilet paper. Bond investors have been severely damaged financially in previous decades, and they are not about to allow this to happen again. They are now watching the FED with microscopic attentiveness, rather than listening to the endless stream of bologna emanating from the white marble palace, the White House, and the Congress. The FED, the other regulatory agencies, the Congress, and the White House are now IN THE EARLY STAGES OF REAPING THE WHIRLWIND. Oh, and by the way, what does the FED/Administration think will happen to stock prices if bond yields shoot through the roof?? |
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