To: pater tenebrarum who wrote (65515 ) 10/1/1999 1:15:00 AM From: Tim McCormick Read Replies (5) | Respond to
The critical flaw in your argument is the assumption the Fed has limitless power. This is why I believe the dollar index is the key. I think that next week's meeting is a seminal event. Our political system is biased toward inflationary resolution to imbalances. We have been down a long road of central bank interference in the business cycle. The easy money/credit creation system of the Fed/IMF allowed the inefficient producers worldwide to survive beyond their natural demise. This produced the deflationary symptoms of the third world and the "Asian crises". Yet, this deflationary symptom of inefficient capital formation is what we fought last year with an only slightly effective monetary policy. It is only slightly effective because the money created flowed mostly into financial assets. Recently, this easy money has begun to flow into commodities and real estate. This is the beginning of the inflationary expectation mindset. Once the psychology of inventory stocking/commodity speculation emerges, it can only be wrung out by recession. Yet, the overleveraged system can't handle a recession. BTW, this excess leverage is also a symptom of this moral hazard created by central banks. So, the Fed must inflate us out of our overleveragedness. We are destined for a very steep yield curve or a credit collapse. This is what we have to pay for believing that monetary policy is more than a postponement of the business cycle. The Fed is actually still too easy. This is apparent by the fact that they have to continually add funds to keep the FF rate down at a higher target. If the cost of money were as high as its natural supply/demand equilibrium, the Fed would not need to add funds. Then, if things cool off, FFs will collapse on their own. So, the Fed is in a box. I say they play with the inflationary route first, so that they can be held harmless for the systemic collapse "caused" by their response to inflation. The smartest most efficient market is the currency market, followed by the bonds, commodities and then stocks. This is why the Dollar index is key, as the smart money loses faith in the Fed. Tim
