Random Thoughts on The City, Wall St & Capitalism

It is a truth universally acknowledged that a slowing economy, possessed of rising inflation, must be in want of higher interest rates. The Fed has been delaying the inevitable for the last ten years. Conventional wisdom says Greenspan did a great job as a central banker, avoiding US economic meltdown and ensuring a soft landing after the dot com bust. I'm not so convinced, by cutting interest rates all that happened was that another liquidity bubble was created, mostly in the housing market and private equity. This has led to the current predicament of 'loose credit' and an increased current account deficit. Is that really symptomatic of a healthy economy. This has created Bernanke's bind, to raise or not to raise. Once you look through the obsfuscatory language and reliance on dodgy labour and consumer data, the only thing that becomes apparent is that the Fed should raise rates. Whether it does is another question. That commodity prices have fallen recently, especially oil, doesn't necessarily mean they will stay like this in the medium term. The inflation risk in the US economy is hugely underestimated, partly because it's hard to get a clear picture of economic health without M3 figures, which inexplicably the Fed has stopped reporting. Why is that? Is the US just printing money so much money that it would make a mockery of the fiat money system that underpins it's economic dominance. The answer is probably yes. If foreign investors start buying alternative asset classes or abandon the dollar as a reserve currency, then the dollar devaluation is only just beginning. It maybe that petrodollars in the middle east and Russia may end up as petro gold. In which case it's a good time to bail out of US equities and treasuries.

RB

See also
http://www.washingtonpost.com/wp-dyn/content/article/2006/04/26/AR2006042602529_pf.html