Wednesday, April 29, 2009

The FED Speaks

The Federal Reserve released another of its anticipated reports and kept the overnight interest rate unchanged at 0-.25%. It also said that "the economy has continued to contract, though the pace of contraction appears to be somewhat slower." On this news, market indices shot up 2%. This despite a preliminary estimate that the GDP contracted by 6.1% annualized in the first quarter. This will no doubt be revised even further downwards. The lemmings are buying into any reason to buy into stocks. There were a bazillion articles you might have read today to get this news, but this one managed to get straight to the point in the very first sentence:
The Federal Reserve said on Wednesday the outlook for the U.S. economy had improved a bit in recent weeks but that low interest rates would be needed for some time to ensure it recovers from its deep recession.
I'm sure that to the writer this was just regular old canned copy, but it pretty much hits the nail on the head: without the insanely low interest rates only available through mass moneyprinting and currency debasement, the economy would by now have entered the deepest pits of the realms of chaos. .25% interest is simply irrational and completely unsustainable. That our economy is barely puttering along, and is admittedly still contracting, despite such insane monetary policy is the furthest thing from good news. Yet if this policy is not sustained, neither is the "recovery." As soon as interest rates rise and the monetary hemmorage curtailed in the slightest, you can bet your last worthless dollar that markets will go back into tailspin. So the operative question remains: for how long is the Fed willing to persist in this madness? To what degree will it tolerate dollar debasement as an acceptable price for avoiding short term pain? Thus far the answer appears to be: to the bitter end. Pay no attention to hopeful speculation that the FED may tighten just in the nick of time. This is a fairy tale. The moment it tightens, we are back at the edge of the abyss. Market addiction to an ever expanding supply of dollars is now complete. Only two things can save the present economy: a complete restructuring along a sustainable path (recession), or ever more worthless dollars to perpetuate the madness (inflation). The FED may "save" the present economic structure, or at least stave off its ultimate destruction for awhile, or save the dollar. It cannot do both. The dream of candyland economics seems to be the weightier of the two priorities at this juncture. It usually is. Expect more mayhem.

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