Monday, March 17, 2008


It's happening right now. By reducing rates, the Fed is in effect printing more money to save these companies. By printing more money, they are devaluing the currency. And by devaluing the currency, they are accelerating the decline.

There's no easy way out.

The years of bullshit in the housing market have come due, and now its time to pay for it. But the fundamental mistake is thinking you can pay for make believe gains with more make believe money. This quote sums it up best:
Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.

"It is like fighting a virus with antibiotics," he said.

Exactly. Continuing that line...
But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams


The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.

And that is the point. No amount of inflation is going to stave off reality. The race to the bottom must begin SOON. So, stop wasting time with half measures and get on with taking the dose. The sooner this thing crashes, the sooner we can start rebuilding.