Tuesday, April 08, 2008

Rock vs Hard Place

The Fed reminds me of the Oracle at Delphi. No one really knew how it worked. But, people believed that it has special powers, that the priests of the temple could see the future, and that they could help avert disaster by appeasing the gods.

The Oracle worked because people believed in it. Unfortunately, in order to retain its powers, it had to carefully manage people's beliefs. When your power rests on being right, you have to be very careful what you say. You either don't say anything, you say things cryptically, or you are so vague that anything that happens could be interpreted as affirmation.

Unfortunately, when you have to ACT, you don't have the luxury of equivocating or obfuscating. That's the problem the Fed faces right now. To wit:

On the one hand, the Fed has been urgently moving to prevent the trio of economic woes—housing, credit and financial_ from plunging the country into a deep recession. On the other hand, with soaring energy prices and high food costs, policymakers realize that they can't afford to let inflation get out of control, either.
To attenuate the credit crisis (Recession, ie, Rock), they are printing more money. But printing more money makes prices go up (Inflation, ie, Hard Place).
You ever try to run without sweating? It looks ridiculous, and it's way too slow. But that's what the Fed is doing right now.