The Fed is in a difficult, if not impossible, situation of its own doing. It knows that the CPI is b.s. and that the real rate of inflation is 3-4x higher than the CPI fraud. And hence real rates are negative. Cutting rates will restimulate the escalation of price inflation. It also knows that if it further loosens monetary policy (hint: it’s not tight to begin with as real real-rates are still negative and M2 has been rising last October) the dollar will head south quickly.
Furthermore, bank balance sheets are deteriorating in quality with rising asset distress: consumer debt, leveraged buyout debt (private equity-related) and the meltdown of CRE loans. The big unknown is true amount of counterparty risk exposure the big banks have from what is now a record level of OTC derivatives. Finally, the yen carry trade will further unwind if the spread narrows between the cost of borrowing the Japanese yen and using the proceeds to buy higher-yielding assets. Finally, Treasury debt outstanding is increasing at a rate that will eventually be catastrophically existential to the US dollar and financial system.
Andrew Maguire (Kinesis Money) and I discuss all of these issues plus, of course, the precious metals market and mining stocks in that latest episode of Live From the Vault: