10 October 2007

The Price of perpetual prosperity

We are at a pivotal intersection in the timeline of our economic history as we again further separate our money supply from economic reality. Another credit bubble has been overseen and now patched on-the-fly by the Deus Ex Machina of our time, the Federal Reserve. It may look clever to save the world from a dilemma you helped create, but at what price? Cutting interest rates reduces the denominator of a fraction that then presumes a higher intrinsic value of the numerator, equities. Money is cheapened and more credit is pushed into the bubble so that it doesn't look like a bubble. As absurd as it might look in black and white, it sold and illusion has become reality. Al sold it with virtually no derivatives available and it's even easier for Ben, with an estimated 500 trillion in global derivatives now trading.

Bailing out another round of creative financing seems to be the new role of a redefined Federal Reserve, one dedicated to sustaining the myth of perpetual prosperity. That prosperity depends upon domestic consumption which seems headed toward indenturing our children to support. Inflating the currency to re-inflate the housing bubble further disconnects the money supply from bona fide GDP growth. Such leaps define fiat money and broach the trust everyone deftly bestows upon the Fed. Creating bubbles to substantiate prior bubbles increases the probability of the deferred pop creating a deflationary accident.

The carnage of this folly isn't hard to see; a once fiat-resistant dollar steadily losing ground against more fiscally responsible countries, most of the world. Imagine the foresight involved in voluntarily diminishing dollar denominated assets worldwide just keep our debt laden consumers buoyed. Are we in reality so much in debt, our currency so valueless, that we need a fire sale on our assets just to raise money for our shaky banking system? Do we need the hard currencies of other countries as they once needed ours?

I sincerely ask for one of the PhDs, who extol the virtues of a declining dollar, to explain how a first world economy does anything other than admit fiscal irresponsibility by inflating its currency. Our banking system is no different than any other (non- collateralized) banking system on the scrap heap of history that inflated its money out of existence. I'm sure that all those bankers felt it prudent to pretend things would somehow get righted in the future rather than realistically confronting their difficult present. Am I alone in seeing that it's not the rest of the world on the way up, as much as it's us on the way down?


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