Aug 19 2007
The Garbage Man Cometh
As we write, Asian indexes are rising on the Fed’s half percent cut in the discount rate, and pundits are touting the move as saving global markets. We say – “Please!” We also ask the simple question, “What’s fundamentally really changed?” (Hint – “Nothing)!
The sub-prime fiasco is far from resolved. In September, an estimated $60 Billion of adjustable mortgages begin to re-set through next year. Because the riskiest lending practices took place during the final years of the real estate bubble – and thus the shakiest mortgage loans are soon going to cost borrowers more to pay off — there has to be a lot of breath holding taking place on Wall Street and in the credit markets. In other words — we would not be surprised to see a dramatic increase in defaults which, could make current problems with mortgage-backed bonds look minor. The subsequent required bailout could make that performed by central banks over the past few weeks – seem miniscule in comparison. All of this has nothing other than inflationary implications.
If you really boil it down to it’s simplest – central banks – Fed included – are giving institutions a place to get rid of their garbage. Only a central bank (certainly not a private one) would offer loans AT A DISCOUNT for collateral of highly questionable quality (of course with money created out of thin air)! Well, not exactly folks. That money is being taken from your hard earned savings. Yep — as the monetary system is flooded with newly created money designed to bail out reckless lending, banking, and Wall Street business practices – your hard earned savings (and purchasing power) is diluted commensurately. In other words – you are paying for this. And you are going to keep paying.
All along we’ve been cautioning that continual injections of liquidity – whether through cheap credit, increased government borrowing, or central bank bailouts will have inflationary ramifications. We’ve also said that the Fed is between a rock and a hard place. If they try to fight inflation by keeping rates higher (or raising them) – the credit dependant, consumer based U.S. economy could go over the cliff. If rates are lowered to re-stimulate (or bail out credit markets) – the Dollar will be sacrificed. Based on the last few weeks, the latter has begun.
