Helicopter Ben to the rescue

Today the Gold Cartel stared down into the abyss, and ended the inflation vs. deflation debate, as far as I'm concerned.  Yesterday with the U.S. markets closed for MLK Day, global markets plunged with Canada's TSX down 600 points.  Last night, all of the markets in Asia crashed as well, with India down 9%.  With the overnight futures indicating the Dow would open down 500 points (and might well go off a cliff after that) Ben Bernanke cut the Fed Funds rate by 75 basis points.

They said they're trying to stave off a recession.  But as I recall, we used to have recessions every four or five years, and the world never came to an end.  Bush and Cheney aren't running for re-election, and if any incumbents are blamed it would be the Democrats who control the House and Senate.  So why was it so important to cut interest rates today, instead of waiting until the next Fed meeting on Jan. 29-30?

Because the financial markets were about to become unglued.  A bond insurer just lost its AAA rating, and the credit-worthiness of the $556 billion worth of bonds it insures is now called into question.  And this is only a tiny portion of the $450 TRILLION worth of derivatives that sit on top of a $13 trillion economy.  We have already seen $10+ billion write-offs at Citigroup and Merrill, and that is only the beginning.  The companies themselves don't even know what they have on their balance sheets, and what they are worth.

So the Fed and the Treasury are going to pump at least another $140 billion of fiscal stimulus along with the monetary stimulus (another rate cut at the Fed meeting next week?) because now they have to inflate or die.  They think they can control inflation later, but they know that if deflation takes hold, there is no antidote.  When companies go out of business (think Countrywide and Bear Stearns for starters) they don't come back.  Everyone loses their jobs, and the effects ripple throughout the economy.

And to think that with monetary growth (the reconstituted M3) running at 15%, gold and silver are below $900 and $16 as I write this.  Not for long!