Fighting an Economic Fire with Molotov Cocktails

Key News

• China's Economic Growth Cools to Slowest Since 2005 (Bloomberg)
• EU Parliament May Ask ECB to Alter Inflation Goal (Bloomberg)
• Australia, N.Z. Dollars Fall as Traders Raise Bets on Rate Cuts (Bloomberg)
• MARKETS & INVESTING: Investors flee from emerging market equities (Financial Times)

Quotable

"A lowering of the gross market rate of interest as brought about by credit expansion always has the effect of making some projects appear profitable which did not appear before … “However conditions may be, it is certain that no manipulations of the banks can provide the economic system with capital goods. What is needed for a sound expansion of production is addition capital goods, not money or fiduciary media. The boom is built on the sands of bank notes and deposits. It must collapse.”

Ludwig von Mises

FX Trading – Fighting an Economic Fire with Molotov Cocktails

I flipped on the Travel Channel last night to catch a program titled “Secrets of the U.S. Mint.” Besides discussing how the U.S. Mint operates, the program also touched on counterfeiters and coin collectors. But as the hour wound down the final segment briefly introduced the U.S. Federal Reserve.

The reason they tied in the Federal Reserve Bank at the end of the show, as the narrator pointed out, was because the Federal Reserve is responsible for protecting the money printed at the U.S. Mint, the Peoples' money.

Yeah, I thought that was pretty funny too.

But a few minutes later, after some dated clips of Alan Greenspan and various other shots from inside the walls of the Fed shown on the screen, a spokesman for the Federal Reserve appeared on camera and summed up the segment quite nicely. He said something along the lines of ...

The Federal Reserve isn't here to make the economy grow powerfully; that's up to the people. The Federal Reserve is just here to see that the conditions are right for the people to make this happen.

After that first quip about protecting money, I found this last quip regarding the Federal Reserve's job description to be rather simple, and surprisingly reasonable. But as is clear from recent events, the perceived job description of the Fed, by the Fed, is much more convoluted.

I think almost everyone can agree that every boom period is followed by a bust period. And typically, the larger the boom the larger the bust – I guess it's kind of like the bigger-you-are-the-harder-you-fall saying. But it seems lately that the Federal Reserve is disregarding the historical boom-bust cycle, doing everything in and beyond their power to keep the good times rolling.

Sounds nice, but there comes a point when the economic system needs to cleanse itself. Hence the subsequent bust to every boom. Excesses need to be worked off; idle capital goods need to be redistributed or repurposed; the fat needs to be trimmed.

By making every effort to sustain the boom when it's already naturally run its course only delays the inevitable; the impending bust will feel all the more painful. Think about fighting fire with Molotov Cocktails ...

Many analysts, including myself, are beginning to believe the Fed needs to stop fighting the fire with bailouts and cheap money. The Federal Reserve needs to tighten up and let the market process work things out from here.

Right now the Fed is in bailout mode -- the obvious Bear Stearns backstop a couple months ago and now the Fannie/Freddie fiasco. That's not even considering who else the Fed has saved (so far) since they've opened up the vault doors to almost everyone.

If the Fed doesn't change its attitude and stop feeding debt creation, asset prices will spiral higher out of control and more and more pain will be crammed into the closet until someone or something knocks the door open.

These aren't the conditions that the People need to make the economy grow powerfully. These are conditions built to fall. The Fed needs to grab hold of some rulers, start smacking back desperate hands and start teaching some lessons.

Jack Crooks Black Swan Capital
http://www.blackswantrading.com

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