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Wednesday, August 10, 2011

Bernanke, What You Gonna Do Now?

What you gonna do when she says goodbye? What you gonna do when she is gone? So Benny’s havin’ trouble with his printing press, cause things just aren’t working out the way they should. Well you better check it out before it goes. Cause you may not be seein' things just the way you should. And you don't recognize what everybody knows… Sorry Pablo for the pun on your song, but sometimes a little humor goes a long way.

Well, well, well! We have yet another popped economic bubble on our hands here, and ‘ol Benny is running out of options. Maybe he needs a stronger soap, or maybe there was an outside culprit. Those awful people at Standard and Poors should be shot, and Michael Moore is going to lead the charge. Everything was fine they took our triple-A status away! Well, Mr. Moore, how about you indulge in one or two of your favorite McDonald’s combo meals while contemplating another tripe filled documentary. Leave the analysis of the situation to those with real expertise.

Houston, we have a problem. Our debt now exceeds 100 percent of our nation’s gross domestic product, our dollar is currently on life support from world banks and misguided investors, the quantitative easing packages have failed; and another bubble is not available to inflate to fool the public into thinking the economy is on the right track. In addition, those meanies at the S&P have gone out on a mild limb with their current downgrade. Worse, the public many not buy into the fact that more spending is necessary to revive the economy. Bernake’s house of cards is about to collapse.

The meanies at S&P are weak bullies, so relax Mr. Moore. The downgrade is years too late and far too mild because it STILL does not reflect America’s current debt position. So all your leftist, Keynesian buddies got was a little slap on the hand with a message that goes something like “Hey guys, can you tone it down just a little bit here? This is getting serious now. We can’t cover for much longer.” Yet, Moore wants to shoot these people, but where were his feelings of rage when S&P, Moody’s and Fitch were giving triple-A stamps to JUNK bonds four years ago…you know the huge bubble that burst, which put the disaster ball in motion?

Returning to our good friend Bernanke, he has a very unique problem. QE1 and QE2 have successfully inflated the stock market, but now that bubble has burst. It’s difficult to believe that during the crash of 2008, people still sought shelter in the U.S. dollar, and it’s even more difficult to believe that DOWNGRADED long-term U.S. treasury bonds were the safe haven this time around. Some investors are always behind the eight ball, but soon there won’t be any place to go. Bernanke will not be able to engage in this pump-priming much longer. How much farther can we go…until debt exceeds 130 percent of GDP? How about 140? Do I hear 150? How many times are we going to go in the same circle? Prime the pump, raise the stock market, market crashes, prime the pump, raise the stock market, market crashes… He’s been trying to re-inflate the housing bubble, but there is a hole in the other side.

Bernake’s decision to keep rates still until 2013 is an admission of complete failure. It also exposes the fact that the “recovery” was bogus and sends a message of further uncertainty to businesses that will continue to mitigate risk and sit on capital. In addition, Bernake’s decision to keep rates low will guarantee the dollar’s demise against foreign currencies. Sadly, this won’t change how Washington will react. Spending will continue, the Fed will engage in more pump priming once the T-bond rally dies, and it’s possible that the debt ceiling might have be raised before 2013.

The end of the line is near. My question is who is going to bail out the U.S. when the dollar loses its world reserve status? The only reason why we have been able to get away with reckless monetary policy is because the U.S. dollar is the world reserve currency. Greece, Spain and Italy didn’t have that luxury, and soon we won’t either.

It’s been time to pull out of the U.S. dollar, but as more and more investors slowly wake up, world banks won’t be able to prop it up. G-7 had an awful time this spring when Japan had to divert away from treasury bonds to address its own natural disasters. When enough people see that it is completely senseless to flock to downgraded debt, the fiat charade will come to an end.

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