Greenspan Has Taken the Horse to the Water. But can he make it drink?
by Fekete which you can read in full at http://www.financialsense.com/editorials/fekete/2005/0301.html
"........Fed governors have found it necessary to shout from their rooftops that, yes, they do have contingency plans to combat deflation. So far so good, but what about contingency plans to combat inflation, and hyperinflation to boot? Here we meet with deep silence. The Fed is not saying how it plans to meet the emergency if the dollar hits skid-row and foreign holders of dollars start crying that the Emperor has no clothes. Let me tell you that the Fed’s silence on its ability to combat hyperinflation is extremely ominous. It is not that the Fed may have no contingency plans to meet such an emergency. It is that the plans it has are unorthodox, unethical, and they can only work clandestinely. They cannot succeed in the light of the day. The Fed plans to trap bond-bears and other speculators shorting the dollar.
Here I stumble into conjecture, hypotheses that nobody can prove or disprove because of the tight secrecy surrounding the plan. It is risky business to make conjectures about the clandestine operations of a government agency, but we are forced to take this risk in view of the web of lies the Fed weaves around itself.
The Fed’s contingency plan is essentially a check-kiting scheme in conspiracy with the Bank of Japan. The Fed swaps interest-bearing Treasury debt for non-interest-bearing yen balances over and above its needs to finance the trade deficit. As the Fed buys the bonds in the open market, it will pull the rug from underneath the bond-bears, and speculators shorting the dollar will burn their fingers right to the armpit. How do we know that this is what the Fed is planning to do or is already doing? By a process of elimination. Short of making the dollar gold-redeemable, and throwing all ethical considerations aside, this plan offers the best chance for saving the dollar from the sudden-death syndrome, the congenital disease of all irredeemable currencies. Note that the Fed’s plan is basically the elevation of the yen-carry trade to official status. It eliminates the risk on the short leg since there are no borrowing costs. The yens are not borrowed, they are simply created on the balance sheet of the Bank of Japan. The rate of interest on dollar loans will continue to fall. Speculators will be forced to cover their short positions on the dollar with a loss; survivors will go long. Here is the perfect example of “running on empty”. Just as check-kiting can tap into the pocket-book of everybody using the bank’s services, this plan of the Fed taps into the public purse. It plunders all the savers and all the producers in the United States in order to save the immoral regime of irredeemable currency.
Note that the Fed’s contingency plan to steer away from hyperinflation is essentially deflationary. It is designed to massacre all short sellers of dollars mercilessly by relentlessly pushing interest rates further down. The trouble with this plan is that it makes bond speculation on the long side of the market risk-free. If you now recall that speculators frustrate the Fed’s anti-deflationary measures by speculating, risk-free, also on the long side of the bond market, then you will understand why I am inclined consider the deflationary scenario as more likely than the inflationary, at least for the rest of this decade, but possibly for the next one as well.
Be prepared for further mind-boggling increases in the money supply as the Fed is desperately pumping liquidity into the economy. Contrary to expectations the dollar will not get much weaker, and may indeed get stronger because the new money, rather than flowing to the commodity market as the handlers of the speculators would hope, is flowing to the bond market where speculation has been made risk free by the Fed’s foolish policies. The deflationary spiral under the long-wave Kondratiev cycle is far from over, in spite of appearances. Please understand I don‘t suggest that you invest in bonds. I just suggest that you... well... fasten your seat belts..."
