Of course the Fed did what everybody expected them to do - they did nothing. How could they do anything else? They are well aware that the debt morass which has been opened by the subprime debacle in the US has NOT been contained or "isolated". Nor will it be. They are equally well aware that the desperate rescue act undertaken by Bear Sterns in bailing out their subprime funds (with about 25 percent of their total capital) is but the tiniest tip of a gargantuan iceberg.
Even more serious, the Fed knows that the rest of the world (including even Japan) is going to go right on RAISING their official rates. Both Sweden and Norway, neither of which uses the Euro as their currency, have raised rates over the past two weeks. Both are doing so in anticipation of another raise by the European Central Bank, likely in August. The most ominous market development of the past week has been the instant slide of the US Dollar (the $US index - USDX - was down 0.41 points on June 29) once the Fed's decision not to decide became known.
Think back to the halcyon days of the late 1990s in the US. With the exception of a one month "blip" in August 1998 when LTCM turned turtle and the Russian Central Bank defaulted, the US markets had ridden right over the top of the "Asian Crisis" without blinking an eyelash. Every word uttered by then Fed Chief Alan Greenspan was held as holy writ. Indeed, it was the popular line in the US mainstream media in those days that the most powerful man in the world was not the US President, but the Fed Chairman.
Mr Greenspan managed to maintain his mantle as the man who could do no wrong right up until his final departure from the Fed at the end of January 2006. In this regard, his tenure as Fed Chairman closely resembles the only man who served longer than he did as Fed Chairman. That was William McChesney Martin who ran the Fed for the two decades between 1950 and 1970.
Mr Martin retired as Fed Chairman in February 1970. Within two years, the global monetary system had been thrown into chaos with President Nixon's closing of the Gold window in August 1971. Within three years, the era of fixed exchange rates had come to an end. And shortly after that, the US was caught up in what was the most tumultuous financial decade since the 1930s, culminating with 20 percent plus interest rates and a deep and prolonged recession.
What followed after Mr Martin's long tenure at the Fed was a decade of global financial chaos. What has followed after Mr Greenspan's long tenure at the Fed is eighteen months of paralysis in US financial and monetary "policy". The chaos has not arrived - yet. It is inexorably coming.
The difference this time is not simply one of magnitude. It is true that the US Treasury owes about nine times as much on a funded basis compared to what it did at the end of the 1970s. It is true that the debt structure has ballooned to a size which would have been literally impossible at the end of the 1970s, the computers of that era simply lacked the power and speed to build such an edifice. It is true that savings rates in the US were still at or about the 10 percent level at the end of the 1970s where they are now negative.
The MAJOR difference between the situation now and the situation as it was in the 1970s is the simple fact that the modern era of floating currencies and global fiat moneys was just getting started back then. Today, the rot has been undermining the "system" for nearly four decades. The total monetary undiscipline unleashed by the severance of Gold has had two generations to work its baneful influence.
As is becoming clearer by the day, the great global experiment of substituting IOUs for MONEY is nearing the end of the road. To give only one example, one which has been used here many times before, over 95 percent of the total funded debt of the US government has been (literally) created in the 36 years since the redeemability of the US Dollar in Gold was ended by President Nixon in August 1971. The story is similar throughout the world, on a private and "public" basis alike.
The other MAJOR difference is an unavoidable adjunct to the destruction of the money. When Mr Martin took over as Chairman of the Fed in 1951, the US Dollar had a legitimate place as the world's "reserve currency". The US was the biggest economic powerhouse in REAL terms - in terms of the output of physical economic goods and services - that the world has ever seen.
Today, the US Dollar remains the world's predominant "reserve currency". But the US economy has changed beyond all recognition. With some honourable and quality exceptions in the private sphere, the "industrial" component of the "military industrial complex" warned against by President Eisenhower at the end of 1959 is all but gone. The US produces guns, but very little in the way of "butter". Its debts have long since passed the point of no return. For more than half a century, the US has not exchanged goods for goods, it has exchanged "Dollars" for goods.
And ever since the US Dollar started its slide at the beginning of 2002, the situation has worsened. Five and a half years later, the Dollar is once again threatening to fall below the lowest point reached in the entire "floating currency" era. The slide accelerated this week, right after the Fed's decision not to decide became known. As has been documented in recent issues of The Privateer, foreign Central Bank takeup of US Treasury debt paper is on an accelerating decline, forcing the Fed to step into the breach to literally "monetise" this debt ("buy" it from the Treasury with Federal Reserve notes - aka US Dollars - created for the purpose) with increasing regularity.
As reported in the Early July Issue (Number 581 - published on July 1), the Bank for International Settlements has come out with an extraordinary warning. Its annual report baldly states that global loose monetary policy has set the world up for a re-run of the 1930s. It has also warned that what it calls "default rates" (interest rates NOT controlled by Central Banks) will BEGIN (yes - "BEGIN") to rise. Given the global level of indebtedness, the BIS clearly sees what has already taken place, especially in the US, as the merest prelude.
It is clear that Central Banks have lost control of the credit creation mechanism. That has passed to the leveraged debt derivative arena where well over $US 500 TRILLION in such paper is washing around. It is equally clear that no Central Bank, least of all the Fed, dares to raise their official rates to the extent required to even slow down, let alone choke off, this out of control debt frenzy.
In such circumstances, it is as certain as anything yet to take place can be that the "post Greenspan" era is going to be a re-run of the "post Martin" era of the 1970s. As already documented, the starting point today has been so degraded from what it was then that the certain economic implosion to come will be much worse. The best thing that could possibly come out of it would be the death knell of the fiat currency era, just as the 1970s was the (temporary) death knell of Gold as money.
Every currency collapse in history, whatever its magnitude and whatever its longevity, has in the end reached the point that only one "cure" was possible. That cure has ALWAYS been either the re-establishment or the re-introduction of GOLD as the MONEY. Ultimately, that will be the "cure" this time too.
With NO currency in the world redeemable in Gold, there is no telling WHERE this will take place initially. The sad fact is that if there is a nation where such a transition is LEAST likely to take place, that nation is the US. The US is the nation which took the world OFF Gold. It is not likely to be the nation which takes the world back to Gold again.
In the meantime, the Fed is increasingly powerless. It is reduced to the verbal baby food which it churns out in the press releases which accompany each successive FOMC meeting. If it raises rates, it admits defeat. If it lowers rates, it admits to panic. And it cannot go on doing nothing without abdicating the shreds of its influence which it still retains.
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