The Jig Is Up For The Fed

Traders seem obsessed lately with the ups, and mostly downs, of crude oil — so much so that every dip, feint and jiggle in energy futures is being replicated almost tick-for-tick by the S&Ps. A recent op-ed piece by Don Luskin in the Wall Street Journal asserted that falling oil prices brought on mainly by a fracking glut are crushing the world economy, but this gets it exactly wrong. In fact, falling crude prices are merely symptomatic, albeit in a big way, of deflationary forces that are starting to implode the global economy with black-hole force.

Economists, policymakers and pundits should be focused on the strengthening dollar, since that is the locus of deflation’s power. That they have instead trained their attention on crude is understandable, since falling prices threaten to gut some very large producers. But the epiphany is likely to be the same in any event, to wit: the Fed is no more able to restrain the dollar than keep oil prices from falling. If you understand this, you can see why the token tightening in December was the worst policy blunder ever made by a central bank. It has set in motion a global deleveraging that will not stop until the Dow Industrials have shed two-thirds or more of their value.

If the unwinding replicates the 1929 Crash and its aftermath, stocks are destined to fall by 85%. That figure could prove to be optimistic, given that the dollar was sound when the Great Depression began and roughly a third of the U.S. economy was tied to agricultural. Americans literally lived off the land back then. These days, tens of millions of workers probably have no idea whether the economy could do without them.  Unfortunately, they may be about to find out. 

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