Fed Dilemma Is Never-Ending

The Federal Reserve doesn’t know what to do.  Even worse, though, is that it probably doesn’t make much difference what they do – or don’t do.

The definition of dilemma is: “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.”

The United States and the rest of the world are hooked on low interest rates and the drug of cheap and easy credit.

Raising interest rates could trigger another credit implosion which could lead to deflation and a full-scale depression.

Maintaining low interest rates furthers the dependency on cheap and easy credit.  This heightens the risk of overdose and could also lead to a swift and renewed weakening – and hasten the eventual death – of the U.S. dollar.

If the Fed emphasizes and proceeds with the liquidation of debt securities on its balance sheet, it could usher in severely higher interest rates unintentionally; and force a collapse in the debt markets.

Doing nothing is an option, too. The problem with that choice is that they are holding a ticking time bomb and don’t know how long it will be until their world blows apart.

Regardless of any specific actions taken or avoided, financial and economic conditions will continue to worsen over time.

The Fed dilemma is never-ending; and it is also of their own making.

THE FED IS RESPONSIBLE FOR INFLATION

Only the Federal Reserve can create inflation. They do it by continually expanding the supply of money and credit. The Fed creates inflation intentionally so that the US government can deficit spend without limits.

The US Treasury issues debt instruments and pays interest on the debt by issuing new bonds and notes which are in turn sold to investors. The Federal Reserve and its primary dealers hold any unsold Treasury bonds on their books and collect the interest.

It is a sweet deal for both parties. The US government is guaranteed all the money it wants to finance its reckless spending habits and the banks collect the interest on the debt which was financed with money created by the Fed. (see Simple Facts About Inflation)

THE FED AND DRUG ADDICTION

As with a drug addict, each succeeding monetary fix has less and less impact.  The fixes at best allow the patient (i.e. the economy) to sustain life temporarily. And with each passing day, the possibility of slipping into a coma (recession, depression, etc) increases.

In addition, the effects of inflation are volatile and unpredictable. The occurrence of catastrophic events become more frequent. Also, the extent and duration of negative events are worsening.

The more severe the addiction, the worse is the experience of withdrawal. As far as finances and the economy are concerned, things will necessarily get worse before they get better. (see The Fed And Drug Addiction)

THE WORST IS YET TO COME

The worst possibilities come after something big happens. The Federal Reserve and the U.S. government will work together to stave off any possibility of loss of control.  Which means everyone – investors, traders, citizens, communities – will be subject to a host of new economic and monetary regulations, restrictions, executive orders, etc.

It will be like nothing we have seen in the past and will surpass the limits of anything we can currently comprehend.

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