UPDATE: Please Do A Surprise 50bp Rate Hike!

There is an additional argument I did not mention in the post below of June 6th for the Fed to keep rates unchanged as they did yesterday.  That argument is that banks, many of which are tottering on the brink of insolvency, need a steep yield curve in order to ‘earn’ their way out of the current problems.  And the Fed is of course the banker’s bank, so they can be expected to keep this near the top of their priority list to avoid bank runs which would further sap confidence (which is of course the linchpin of a free economy) and create a sense of panic.

The counter-counter argument is that by doing what the fed did yesterday, which commentators have described as the equivalent of not having a meeting at all, the dollar is again getting crushed and commodities are blowing the doors and windows out, so the general economy is going to actually be shot in the back of the head and toppled into the freshly dug hole.  That is, inflation and inflation expectations will now become firmly entrenched (they already have, but the boneheads at the fed have not admitted it yet).

Now consider the fact that we are on the verge of having federal promises to pay things like medicare and social security balloon out of control – even if assumptions of strong growth come true – which see,ms unlikely.  So either the government will have to lie to the body politic even more than it does now to even have a shot at meeting the social policy promises it has made, or it will have to break the promises.

It reminds me of Alan Guth’s cosmological theory of inflation, which posits that the early universe expanded by trillions and trillions of orders of magnitude in an infinitesimally short period of time.  If the government acknowledges the real rate of inflation, its obligations will also undergo an inflation that will boggle the mind and potentially destroy the great American experiment.

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