Is it Decision Time for the Federal Reserve?

There is a lot going on right now.  The protests are spreading in the Middle East.  The latest big news with protests is coming from Libya, where the thug dictator is not going down easily.  This in turn has caused the price of oil to spike.

Silver is hitting 30-year highs and gold is near all-time highs.  Food prices are going up just about everywhere.  Meanwhile, there have been a couple of bad days for Wall Street.  In addition, housing prices are hitting new lows (although this is good news for buyers) as more and more people are underwater with their mortgages.

Today there was news of Charles Plosser, president of the Federal Reserve Bank of Philadelphia, saying that he may push for an early end to QE2 (money creation).  Whether or not QE2 ends early does not matter much in the long-term.  Eventually the Fed will be faced with a choice and that choice may have to be made sooner than expected.

Although Bernanke gets a lot of attention as the Fed chairman, he really is just one man.  His views may not matter quite as much as some think.  The Fed is part of the establishment.  But they are their own sector.  It is a group of elitist bankers.  The establishment matters more than one man (Bernanke).  In the same way, the presidency is part of the establishment.  The president doesn't really matter all that much, as long as he plays the game.  The last one who didn't play the game was Kennedy and we know how that ended.

So basically, it is not just Bernanke's decision on what happens.  It is really up to the banking establishment.  This is why I don't think we will have hyperinflation.  We may have massive price inflation, well into double digits, but I don't think the bankers are going to go Zimbabwe style on us and risk their own fortunes.

The Fed will face a decision when price inflation gets higher and there is pressure from foreign nations.  Paul Volcker is not some wizard, but the Fed pulled back when he was chairman.  This saved the dollar and the economy.  There was some short-term pain in the recession of 1981/1982.  I think the same thing will happen again (with a much bigger recession), regardless of Bernanke.

The Fed will be under pressure by Congress, and maybe the president, to monetize debt.  The Fed will only play the game for so long.  If there is a high risk of hyperinflation and a total collapse of the dollar, the Fed and the bankers will save themselves.  They will not risk a total breakdown of civilization.  They have too much invested.  In addition, there will be much pressure from other countries, blaming global problems on the U.S. central bank.

The Fed will stick it to Congress.  The problem and decisions will then be forced on the federal government.  They will have decisions to make as to what will be cut.  I think the empire will be the first major thing to go.  Americans would rather choose Medicare and Social Security than Iraq and Afghanistan.  If it is really bad, there might not be a choice as everything would get cut.

The biggest bubble has not been tech stocks or real estate.  The biggest bubble is government at all levels.  The bust is coming.  It will hit state and local governments first.  Then it will be the federal government's turn to go bust.