Poor Mr. Bernanke can't win! (page 2 of 2)

But, today, with total credit market debt at over 320% of GDP and with asset prices being badly inflated, tight monetary policies "a la Volcker" would have a lethal impact on US consumers, which are the only driver of the economy thanks to the extraction of money from rising home prices. In fact, given the debt level in the US, I believe, that Mr. Bernanke has really no other option but to print more and more money if he wants to avoid a deflationary recession/depression.

Also, while the Fed has increased short term rates since June 2004 in baby steps, money is simply not tight. In the fourth quarter of 2005, financial and non-financial credit grew at a rate 39% above the rate in the second quarter of 2004, when the Fed began to increase short term interest rates!

Moreover, whereas the Fed Fund rate is now at 4.75% compared to 1% then, inflation - measured by true price increases and not by the government's Ministry of Truth (BLS) - is running at least at between 5% and 6%, which means that it still pays to borrow money, as real rates remain negative.

Overconfidence

I may also add that it does not require an economist with lots of degrees to see that if money were "tight", asset prices would not be soaring and speculation would not be rampant in all asset markets. In fact, what surprises me is how many investors feel that the gold market is way ahead of itself but are very confident to invest in US equities.

But speculation in equities is at least as widespread as in the commodity markets and, therefore, when asset markets will finally correct, which I expect to happen shortly, all asset markets could sell-off at the same time - the same way they also all rose in concert since October 2002. Needless to say that such a correction could lead to a temporary rebound in bond prices.

To summarize, the higher the S&P 500 goes the more the US dollar will lose its value against gold and foreign currencies. In our opinion, the underperformance of US assets against foreign assets and precious metals, which began in 2002, will continue for as far as the eye can see.