Advice to Fed Chief Bernanke
By Bill Bonner
Aug. 3, 2006

"Anxiety Rises as Paychecks Trail Inflation," says the New York Times.

"Home loan demand at 4-year low," adds Bloomberg.

"South Florida House Sales, Prices Fall," notices the Inman Real Estate News. In Broward County, for example, sales fell 25% in July, compared to a year ago.

A credit bubble is typically followed by a credit collapse, which is the last thing a central banker wants. But we read the headlines and see it coming:

"Goodbye, condo mania," adds Kiplinger's.

"At $222,000, the nationwide median price of a condo is once again less than that of a single-family home ($222,700). Condos had been appreciating more quickly than single-family homes because they are concentrated in high-cost metro areas, where prices were rising rapidly. As home prices cool in overheated urban markets, the drop in condo prices is likely to be more precipitous."

The consumer economy depends on consumers with money in their pockets - or at least a line of credit. For the last five years, that line of credit has run directly from increases in house prices. Now that house prices are no longer going up, consumers are running out of spending money. Particularly hard hit are companies that offer middle-class luxuries: Starbucks, Whole Foods, Red Lobster, Cheesecake Factory. And, let's not forget the loan companies: Countrywide Financial and Capital One, for example.

Bankruptcy, ruin, revolution and death. People spend their whole lives trying to avoid crises that are either inevitable or actually beneficial.

The Roman Empire lasted for hundreds of years, but it did so only by heaving itself out of the ditch every so often - with civil wars, mass murders, coups d'etat, rebellions, insurrections, revolutions. Blood ran in the streets of Rome often - long before the city was sacked by barbarians.

Now, it is the modern financial world that faces ruin. Having inflated the money supply, the Bernanke Fed attends rising consumer prices like Joan of Arc waiting for a match.

But what can they do about it? The Fed has stopped reporting increases in broad money supply, M3, and has redefined the word 'inflation' so as to exclude prices that are going up. It has also increased short rates by 450 basis points - the sharpest increase since the '60s. But while it publicly fights inflation, its real enemy is deflation. So, while M3 goes unreported, M2 tells us that the money supply has exploded at a 10% rate over the last 10 weeks. The Fed is desperately trying to avoid deflation by making more money and credit available.

Poor Ben Bernanke. The poor man confronts a world in ARMs way. The adjustable rate mortgage was an innovation that helped the housing industry sell houses to people who couldn't really afford it. Now, those same people - millions of them - face automatic increases in their housing costs. From Palm Beach comes news that "Easy-to-get loans cause thousands to lose homes." From the West Coast we get a similar story: "Lenders take notice as defaults are rising; Homeowners feel pinch of adjustable rate loans." From coast to coast, mortgage defaults are running 72% ahead of last year.

Our advice to the Fed chief: relax. Yes, the economy is going into a slump. Yes, millions of people will go broke. But look on the bright side: we wouldn't have bankruptcies, revolutions and death if we didn't need them.

* Latest Market News ... with more on defining "stagflation" from Bill Bonner
"We remind readers how stagflation comes about (and why Ben Bernanke is doomed)... The Keynesian economics practiced by governments and central bankers depends on deception...

* 6-30-06 -- Inflation, Deflation, or Bust!-- By Bill Bonner, Daily Reckoning
Imagine what a real deflation would do! When the debt- soaked US householder dries out, the whole world goes into a slump. Chinese factories would go quiet. The demand for raw materials would collapse. Unemployment would increase. Wage progress, feeble as it is, would go negative. Even the debt pushers would have to look for other work. Refinancing could turn brown and curl up like an old leaf. Defaults and bankruptcies would soar. Gold, the ultimate safe-haven, may be the only thing to go up.

DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.

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