The Federal Reserve and its new chairman Mr. Ben Bernanke are in a box. By this I mean there are opposing issues that prevent them from taking action that will solve their problem.
Consider this report:
This is indicative of a slowing of the economy. In order to stimulate the housing market, the Fed would have to reduce interest rates to make the purchase of new homes more attractive.
The catch is that a reduction in interest rates will make investment in U.S. treasury debt by foreigners less attractive and they will look elsewhere to invest their dollars. If we don't continue to receive the billions of dollars daily from foreigners that finance the U.S. debt, the shortfall will have to be filled by the printing of dollars. This will inevitably lead to more inflation. If foreign investors perceive an inflationary trend in the U.S. they will back off on their investment of U.S. debt. which will fuel a cycle of less investment in the U.S.
Here's another report report that indicates that many existing home owners may already be under water regarding their mortgage and that many individuals are in for some real financial pain.
Given the above, I can only wonder what contribution these people are going to be able to make to the economy in terms of spending. The answer is, most likely, not much. And if that's the case, a recession or worse is likely.
Understanding the current state of affairs, it is easy to see why the Federal Reserve has discontinued publishing the M3 money supply figure as of yesterday. It will make it difficult if not impossible for analysts to determine our true rate of inflation but even so, the results will surely become apparent to the casual observer in short order.
There's no doubt that the money supply is going to go to the moon. I may have been mistaken in my suspicion that the reason for the discontinuance of M3 reporting was specifically because of Iran's intent to establish the oil bourse selling oil for euros but it hardly matters. It appears that several months ago when the Fed announced it would discontinue the report they could see that they would have to flood the economy with dollars (and try to hide the fact) either because of Iran's intentions or because of the news linked above, or for other reasons that we don't know of yet but it hardly matters what the cause is. The fact of the matter is that we are where we are and consequently, it looks like the Fed will be pressured to print enormous amounts of dollars.