Friday, January 28, 2011

The Video Bernanke is Watching Right Now

Somewhere in the lavish Eccles Building in Washington D.C., Bernanke is watching this video: thousands clash with Egypt riot police in Cairo.

Bernanke is caught between a rock and a hard place. The stock market bubble began to collapse last summer as soon as the Federal Reserve began unwinding its special "liquidity" and "easing" programs.

So they went back to the "quantitative easing" well, with the hope of getting investors to buy real estate and stocks. Unfortunately for that plan, there are no free lunches.

Money flooded into commodities, which are a much better store of value and a much better play on inflation.

The commodity speculation has caused food prices to rise, which has led to riots. According to the Financial Times, twenty-five per cent of Egypt’s budget is already devoted to food and energy subsidies, and it’s also the world’s biggest importer of wheat. Food riots have the potential to topple governments, sweeping away the system of puppet governments controlled by the U.S.

As Dmitry Orlov puts it, American leaders appear to be following the Soviet playbook for the imperial end-game quite faithfully: cringing behind high walls and locked doors, looting the treasury like there's no tomorrow, and, of course, lying their heads off. There are a few moments each century when status quo suddenly becomes status quo ante. We may be living through just such a moment now.

The bulls are pretty confident that there will be a third quantitative easing program, and a fourth, ad infinitum. But the Egyptian food riots fortell what will happen in other countries if quantitative easing continues.

Also, I explained a couple months ago that inflation is bad, not good for corporate profits and for earnings multiples. Now, we are starting to see the effects in fourth quarter earnings:

Meanwhile, European Union officials are considering extending euro zone bailout loans to Greece and Ireland to 30 years. It's abundantly clear that the peripheral European states are insolvent and need to deleverage.


EconomicDisconnect said...

reports of the affluent leaving Egypt em masse. Wonder if they are taking their gold with them as metals are more common in countries not called the USA. Scary stuff, actual tanks in the street! Maybe Paulson was tight all that time ago.

Tsachy Mishal said...

excellent post CP