In a Corner

Fed Chairman Alan Greenspan has positioned himself into a potentially dangerous corner.

Greenspan has told the media repeatedly the economy is doing better and the Fed will continue on a path of “measured” interest rate hikes. Hence, on the Fed meeting scheduled for August 10th, all eyes are on another 25 basis point increase in the Federal Funds Rate.

But the stock market is technically in trouble. Company earnings reports are not coming in as expected. Consumers are tapped out of cash and borrowing room. The economy is not doing as well as Greenspan would like us to believe. But if he doesn’t raise rates on August 10th, he’s basically admitting the economy is in such a poor state that it cannot withstand another rate increase.

The action in the bond market and in the gold market is not one of expected inflation. The action to me looks like deflation is what is anticipated. This is Greenspan’s nightmare. We are sitting at record debt levels. If deflation, which is declining prices, comes in, then the assets borrowed against debt incurred starts to decline in value. This would be terrible for the economy as it would be a high-debt consumer’s worst nightmare.

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And talking about high debt levels, if it were not for the threat of deflation holding over the gold market, gold bullion and gold stocks would be going through the roof. Long-term, as the effects of deflation ravages the value of the U.S. dollar, gold will shine bright as the flight to safety takes stride.

Back to Greenspan, in my opinion, he waited too long to cool the stock market during its “irrational exuberance” stage of the tech boom thus prolonging the great bull market of the 1980s until it burst. And he dropped rates far too low in his question to keep the consumer spending creating a debt and property value bubble.

Now he’s in a corner. Problem is that he’s brought the American consumer with him this time.