The Bubble Economy, the Dollar, or Both?
Ben Bernanke is in a tight spot. He currently resides in a job that shouldn't exist at a time where the implications of the job itself are causing the logical, ugly-looking conclusion of its market-inefficient existence.
The United States economy sits on a precipice -- facing its ultimate denouement after a 30-year ascent up a massive, historically-unprecedented credit bubble. Fiat paper currency, computer-assisted credit expansion, fractional reserve banking, and government shenanigans too plentiful to count have helped paved the way to where we currently find ourselves. The fate of the economy as we know it hangs in the balance.
Imprudent actions over a long period of time have their way of forcing such a hand.
In practical matters, the U.S. economy is in BIG trouble. Debt-to-GDP levels are off the charts, the housing market is tanking from monetarily-created and unsustainable levels, and layers upon layers of the economy have been built on the mortgage and structured finance bubble and face potential significant retraction, as evidenced by what is currently taking place in the subprime arena. The tentacles of credit expansion have worked their way into all corners of the economy. Risk is everywhere!
The U.S. Dollar is in trouble, as well. As a fiat (i.e., backed by force only) currency, the U.S. Dollar has no inherent value. It is only worth as much as people are willing to trade it for based on previous experience. Its position is tenuous; at true risk of being exposed, as Ben Bernanke and his Merry Men may feel that the economy is more important than the health and solidity of the Dollar.
The Fed may, in fact, choose to debase, and if further money-printing and artificial interest rate jiggering continue, the U.S. Dollar, as we have come to know it, may be destroyed. Clearly, this would be something that would take the economy and the U.S. consumer down with it. To put it simply, dollar risk is elevated!
So Bernanke -- finding himself presiding over a situation that is untenable over the long run -- now faces his moment of truth: Does he try to save an over bloated, debt-filled economy and imprudent financial system at the expense of the dollar? Or does he keep the dollar from free falling while overseeing a severe retrenchment in the financial (and thereby real) economy? Perhaps he will try his best to put on a continued outward front as those great forces (credit deflation, dollar illegitimacy) fight it out, knowing that he is powerless to break up a battle between King Kong and Godzilla.
I think the latter is the most likely scenario.
For too long, our economy has relied on the expansion of credit at the expense of real productive achievement. Additionally, government edicts and monetary policy have distorted the market process to such a degree that a free market economy certainly is not what we have at this point. They may try to fool you into thinking that one exists, but the reality is the economy has been "shepherded" to the point where laissez-faire might as well be a French pastry. To put it plainly, the risk that imprudent government action has added to the equation has grown into an 8,000 pound untrained gorilla sitting in your living room.
When it is all said and done, Bernanke will be powerless to stop the forces that have built up over 30, 50, even 100 years -- directly at odds with what should encompass the spirit of his job. It's inevitable. You can't brush economic reality under the rug forever.
Indeed, we appear to have reached a critical turning point; where we go from here is anyone's guess.
The question we should all ponder right now is this: Which will take the greatest hit on the chin? The economy or the dollar.