ebear

We actually agree on a lot of issues. There are many sectors of the economy that are drastically overpriced.

The financial sector is disproportionately large.
The housing sector is overpriced.
The general stock market with falling earnings is not a screaming bargain even today after the drop.

The fed is fully aware of what the problem is and I believe they are trying to engineer a 70’s style stagflation. This they believe will over a few years solve their problems and is preferable to the more drastic alternatives.

6 months ago they had 2 problems.

1. Inflation was getting away from them with oil at $147.00 and gold over $1000.00. Other commodities were seen as too high as well.
2. An imploding credit bubble that was threatening to bring down the banking sector.

They needed to pump huge amounts of dollars into the economy to save the banking system but it was politically unpalatable to do so with a high inflation rate. The solution was to engineer a commodities take down and cause a deflationary scare. This has been discussed at length by Donald Coxe. I believe this got a little out of hand and went further than they wanted. It spilled over into the general market. They have however been able to inject the capital needed to shore up the banking system. The next step will be to reignite the inflation.

An inflation rate at 10% over a few years would make all of the overpriced sectors reasonably priced again. This is what happened in the 70’s as the general stock market and home prices moved sideways the inflation rate eroded the value of the dollar. In real terms the prices of both fell far further than the charts indicate but were masked by inflation. http://bigpicture.typepad.com/commen...

As people are afraid they may loose their jobs they pay down debt.

I think the fed believes that over time this is their way out and their best chance to avoid a complete disaster.

I also agree that ultimately the re-inflation will probably fail and end in either deflation or hyperinflation. Both of which are very painful but will solve the ultimate problem in the economy. TOO MUCH DEBT. As the fed levers up their own balance sheet and the government debts become larger people will eventually loose confidence in the US government to pay it back. We are just not there yet. 1 more bubble to blow.