The Fed

The Fed is in panic mode and has been for the past six months.

Oh no, liquidity is drying up! QUICK! THROW MORE MONEY AT IT!!!

Except lowering rates and passing out more money isn't going to fix anything. The loss of liquidity isn't the cause of all the pain we're feeling, it's a symptom. An estimated $200+ billion is going to be lost, not because of liquidity, but because that value was built on top of highly levered investments that turned out to be crap. Once you yank out that last bottom Jenga piece, everything's going to come crashing down, no matter how hard you blow on it.

A very harmful side effect of continuing to lower rates is inflation, which has noticeably creeped up in food and energy prices - two things consumers can't stop consuming.

The Fed needs to start acting like an adult and stop dealing more drugs to the financial community. They're junkies who need to kick the habit.

An Exercise in Bullshit

The CPI:

U.S. consumer prices stayed under wraps last month as contained housing and clothing prices offset a big jump in energy costs, suggesting that higher oil prices haven't yet filtered into underlying inflationary pressures.

The data should provide some comfort to Federal Reserve officials worried about the potential inflationary impact of oil and commodity prices as well as the weak dollar.

The consumer price index rose 0.3% in October, the Labor Department said Thursday, matching September's increase. The core CPI, which excludes volatile food and energy prices, advanced 0.2% for a fifth-straight month. The headline and core gains matched Wall Street expectations, according to a Dow Jones Newswires survey.

...

Energy prices last month increased 1.4% compared to September, according to Thursday's report, as did gasoline prices. Electricity prices were up 1.5%. Food prices increased 0.3%.

Medical-care prices, meanwhile, advanced 0.6%. Clothing prices were flat.

Call them volatile all you want, but food and energy are staples of peoples' lives that they can't stop consuming. Clothing, on the other hand, is not something that needs to be replaced at a rate anywhere close to how often you need to replace the food in your stomach or the gas in your car. The same goes for housing. You need a place to live, but you don't need to go out and buy a new house that often.

Housing, which accounts for 40% of the CPI index, was up just 0.2%. Rent increased by 0.5%. Owners' equivalent rent rose 0.2%. Lodging away from home fell 1.5%. Housing-related prices have risen at only a 1.9% annualized rate over the past three months, suggesting that the slowdown in that sector is easing pressure on prices.

Rent is by far the more important indicator since it has a much higher turnover than new home sales does, and more people will become renters as they can no longer afford to pay their mortgages. It's not like we're getting richer either:

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.2% in October. Average hourly earnings increased 0.2%, and average weekly hours were flat.

People's quality of life is going to fall. It's true that for most people it never should have been as high as it was - we have cheap debt from China to thank for that - but it's going to fall and people are going to hurt in the process. As they devote a greater percentage of their income to food and energy, some things are going to have to give. Maybe it will be luxury retail goods, clothing and vacations, but maybe it will be houses, healthcare and education. That's not good.