When Push Comes to Shove

Watching the closely correlated moves between gold and the broader stock market in the early days of the crisis, however, had us wondering just when it would be that other purportedly intelligent market observers would figure out the nature of the Fed's dilemma, and the inevitable implications of same. To wit, that when push came to shove, the Fed would almost certainly sacrifice the dollar.

The reasons for that conclusion are, at least in our thinking, obvious.

While the Fed and the world's central banks could, after the initial round of rate cuts and cash infusions, switch course again and decide to simply sit tight, allowing a deep recession - or perhaps even a depression of 1930s depth - to clear out the monumental excesses now in the financial system, we don't think they'll find that option attractive, especially in the midst of a presidential election cycle. Instead, the law of relative unpleasantness strongly skews the odds in favor of the printing press option.

Specifically, they are now well aware of what sort of unpleasantness will almost certainly occur if they fail to feed the beast with greenbacks by the helicopter load. Collapsing real estate prices, closing factories, soaring unemployment and, given the size of the problems, a clear possibility of things spinning seriously out of control from there. Returning to my earlier metaphor, we're talking a sure trip onto the sharpened sticks below.