The Fed us stymied

As students of history like to point out, housing collapses follow a recession. And so does an increase in unemployment.

Well, not this time. Now we have a massive unemployment rate about to hit the books before a recession. Friday's unemployment report may not sho wit, but the layoffs from builders and mortgage companies will add 300,000 folks to the non-income earning lists - in just 2 months. Official estimates are that 80,000 planned layoffs will happen inAugust, up from 45,000 in July. Countrywide alone will fire 25,000 in September. And it is just starting.

This will be a very bad holiday season for retailers.

The Fed doesn't know what to do. Although it is VERY clear that they will not re-inflate this asset bubble. But they are scared.
* Financial institutions are not solid - Merril Lynch, Citi, H&R Block and others are playing accounting games to hide the impact of the loans that are defauling that they can't sell off.
* Lenders are losing business - loan volume is pitifully down
* Retailers are showing signs of consumer distress - Mainly blue collar workers (construction workers and home builder related workers) but there are plenty of faux white collar workers (real estate agents, lenders, brokers) who are going
* True inflation is much higher than reported. Steel and other materials continue to rise in price. Now wheat is jumping 20%. Wheat is rising partly because of the dumb ethanol craze (which takes land and corn out of the system) an dpartly because of world demand growth

The unfolding dilemna of inflation coupled with rising unemployment is a problem and are the marks of stagflation.

The Fed will stick to official numbers and by January those numbers will show a big drop in economic strength.

I think this Friday will show that we are downtrending and I wonder how the markets will react. They may actually get excited because this heralds a strong potential for a rate cut.

I believe that the Fed is not dumb about the housing crash impact on consumer spending. But I think they either don't care (consumer spending is inflationary) or they recognize that the housing market as a bubble distorted asset allocation and it needs to end. oftentimes, that is where a recession helps - it clears away misallocated capital, much the way a brush fire prepares the land for new growth.

I think the Fed is striving for a brush fire but it will become a major fire instead. Not just because they may be ignorant (they were blindsided by last month's liquidity squeeze). I thinnk the Fed knows but isn't saying that they have no control over inflation. Their entire mandate is to keep pricing predictable (thereby ensuring stable growth and ongoing investment). Because the global economy is now in charge of the US economy, the Fed is in a very precarious position - a new one at that.