You mention a 17% annual increase in the money supply. Where are you getting this figure? If it’s M3, that is now a government secret isn’t it?

BTW, did you see Pete Carroll on that same 60M episode? That was a really good piece.

You make some outrageous claims on occassion that merit a response. You seem like a pretty bright guy, so I think you are just getting stuck in the dogma of a true gold bug (paper money is bad and only gold is good). I really liked your decision to sell your condo in 2005 as I have told you before. It was brilliant and very contrarian at that time. But you need to keep an open mind to stay contrarian. I like that you would try to buy back your condo at a 50% discount to where it was valued before. Good move. But, I don’t agree that there is a “3-5 year overhead supply” of real estate. Where does that number come from? Federally reported numbers are more in line with 10 month supply, Case Shiller data in Q2 shows 11.4 months and I track a Phoenix website where it varies between 6 and 12 months supply based on zip code.

But at the right price and with easier lending encouraged by the Feds, it will be possible to absorb that inventory and bring it down to a more typical 3 month supply. Affordability is the key to real estate demand (when it is not being inflated by a buying panic like 2003-07). Two times gross family income is considered very affordable. So, a family making $100K should be able to afford a $200K residence, especially with super cheap (4.5%, 30 year fixed) mortgage rates. Again, the Case Shiller data are showing an affordability index at 135%, as high as it has been in over a decade and close to an all-time high from 1973. The OFHEO data are a little less at 119%, but I think the Shiller data is more accurate. Now, for the rest of your arguments:

First, Ben Bernanke is not stupid. He knows exactly what he is doing. The move down in the Fed Funds rate was entirely symbolic. The short term Treasuries (1, 3 and 6 month) were already trading below 0.25%, so this is just a belated acknowledgement of that fact, since the overnite loan should trade for even less than a one month. Bernanke doesn’t really think interest rate policy is important any longer, in the sense he can’t drive the rates any lower (he knows all about “pushing on a string”). His statements said as much. He talked about alternative policy moves to lower the cost of mortgages and other higher risk lending, backstopping the financial system by buying all manner of debt securities onto the Federal balance sheet. In so doing the Fed would minimize the return on “safe” investing by keeping rates extremely low and encourage more “risky” investing. A little inflation is needed to force investors to seek riskier investments that will stay ahead of inflation.

As for this new round of fear mongering among some of the TV pundits, that “the worst is yet to come”, I don’t buy it for a second. The reason the sub-prime situation was so bad is it caught the markets (investors) and policy makers flat footed. The Fed had been in full inflation-fighting mode by raising rates in 2006-07 when all of this started (just as the Fed in 1929 was doing the same). Raising rates into a credit crisis is not a good idea. But they didn’t see this coming to such a degree like lots of us, you and me included (even though we both knew real estate was overpriced). Now that we are in the middle of the crisis, the Treasury and Fed are implementing actions to slow and eventually stop the real estate market price decline and mortgage defaults. They can easily do this by making the government the mortgage company. They have already done this by moving the mortgage assets from the banks to the Fed balance sheet and assuming control of Fannie and Freddie (80% now owned by you and me). The government (us taxpayers) therefore already controls 95% of the mortgage market. So any further impact will be absorbed by the Fed balance sheet, not banks and other financial institutions. That is a huge change from a year ago.

Underwater mortgages are a bigger problem, but one that can be solved. It is possible for the Feds to absorb the losses. The loss is already a reality, so the government might as well take the hit by allowing its intermediaries (Fannie) to negotiate principal reductions. If we don’t write down property values now on underwater mortgages, we will do so later when they default. Again, we own 95% of the mortgage market, so any defaults will end up on our (the Fed’s) balance sheet. Better to be proactive and address the situation now before it deteriorates. This is the next step for the Fed, and Obama’s inauguration will clear the way for this to happen. Right now, we are in the presidential transition period where nothing can happen, so this will take 6-8 weeks. But I am confident the plans are already being drawn up to make this happen. And your state Congresswoman, Nancy Pelosi, will be the key cheerleader.

I do want to congratulate you on the move on the Australian dollar. I am doing, have done, the same. I have many investments that are denominated in Canadian or Australian currency, and are hard asset / commodity or high cash flow plays (like the Canroys). I do think there will be inflation to pay for stopping this credit crisis. And I am positioning my portfolio accordingly. Once economies recover and there is inflation, commodities will soar. But unlike you, apparently (”In the long term, Bernanke (or Bernie for short) is more worried about saving the economy than fighting inflation.”), I think some future inflation is a reasonable policy risk. As I referenced earlier, zero inflation equals low incentive for investors to seek riskier returns. I don’t get the people who bash the decision to save the economy at the expense of future inflation. Every major economist of the last 100 years Keynes, Friedman, Heller, etc), would agree with this decision. Deflationary depressions are much worse a problem than currency inflation. It is relatively easy to stop inflation (reduce money supply / drive up interest rates) as compared with stopping a depression and the back-feeding, self-defeating psychology that goes with it.

All of this sounds a lot like socialism. And I guess it is. But what is the option? Allow the failure of the American and global economies and invite a global depression that could last for years and bring on all kinds of human misery, even world / nuclear war? Even though I am a fiscal conservative and free marketer, I will take a little government ownership and some eventual inflation, any day, over the alternate nightmare scenario. Don’t hang yourself (and all of us) from some cross of gold.

Thanks

Brian