Gold closing on platinum prices

In the Lead: “Talking [Ratings] Heads: Burning Down the House“

The so-called “Tea Party Downgrade” has prompted the Obama administration to intensify its efforts to reassure the American nation that the events of the last week do not imply that the country is not deserving of an AAA rating but that they merely reflect the outcome of the political fist-fight to which the country has been subjected since late July.

And now, the Fed meets. While Mr. Bernanke and his colleagues have given indications in recent months that the US central bank was essentially done with stimulating the economy, the FOMC will sit down today amid a reality on the market and economic front that has been substantially altered. On top of that, the number of dollars that has actually gotten into the system (M2) during the current year has actually been on the decline after it rose in 2010.

When factoring in the 13% drop in the stock market that took place over five days and the fact that each time such a thing happened (1987 and 2008) the outcome was a recession, well, you can see where the Fed might have to lay out a fresh set of blueprints at the meeting table today and tomorrow. There is one exception to that 13% / five-day drop rule; it came in 1962 and that time, the same decline actually signaled the end of the recession and the start of a long period of growth. One-in-three. Some odds.

Some economists have suggested that the way out of this pickle is for the Fed to simply raise its inflation target. Going from 2% to 4% (or even to 6%) might make for easier repayment of debt (public as well as private) but it carries with it the risk that when the time to pull the trigger comes, the mechanism malfunctions. At the moment, the US as well as the rest of the world (for the most part) is trying to cope with falling levels of inflation and slowing growth amid rising debt.

One place where the disappearing inflation problem is apparently not a problem at all, but quite the opposite, is China. The latest tally from that country shows prices rising at a 6.5% clip; beyond the comfort level of the PBOC and China’s leadership. To make matters worse, the country’s real estate investment and sales patterns showed nothing but acceleration in July.

Thus far in 2011, China’s property investment expanded at a rate of 33.6% and property sales grew at a 13.6% pace. All of this took place despite concerted efforts by Beijing authorities to contain housing inflation and rampant property speculation with various drastic purchase-restrictive measures. Trying to keep a “good thing” down is proving a difficult task for Beijing. However the efforts are only likely to continue and to become more serious as the country’s leadership is very aware of the potential consequences of such bubbles. All they have to do is look across the Pacific, to the shores of the USA…

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