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                 BEST OF DOUG NOLAND

The Bernanke Fed is in one hell of a predicament. There is today no way to rein in escalating global excesses without a serious bout of U.S. financial and economic tumult. These days, such a scenario is simply unthinkable. Yet the status quo fosters only more problematic Monetary Disorder. Mortgage Credit growth is likely to approach last year's stunning $1.4 Trillion level, while energy and M&A-related borrowings surge. Global leveraging of commodities, securities markets, and real estate is creating unfathomable liquidity excesses. Bull markets create their own liquidity until they don’t.

More than ever before, U.S. consumer retrenchment and resulting recession are required for the commencement of the long-overdue and unavoidable adjustment process, although the Fed is more determined than ever to maintain the boom. At this point, boom-time conditions are sustained only by ongoing massive Credit inflation (dollar debasement), with this inflation/debasement exacerbating the increasingly destabilizing non-dollar speculative flows.

We are indeed witnessing The Critical Policymaker Credit Bubble Dilemma: the bigger and more vulnerable the Bubble, the greater the propensity for policy acquiescence and accommodation. The present course guarantees ongoing $800 billion-plus Current Account Deficits. Unconvincingly, Dr. Bernanke too loudly declares that our deficit is a global issue and – especially considering the backdrop - too conspicuously is content to do nothing.

We’re now into year four of the Great Dollar Bear Market. Importantly, the Financial Sphere has by this point had ample opportunity to adapt and devise myriad instruments, avenues and strategies to profit from a declining greenback (inflating non-dollar prices). Speculators and investors have played and won overseas, and these strategies are now widely accepted as mainstream (a deepening "inflationary bias"). Global markets today capture the majority of U.S. mutual fund flows, while American stocks are bolstered by massive company buybacks. The ballooning pool of global speculative finance is more than comfortable playing global equities, emerging market debt, and commodities; and the more favorable the relative out-performance versus dollar returns, the greater the (self-reinforcing) flows from dollars to non-dollars. Additionally, pension funds are now keen to participate in the easy outsized returns. Derivatives markets and other leveraging strategies have evolved to meet booming institutional demand across all markets.

Meanwhile, scores of new mutual funds, ETFs (exchange-traded funds) and other instruments have sprouted up to provide less "institutional" investors easy access to the commodities and emerging market booms. Pimco’s Bill Gross even recommended an Asian ETF (twice) yesterday in a Bloomberg interview. I don’t believe the ramifications for the powerful and intensifying Inflationary Bias toward non-dollar asset classes garners the analytical attention it deserves.

The Fed is playing a losing hand and keeps wagering our currency. Accommodating the current Credit Bubble guarantees massive Current Account Deficits, as well as heightened speculative flows out of dollars and into commodities and global markets. The expectation that a declining dollar would help rectify global imbalances has failed to come to fruition, a circumstance not the least bit surprising to Macro Credit Analysts. Flawed policymaking (accommodating Financial Sphere excesses) ensured escalating Credit Inflation and only more and bigger Bubbles. As buyers of last resort, foreign central bank reserves have ballooned about $1 Trillion over the past 18 months. Ominously, this incredible support has only stabilized the dollar’s freefall. Time to pause?

It is today ridiculous for chairman Bernanke and Fed officials to state that changes to our trading partners’ policies (chiefly to stimulate foreign domestic demand) and currency exchange values will assuage the U.S. Current Account Deficit (and other global imbalances). We’ve already witnessed the consequences of wholesale Global Credit Inflation: a ballooning and more unwieldy pool of global speculative finance, along with wildly inflating commodities and asset markets. Global inflation is the problem and not the solution.

The higher energy and commodities prices surge, the greater U.S. Credit expansion and resulting dollar outflows necessary to satisfy (monetize) our dependency. The more foreign asset markets inflate, the greater the tide of speculative outflows to non-dollar markets and assets. With foreign central banks fully loaded to the gills with dollars and not all too tickled about it, it is not an easy exercise to contemplate a backdrop more conducive to a run on our currency. And how ironic would it be if such a run was instigated by our own institutions and citizens, as opposed to our foreign creditors?

Time for the Federal Reserve to contemplate pausing? Of course not. Chairman Bernanke just committed his first mistake; the dollar got clobbered; and the flight to the safe-haven (non-dollar) metals intensified. The bond market froze (deer in the headlights?). And, as one would expect, global markets turned increasingly unsettled this week and are surely poised to become only more so.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.