Official inflation figures make for some scary reading. Not just that the numbers are high, but, because like most official government figures they have probably been understated to hide or minimise the true damage being done.

Country Annual inflation
China
7.7%
India
8.2%
Indonesia
10.4%
Malaysia
3.0%
Philippines
9.6%
Singapore
7.5%
South Korea
4.9%
Taiwan
4.1%
Thailand
7.6%
Vietnam
25.0%

If and when the various governments finally decide to tackle this problem, interest rates the method that will produce the results, will have to go above the inflation rate. That means Vietnam will need interest rates in excess of 25%, say about 30% The results of such a rate on the stockmarket and economy will be devastating.

Bernanke needs now to start raising US rates before the inflation genie again consumes the US economy. Regional banks should be allowed to fail if they have no depositor base from which to finance their business. If they became addicted to money market funding, and they can no longer profitably access these funds, so be it, let them fail. They pose no systemic risk as did the fools at Citi and other derivative warehouses.

Banks when properly managed have no problems with the absolute level of interest rates as they lend on a spread and earn a margin. The problem arises when they require funds from the money markets to fund loans. This is where an inversion of the short-end over the long-end decimates their business model. This dates back to June 1970 and the Penn Rail bankruptcy, where the Federal Reserve gave up the right to control interest rates on CD’s over $100K. This abrogated the Feds control to turn off the money spigot.

US homeowners have now had ample time to lock in a fixed rate mortgage. Any who have failed to do so, are playing Russian roulette with interest rates, common sense should reveal that there is only one direction left…up.

In 1978 the Humphrey-Hawkins Act was passed, making the Federal Reserve responsible for interest rate policy as it impacts unemployment as well as inflation. Unemployment will be far worse later if inflation gets out of control, and unemployment is rising anyway. Time to bite the bullet.

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