The Fed is doing a balancing act, and it has been doing so for some time, making its way from bubble to bubble through the uncharted waters of fiat-onomics, the monetary mythology.
On one hand is the US financial system breaking down with the economy in a deep recession. On the other hand is the US dollar and bond in freefall with inflation flying higher than Icarus with a tail wind.
Using a classical Greek metaphor, the Fed is navigating between the Scylla (Σκύλλα)of Recession and the Charybdis (Χάρυβδις) of Currency Debasement.
Greek mythology portrayed Charybdis as lying on one side of a narrow channel of water, which some think was the Strait of Messina. On the other side of the strait was Scylla. The two sides of the strait are within an arrow's range of each other, so close that sailors attempting to avoid Charybdis will pass too close to Scylla and vice versa.
The phrase between Scylla and Charybdis has come to mean being in a state where one is between two dangers and moving away from one will cause you to be in danger of the other. Between Scylla and Charybdis is the origin of the phrase between the rock and the whirlpool (the rock upon which Scylla dwelt and the whirlpool of Charybdis) and may be the genesis of the phrase "between a rock and a hard place".
Scylla is a horribly grotesque sea monster, with six long necks equipped with grisly heads, each of which contained three rows of sharp teeth. Her body consisted of twelve canine legs and a fish's tail.
Charybdis takes form as a monstrous mouth. She swallows huge amounts of water three times a day and then belches them back out again creating whirlpools. Charybdis was originally a naiad, sea-nymph who flooded land to enlarge her father's underwater kingdom, until Zeus turned her
into a monster. He was angry that she was taking so much of his land and made it so that she would be incredibly thirsty three times a day and suck in the water.In the Odyssey, the Argonauts were able to avoid both dangers because they were guided by Thetis, one of the Nereids.
Can Ben Bernanke find Thetis? Can he navigate through uncharted waters on the course that Greenspan has put us upon?
Charybdis Rears Its Ugly Head
Rate cuts will hammer dollar: Chinese official
Flight of capital seeking higher returns in Asia could depress dollar on further rate cuts, China says
December 27 2007: 7:28 AM ESTBEIJING (AP) -- Further cuts in U.S. interest rates would have a "harmful effect" on the dollar and the international finance system, a Chinese finance official wrote in a commentary Thursday in an official newspaper.The dollar's fall against many currencies has prompted investors to sell dollar-denominated assets, Hu Xiaolian, director of the State Administration of Foreign Exchange, wrote in the Financial News, a newspaper published by the central bank. "If the (U.S.) federal funds rate continues to fall, this will certainly have a harmful effect on the U.S. dollar exchange rate and the international currency system," Hu wrote. Financial markets closely watch official Chinese comments on the dollar because Beijing keeps a large portion of its $1.4 trillion in reserves in U.S. Treasury securities and any change in China's investment strategy could affect exchange rates. Despite his warning, Hu wrote, "the U.S. dollar's dominant position in international currency markets is unlikely to change in the near term. "The U.S. Federal Reserve has lowered its federal funds rate, the interest that banks charge each other for overnight loans, to 4.25 percent, a full percentage point lower than it was in September, to ease a credit crunch in the U.S. financial system. Chinese officials have said that cutting the rate could encourage investors to move money to Asia or elsewhere in search of better returns, which could depress the dollar.