Will the Fed vote to loosen when it next meets on September 18? It seems almost a foregone conclusion on days when the stock market is getting pummeled, often because of depressing statistics from the housing sector. But what about days like yesterday, when shares were getting short-squeezed higher, strong retail sales were being reported for August, and gold was thrusting above $700 for the first time in months? On such days, Wall Street’s addictive craving for more liquidity seems to recede into the background, along with rumors such as the one that has the Fed cajoling all of the major central banks to loosen along with us so as to avoid a run on the dollar.

Our friend Larry Amernick, editor of The Amernick Letter [click here for a free sample], has argued for months that there is already plenty of liquidity in the system and that none of the central bank’s economic benchmark call for more. In fact, he notes, a not insignificant amount of borrowable funds has been going unborrowed, as evidenced by a recent spike in banking system net free reserves. He further notes that the recent detumescence of this number implies that banks have broken the log-jam and are borrowing and lending more freely once more.

Jobs Report Crucial

‘There’s not enough evidence to loosen,’ he says, nor would doing so much affect the still-skittish commercial-paper market over the near term. Amernick is betting that if the employment numbers due out Friday are strong, it will all but kill the chances of a cut in the federal funds rate.

One of our regular correspondents actually believes the Fed is about to tighten. ‘The price of gold gapped up to 705 [yesterday], and now Bernanke is taking notice,’ writes Erich Simon, a whose bird flu reports appear regularly in the Rick’s Picks subscriber pages. ‘The stage is being set for a rate hike and a time, I hope, when, in response to the rate-hike, the metals sell down, allowing side-lined money to add to physical positions.

‘Bernanke is going to hike to protect the dollar, the status quo, the old money, wealth holders, the bond markets, the larger credit markets… really nothing short of the present and future existence of Western Capitalism, brought to the forefront by Greenspan’s flawed, ‘new era’ productivity paradigm, now exposed as a classic credit fueled boom and coming bust.

Gross an Alarmist?

‘Meanwhile, the ten-year note is cratering at 4.49%, in response to (housing) deflation and a flight to safety in the unfolding global Depression… transitioning into the Pandemic model. But the flight to safety is most punctuated at this time by the threat of a looming threat/shock to this very system of Western Capitalism. There is consensus today of a large, up and coming default buried somewhere in the system. More alarming though, bondman Bill Gross recently stepped outside the box of sanity and proffered a blanket bail-out for the mortgage market.

‘The sole reason for such drastic and half-baked prescription, coming from a liquidity vigilante no less, is that Western Capitalism is broken and salvage in some form is the order of the day. Like children playing a board game that has disintegrated into cheating, arbitrary game piece movements and the indecipherable chaos of broken bank which has now reached the point where the players are trashing the field of play and getting up to leave in pursuit of something more worthwhile.’