(I write a weekly market report for my own company. This is 1 reason among many that I believe the dollar is in trouble)
(The reason why I post it here is because I feel any long term technical play in the money market has a better probability of success if it matches the long-term fundamentals. A long-term position opposed to the overall long-term principles is, in my opinion, too risky.)

Extended Term Basics: Fed Policy - A Hobson's Choice
The Fed, under present national and international conditions, must select between price inflation and asset inflation. The sexually available alternative is asset inflation.

Overvaluing US Dollar denominated assets in order to keep on attracting foreign funds fuels the market but only adds to the long term structural debt issue facing the US market.

Bernanke, like Greenspan before him, chose the path of least resistance. In the long run, when nervousness about US debt turns into flight from US Bond and Capital markets, it will be that the two of them who'll take on an unfair share of the attribute. The Fed has been at the part of compensating for an out-of-control financial policy for a long time. Borrowing to invest has become the American way of life and things are only going to get worst.

This asset inflation actually generates is security for runaway debt. There's only 1 way to make genuine wealth: consume LESS than current production or income, invest in tangible income-creating products and services.

The most vital problem in generating wealth by inflating the value of assets such as stocks and houses is the fact that it happens outside the GDP: it inflates asset prices by inflating credit, not by generating income from products and services.

Over consumption using fake collateral is just one of those America's structural ailments. Foreign debt combined with decreasing income increase is the other. Debt deflation and rising interest rates will be the ultimate outcome.

Having raised interest rates yet again, is an indiion that the Fed has lost control.

Greenspan could have requested Bush to extend his stay for a couple more months; it would have made him the longest serving Fed Chairman at US history. He opted out since he understands exactly what the future might just hold. All bubbles burst. America may very well be the next Japan.



In a Nutshell:


The point to realize is the whole inflationary effect of extra money and credit from the U.S. has been partially diluted by overseas investment. The U.S. consumer increases consumption because of taking on more debt. This boost in demand-side consumption is made possible by abundant and cheap credit (inflationary). Considering that the U.S. market is not able to fulfill all customer demand, excess demand is composed through overseas imports of both goods and funds. This also lessens the effects of inflation because overseas goods help meet extra demand while keeping a lid on prices.

Foreign goods can also be manufactured at a lower cost.
When new credit and money are created, they enter the system via different avenues. The money and credit can actually be spent on domestic goods and services, overseas products and services or financial assets leading to higher asset rates. Asset inflation and Goods inflation are two surfaces of the coin.