U.S. Federal Reserve Chairman Ben S. Bernanke is caught between a rock and a hard place right now.

Sure, he would prefer that you focus on "core inflation," since it excludes sharply rising food and oil prices. But we all have to eat and we all consume energy. It’s just a matter of time before core inflation starts rising alongside corn, wheat, beef and prices at the pump. 

Ordinarily, the Fed would start raising rates to stave off higher prices. 

But Bernanke really doesn’t want to be an inflation hawk right now. Raising rates would only make the already weakening economy weaker still. (Never good in an election year).

If Bernanke has to choose between a weaker economy and moderately higher inflation, I believe he will choose higher inflation, hoping that he can put the genie back in the bottle once the economy is growing again.

Since gold traditionally rises with inflation, that means now is probably a good time to add to your holdings.

Here are the essential facts:

At one time the world’s monetary system was based on gold. It is a universally recognized store of value. It can be bought and sold in any country.

And it is scarce. There are 4 billion ounces of gold in people’s hands, enough to fill a cube 60 feet on a side. Of this, investors own 1 billion ounces, and central banks another billion, with the remaining 2 billion ounces accounted for by jewelry and other baubles.

Last year, more than 80 million ounces were extracted worldwide.  Two-thirds went to jewelry makers and the rest to bullion.

If you want to own gold that you can touch, you can buy bullion. But there will be a markup when you buy it or unload it – and fees to store and insure it. The same is true of coins, especially with numismatics. 

Understand, too, that while gold has been in a major uptrend over the past few years – hitting an all-time high of $1,030.80 on March 17 – shares of the natural-resource companies that bring the gold to market have performed considerably better. That isn’t likely to change.

Over the past 50 years, major gold mining companies have risen at an annual rate of approximately 12%. That’s better than the return of the Standard & Poor’s 500 Index, although the trade-off has been head-snapping volatility along the way.

Perhaps the most conservative way to buy blue chip mining companies is to plunk for a few shares of Market Vectors Gold Miners (GDX) Exchange Traded Fund.

An ETF, Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment. 

The annual expense ratio is one half of 1%. The shares can be margined or sold short – and there are options available for traders.

Here are some of the stocks among the Top 10 holdings:

• Newmont Mining Corp. (NEM).
• Freeport McMoRan Copper & Gold Inc. (FCX).
• Barrick Gold Corp. (ABX).
• Anglo American PLC (ADR: AAUK).
• Harmony Gold Mining Co. (ADR: HMY).
• Kinross Gold Corp. (KGC).
• Yamana Gold Inc. (AUY).
• Gold Fields Ltd. (ADR: GFI).
• Agnico-Eagle Mines Ltd. (AEM).

Right now the economy is weak – and the outlook for inflation is poor. But this is creating plenty of profit opportunities – if you know where to look. 

So pick up a few shares of Market Vectors Gold Miners ETF – or talk to a resource broker.  

Tell them Ben Bernanke sent you…

[Editor's Note: Alexander Green is Investment Director of The Oxford Club and Chairman of Investment U. To get Green's actionable investment ideas three times a week - at no charge - sign up for the Investment U e-letter. If you join for free today, they'll send you their latest special commodities research report: "Five Million Reasons to Load Up On Coal Now - and Three Easy Ways to do it." You'll find out why the standardized shipping container is driving coal demand through the roof -and how that's delivering literal "boatloads" of profits to three companies. Just click here to have your report delivered in less than two minutes. Again, the report, and the service, both are free of charge.]

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The U.S. Federal Reserve will make sure the global financial markets have sufficient liquidity to operate effectively and will increase the size of its government bond auctions if additional capital is needed, central bank Chairman Ben S. Bernanke said today (Tuesday).

Speaking via satellite at the Atlanta Financial Markets Conference in Sea Island, Georgia, the Fed chairman said he sees some signs of improvement in the financial markets, but noted that  "at this stage conditions in financial markets are still far from normal."

In his speech, Bernanke outlined the steps the central bank has taken to help mitigate a credit crunch that was spawned by a historically weak housing market, and to offset at least some of the damage that’s been caused by a subprime-mortgage crisis that has riddled the worldwide financial-services sector.

In fact, Bernanke made a special effort to underscore the global nature of the crisis, and to emphasize the need for worldwide cooperation on solutions.

"The financial distress since August has also underscored the importance of international cooperation among central banks," he said. "For some time, central banks have recognized that managing crises involving large financial institutions operating across national borders and in multiple currencies can present difficult challenges. Funding pressures can easily arise in more than one currency and in more than one jurisdiction. In such cases, central banks may find it essential to work closely together."

And while he made it clear that part of the Fed’s role was to help maintain liquidity in the markets, Bernanke also preached the importance of balance, cautioning against extreme overly aggressive measures.

"Central banks should give careful consideration to their criteria for invoking extraordinary liquidity measures," he said.

He warned that if financial institutions come to believe that the Fed is always standing ready to come to the rescue, then those same institutions and their creditors have "less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks."

"A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard," Bernanke said.

Views like that are a big reason that both Bernanke and the Federal Reserve have been criticized for what some saw as a government-sponsored bailout of strapped-for-cash investment bank, The Bear Stearns Cos. Inc. (BSC), in mid-March.

Bernanke’s speech didn’t address the aggressive rate-cutting campaign central bank policymakers launched last September. And he also made no mention of the next meeting of the policymaking Federal Open Market Committee (FOMC), which is set for June 24-25.

At its last meeting, the FOMC voted to lower the benchmark Federal Funds rate 25 basis points to its current level of 2.0%. It was the Fed’s seventh rate cut since September when the key interest rate stood at 5.25%.

Language in the FOMC statement that accompanied that rate-reduction order led some analysts to expect the Fed to remain on pause throughout the summer. That would provide the prior rate cuts time to work their way through the financial system. The belief that the interest-rate reductions were finished, for now, has helped the dollar, which has been weakened by the rate cuts, to rally.

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How do you know when you’re "through the looking glass?"

One terrific clue is when the price of gold – which normally moves up in response to monetary easing – instead plummets in reaction to one of the largest interest-rate reductions in U.S. Federal Reserve history.  Apparently, the 12% decline in gold prices last week [with half of that coming in a single day] resulted from the "hawkishness" shown by the Fed in only cutting rates by three quarters of a percentage point, instead of the full percentage point that many had expected and most had wanted.

That 12% decline – gold’s biggest weekly loss in 25 years – is a testament to how low the bar has been set that the Fed can slash rates in the face of a collapsing dollar and soaring commodity prices and still be viewed as hawkish on inflation.  Is it just me, or is central bank Chairman Ben S. Bernanke morphing into the Mad Hatter?

Despite the mildly tough language in its statement, it should be clear to all that the Fed sees inflation as the only politically acceptable "solution" to the problems it created. The conclusion that a three-quarter-point cut shows concern about inflation is half right.  The Fed is concerned, but only to the extent that the markets stay focused on bogus Consumer Price Index (CPI) numbers and fail to notice severe price increases throughout the economy.  The fact is that inflation will be with us for some time, and the knee jerk drop in gold is yet another excellent buying opportunity.

Story continues below…

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As the credit and financial crisis spirals out of control, and the Fed moved $30 billion of garbage Bear Stearns debt onto the public balance sheet, the proposals coming from other market leaders are taking similarly phantasmagorical turns.  Magazine publisher and perennial presidential candidate Steve Forbes, in an interview on CNBC-TV early last week, proposed that the government suspend "mark-to-market" rules for one year so that holders of unsellable mortgage-backed securities no longer have to recognize losses.

Remember, the dominos began to fall precisely when two Bear Stearns Cos. Inc. (BSC) hedge funds were forced to actually sell assets they had failed to properly mark-to-market.  Were the government to actually follow this advice it would destroy what little confidence remains in our financial system.  However, Forbes believes that the markets can be spared unnecessary pain if participants can simply pretend that their holdings are worth par value.  This amounts to a plea for accounting by "mutually beneficial mass delusion."

Later in the week, investors were cheered by the government’s decision to slash the surplus capital requirement of already overextended Fannie Mae (FNM) and Freddie Mac (FRE) by 33%, and by Wall Street’s success in convincing investors to dump $17.9 billion into the record U.S. initial public stock offering of Visa Inc. (V) [$19.65 billion if you factor in the over allotment provision] – which may qualify as the largest sucker bet in history.  But the most bizarre idea was introduced on the pages of The Wall Street Journal when veteran opinion page writer Holman Jenkins Jr. recommended that the government buy and "bulldoze" foreclosed homes in order to prop up the values of those that remain standing.  I’ll deal with these ideas in sequence.

After the government pushed through some earlier proposals that allow and encourage Fannie Mae and Freddie Mac to buy larger loans, the resultant reduction of capital requirements now pushes the government-sponsored lenders farther out on a well leveraged limb.  By allowing the accumulation of even more taxpayer-guaranteed debt, the moves will merely delay and exacerbate the housing problems and will increase the size of losses when these two government-sponsored enterprises ultimately fail.  In the meantime, by taking on more risk, the appeal of existing Fannie-and-Freddie-insured debt will erode further, driving up mortgage costs, and creating additional losses for leveraged owners of these securities.

In the early stages of the biggest credit crunch in U.S. history, buying shares in Visa, a company that derives its revenue based on transaction fees from credit-card purchases, qualifies as a particularly ill-timed investment.  Perhaps buyers of these shares didn’t get the memo, but the days of Americans using credit cards to buy products they cannot afford are about to come to an end.  For all its flaws, Wall Street does possess an extraordinary ability to apply lipstick on any pig.  For the formerly private owners of Visa, this is perhaps one of the best exit strategies ever engineered, on par with last year’s Hail Mary pass tossed up by top hedge-fund player The Blackstone Group LP (BX) last year [shares of Blackstone are now trading for half their IPO price].

Finally, in response to Jenkins’ proposals, there is no question that we built far too many homes during the housing bubble.  However, destroying them now will merely compound our losses.  The one benefit we have from excess construction is an ample supply of what will soon be highly affordable homes.  At the moment, foreclosed houses are only unwanted because their prices are still too high. Once prices drop sufficiently, there will be plenty of demand.  However, destroying existing homes reduces their value to zero [actually less due to demolition costs], and only exacerbates the losses to creditors and society.  Jenkins’ thinking is formed by the same perverse logic that led the Roosevelt Administration to destroy farm animals and crops during the 1930s because President Franklin D. Roosevelt wanted to prop up food prices.  As I wrote in my book, "Crash Proof: How to Profit from the Coming Economic Collapse," we must certainly be on the eve of our financial destruction – as we are clearly a nation that’s now mad as hatters.

[Editor's Note: Money Morning Guest Columnist Peter D. Schiff is the president of Euro Pacific Capital Inc., a Darien, Conn.-based broker/dealer known for its foreign-markets expertise. A well-known financial author and commentator, Schiff is a regular Money Morningcontributor, and has most recently written about the fiction of the Bush Administration's professed "strong dollar policy", the futility of "juicing" the economy, speculative bubbles and soaring gold prices. In mid-August, when analysts were touting beaten-down financial shares, Schiff said the stocks were "toxic," were destined "to get hit hard," and advised investors to "stay away." Investors who heeded that advice, and avoided such shares as Merrill Lynch, also avoided some stressful, subprime-induced losses. Check out Schiff's first book, "Crash Proof: How to Profit from the Coming Economic Collapse," which was published by Wiley & Sons last February.]

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Last Wednesday, U.S. Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee something that’s becoming more evident by the day, "I don’t know how to fix it."

Bernanke was actually referring to the mark-to-market accounting rules that may be forcing the banks to take bigger write-downs than are actually warranted. But in my mind, those valuation issues are at the heart of the subprime-mortgage and credit crises. So the fact that the head of our central bank has no idea how to address that very basic problem is incredibly unsettling.

You see, the global credit crisis isn’t just "a" crisis – it’s "the" crisis of our time. It’s so important that I offered my views in a letter to our central bank chief earlier this week. And now I share that letter with you.

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Addressing the economy for the first time since the Federal Open Market Committee’s Dec. 11 meeting, Federal Reserve Chairman Ben S. Bernanke said the Fed was ready to take "substantive additional action" in the face of a weakening economy.

"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said yesterday (Thursday), speaking before a group from the Exchequer Club and Women in Housing and Finance in Washington.  

One analyst welcomed Bernanke laying out a course of action.  

"I think he’s come to terms with the fact that while inflation may be a concern down the road, he has to take care of the train that’s coming at him right now, which is the fear of a recession," Angel Mata, managing director of listed equity trading at Baltimore-based Stifel Nicolaus Capital Markets told Reuters.

Bernanke was careful to clarify that the Fed was not predicting a recession.

"A number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending [in 2008]," he said.

Analysts and investors welcomed Bernanke’s remarks. Most saw it as a sign that the Fed will make a 50-basis-point cut at the next Federal Open Market Committee meeting slated for Jan. 29 and 30. Interest rate futures priced in a 90% probability of a half-point rate cut.

"From the tone of the speech, a 50-basis-point cut seems likely," Lawrence Lindsey, a former economic adviser to President George W. Bush and ex-Fed governor, told Bloomberg, adding that it’s "unlikely" the United States is currently in recession.

Bernanke "is quite right to take precautionary measures right now," Lindsey said.

The markets reacted well, as all three major indices ended up for the second straight day after posting losses for the first five trading days of 2008. The blue-chip Dow Jones Industrial Average Index rose 0.92% to close at 12,853.09. The tech-laden NASDAQ Composite Index gained 0.56% to close at 2,488.52. And the broader S&P 500 Index rose 0.79% to close at 1,420.33.

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The market is anticipating another rate cut at the Dec. 11th FOMC meeting – despite Fed Chairmen Ben Bernanke’s deliberately neutral remarks in Charlotte, NC this past Thursday. 

Bernanke acknowledged some weakness in the economy, but reiterated that economic data remains mixed.  "We will be receiving a good deal of relevant information in the coming days. In making its policy decision, the FOMC will have to judge whether the outlook for the economy or the balance of risks has shifted materially," he told the Charlotte Chamber of Commerce, who honored the SC native with their "Citizen of the Carolinas Award."

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Many important economic indicators, including the November unemployment report, will be released this week, and Bernanke’s remarks indicate he is inclined to wait for the official data before leaning either way.  If the labor market and wages remain strong, the Fed may hold rates steady in a bid to dampen inflationary concerns.

Despite Core CPI (excluding food and fuel) holding relatively steady over the past several quarters, gas and food prices continue to rise.  Coupled with the lagging housing market and continuing credit market woes, U.S. consumers are feeling the pinch.  The weak U.S. dollar isn’t helping either.

The never-patient market, however, is already pricing in another rate cut as demonstrated by the federal-funds futures market.  The probability of the FOMC holding rates steady declined from 20% to 10%, and the chance of a 50 basis point rate cut more than doubled to 24% by the close of business on the day of Bernanke’s remarks. The probability of a 25 basis point cut was 55%.

Stocks reacted favorably to Bernanke’s remarks, as most investors saw a sign of upcoming rate cuts.  Beleaguered financial stocks rallied as the two largest U.S. banks, Citigroup, Inc. (NYSE: C) and Bank of America, Corp. (NYSE: BAC), both showed gains.  Mortgage lenders Wells Fargo (NYSE: WFC) and Countrywide (NYSE: CFC) also rose.

Global markets also reacted favorably to the possibility of another rate cut, as Barclays (LON: BARC), Royal Bank of Scotland (LON: RBS), and HBOS (LON: HBOS) all showed gains.  HSBC (LON: HSBA) gains were more modest as Moody’s downgraded their rating from positive to stable.

Two of the economic indicators Bernanke was waiting for, personal income and spending numbers, were released Friday.  Both only increased 0.2%, adding to the case for further rate cuts.  Peter Kretzmer, a senior economist at Bank of America Corp. in New York, told Bloomberg, "Consumer spending is off to a pretty weak start for the fourth quarter. This helps confirm what is built into the market by now: that the Fed is likely to move on interest rates next month."

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Subprime defaults and the ongoing mortgage crisis could have a "dramatic" impact on the overall economy, as banks and other financial institutions cut back their lending by as much as $2 trillion, according to an economist with Goldman Sachs Group Inc. (GS).

In a Nov. 15 report, Goldman Chief Economist Jan Hatzius said losses related to U.S. home foreclosures could reach $400 billion, as leveraged institutions will struggle to preserve their capital ratios. In that sense, the loss would not be an outright decline, but relative to the normal growth of lending.

"If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion," Hatzius wrote. 

If this occurred within a one-year period, this could cause such a financial shock that it would result in a "substantial recession," Hatzius said. But if those losses were stretched out over a longer period, however, it would translate in a protracted period of sluggish growth.

Goldman’s forecast already assumes lending will fall by $1 trillion – half the potential decline – over the next two years.

"It’s basically another downside risk to the macro-economy at a time when the macro-economy already isn’t doing that well," Hatzius said in an interview with CNBC TV. 

Hatzius also said in the interview that this is yet "another reason for why the Fed will need to ease monetary policy," presumably when the policymaking Federal Open Market Committee (FOMC) meets again in December. The chance of the FOMC slashing rates by another quarter point at that Dec. 11 meeting stands at 86% according to futures prices on the Chicago Board of Trade, Bloomberg News reported.

But during a speech in New York Friday, Federal Reserve Governor Randall Kroszner talked down the chances of a rate cut.

"The downside risks to economic growth now appear to be roughly balanced by the upside risks to inflation," Kroszner said.

Kroszner said policymakers probably wouldn’t need to reduce interest rates further to help the economy weather a "rough patch" in the coming year.

Goldman Sachs was the only major financial institution to post a third-quarter profit, having limited its exposure to the subprime market and mortgage-backed assets before that market collapsed.

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As expected, U.S. Federal Reserve Chairman Ben S. Bernanke cut the Federal Funds Rate by another quarter point Wednesday, taking that benchmark lending rate down to 4.5%.

The European euro immediately soared towards $1.50, oil topped $96 a barrel, gold exceeded $800, and the once-proud U.S. dollar behaved more and more like the Argentine peso in one of that country’s most-troubled periods. The financial markets seem to believe there’s a severe danger of renewed inflation, and so do I. The question is: What’s to be done about it?

There’s no question that the U.S. housing market is in a real mess. House prices dropped by 5% in the year to August, housing starts are 40% below their peak, and unsold house inventory has reached a record 10 months of sales. The latter is the most dangerous statistic; most homeowners – those who aren’t burdened with super-high mortgages – can well survive a decline in the value of their homes when they try to sell, particularly if the purpose of that sale is to buy another house, perhaps in a different area.

But if that house takes 10 months to sell, then the situation can be quite sticky, to say the least.

For one thing, if homeowners lived in the house for a long time, the plunge in value can mean that years and years of mortgage payments – and counted-upon home equity – have been vaporized. But if those homeowners are then forced to buy and move into another house before the first one sells, the financial squeeze can be deadly. For one thing, there’s no longer that built-up equity, which can provide a down payment and even provide a cushion to borrow against, should the house take a long time to sell. Then there’s the challenge of simultaneously juggling two mortgage payments, a near-impossible feat for someone actually burdened with the dreaded super-high mortgage I mentioned a moment ago.

When Time Doesn’t Equal Money

It’s not true that money is the most important thing in life; even ignoring any spiritual components, time is often much more critical, and wasting it much more damaging.

The same should be true in the financial system, but it isn’t.

In a system that works properly, if some financial assets became damaged, dealers would just mark down their prices enough to sell, and move on. But in the system we have, dealers are reluctant to mark prices down, because their entire inventory would then have to be "marked to market," thereby reducing the current quarter’s profits – and vaporizing everybody’s bonuses.

Under such circumstances, it’s much easier to let trading to dry up altogether, allowing traders to pretend all is well with the portfolio. That’s essentially what happened with subprime mortgages and asset-backed commercial paper (ABCP) back in August, even though many of the securities were in theory only moderately value-impaired, meaning they still should have traded smoothly.

Fed Chairman Bernanke’s rate cuts were intended to revive the market and relieve the blockage of paper that wouldn’t trade, but they haven’t succeeded. The stuff that wouldn’t trade then still won’t trade now, because it wasn’t the previous higher interest rates that were preventing it from trading. Housing hasn’t recovered, because there are still too many credit problems in that sector. These are credit problems that can’t be solved without housing sales, and that can’t take place until house prices have dropped to a level at which new buyers can afford them.

Meanwhile, share prices have resumed their climb, in spite of numerous earnings disasters in the financial sector. At the same time, international stock markets, fueled by liquidity from the United States and China, have gone on another roll, while oil has shot up another $20-plus per barrel.

Bernanke’s medicine hasn’t cured the patient’s affliction; instead the meds have infected the given him a whole new set of diseases that will eventually make him worse. For one thing, you’d better believe that $96-plus oil, if it persists at these price levels for more than just a very few weeks, will cause all sorts of new and unanticipated stresses and strains in the U.S. economy – not the least of which is to finally make the inflation numbers tick up.

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Higher inflation would, in turn, cause the dollar to sink further, which would cause oil and commodity prices to increase … you get the idea. It’s a vicious circle. Raising interest rates would halt the inflation of oil-and-commodity prices, while also stopping the dollar’s downward spiral. But higher interest rates would speed the decline of the housing market, as well as making Wall Street squeal.

What a mess. The only consolation is that the havoc that’s been caused is finally causing some of the Wall Streeters who helped cause all this to lose their jobs – though, if like E. Stanley O’Neal of Merrill Lynch & Co. Inc. (MER), they all get $161.5 million payoffs, Wall Street will be both broke and empty pretty soon, as all its practitioners exit stage right.

Profiting Against a Backdrop of Chaos

The question to ask, then, is how do we profit? There are several potential plays here. Let’s review them carefully:

• The currency that hasn’t yet been affected by the declining dollar, and whose economy is big, highly liquid and immune to Wall Street, is Japan – hence the Russell/Nomura Japan small-cap (JSC) exchange-traded fund, or ETF, which invests in domestically-oriented Japanese stocks, seems a safe haven.

• Gold may suffer the occasional hiccup, but overall it seems poised to soar, so the StreetTracks Gold ETF (GLD) seems a good place to have part of your money.
   
• Overall, you might consider a large natural resources company like BHP Billiton Ltd. (BHP), especially since most of its operations are located in safe, resource-rich Australia.

• For oil itself, you should remember that for every dollar that oil increases in price, there’s also a gain in value in Canada’s Athabasca tar sands, a politically reliable – if expensive – oil source. Accordingly, Suncor Energy Inc. (SU) should show some nice earnings momentum going forward.

• Finally, if you still want a financial services exposure, you should consider Kookmin Bank (KB), a bank oriented towards the Korean economy, whose forecast growth rate for 2007 has been revised up to 4.6% recently. Korea has an election in December, and seems poised to become more business-friendly, which shouldn’t hurt valuations in that market.

Interest-rate cuts make U.S. markets rise in value, and also bring happy smiles to the Wall Street crowd. But don’t be fooled by their apparent happiness. Each time U.S. interest rates decline, foreign markets become all that much more alluring as places to put your money.

And remember this: Even the Argentines have always had the good sense to put their money abroad.

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• Money Morning:
  Citigroup and UBS Brace For Losses, but Dow Jones Sets Record Above 14,000.

• USA Today:
  Investors Cheer UBS, Citigroup Write-Downs.

The markets are clearly counting on the "Bernanke Put," which is how market insiders refer to the Federal Funds rate cut nearly everyone is hoping for today (Wednesday).

I have to say that I’m dumbfounded.

I simply can’t understand why investors believe that another rate cut will somehow bail out the stock market and sweep away the nation’s housing and credit problems – as if Federal Reserve Chairman Ben S. Bernanke were the second coming of Harry Houdini.

Nor do I understand why millions of investors who have no rational belief in the tooth fairy, Santa Claus or any other creatures of myth and mirth, are willing to wager their hard earned money on nothing more than an assumption (with some folks, it’s more of a blind hope) that Team Bernanke will cut interest rates

What I think, though, really doesn’t matter leading up to the announcement that Federal Open Market Committee (FOMC) policymakers will make at around 2:15 this afternoon.

In reality, what does matter are the facts. And when you consider the subprime mortgage mess, the spillover effect that financial catastrophe has had on the global credit markets, and the sorry state of the U.S. housing market, well, those "facts" aren’t especially pretty.

The bottom line: No matter what the Fed actually does today, there are three key factors that underscore why it is crucial for you to "go global" – as always, the dominant theme here at Money Morning.  Let’s take a look at just why this is the case:

• First, the Fed usually bases its interest-rate decisions on inflation. Right now, inflation is running at an annualized rate of almost 2.5%, meaning it is well above the central bank’s well-established "comfort zone" of 1% to 2%. (If you really want a Halloween scare, check out http://www.shadowstats.com/cgi-bin/sgs which tracks unadulterated versions of the CPI that are tracking north of 6% at the moment).

• Second, the Bernanke-led Fed is right now engaged in the shell game of its monetary life. The central bank desperately wants to create the perception that inflation will take a breather. Not surprisingly, much of the commentary it has provided recently is oriented around the notion that oil prices will stop rising and that the credit crisis will ease. In other words, Bernanke & Co. are trying to get us to focus on an "inflation-free" future – ignoring what’s right in front of our noses. I find that worrisome at best, and troublesome at worst, for it leaves me wondering just what they really know. Hmmm….

• Third, Team Greenspan – and now Team Bernanke – has created and then perpetuated what is probably the most massive asset bubble of all time [and given the Godzilla-sized bubble Japan created back in the 1980s, we're really saying something here] by allowing real interest rates to slip to unprecedented lows. Greenspan dropped rates in the late 1990s to stave off an implosion of our financial system because of the Asian Contagion and the collapse of the Long-Term Capital Management hedge fund – only to inflate the money bubble that created the "dot-bomb" debacle. When Internet stocks imploded, we merely shifted what was left of our excess capital from stocks and into real estate – creating a housing bubble fueled largely by a barrage of hazy "liars’ loans." I mean, to borrow under some of those subprime- and "no-documentation" mortgage loan programs, prospective borrowers essentially only needed a heartbeat and they could obtain money to buy a house, or car, or some other hard asset. That ill-advised credit policy finally came home to roost this summer, as banks realized they couldn’t accurately value the asset-backed debt and the credit markets seized up. Now we’re left with a greenback so tattered that it looks like something a Depression-era hobo would wear while hopping a westbound freight train.

After reviewing all this "evidence," I reach two inescapable conclusions – both of which point to higher inflation:

• First, there’s still too much easy money available [in technical terms, the money supply is still way too high], an inflation-inducer if ever I’ve seen one.
• And, second, judging from the fact the global economy is still accelerating – even as the U.S. market slows – real interest rates are far too low to slow inflation down.

So when the Bernanke and the policymaking Federal Open Market Committee end their two-day meeting with a public pronouncement this afternoon, it will take one of the following three forms:

• First, the Fed could cut rates again. Given the way the markets reacted to the Sept. 18 "Bernanke Surprise," you can almost bet the ranch that a rate reduction of any magnitude would fuel an immediate rally in U.S. stock prices. However, it will simultaneously make the dollar weaker than it already is. And that’s going to mean more pain for American consumers because foreign made goods will be made more expensive. So will fuel. However, this will likely point to more big gains for investors holding shares of companies deriving a substantial portion of their sales and profits from outside U.S. borders.

• Second, Fed policymakers could actually raise interest rates – although that’s about as likely as the Air Force holding a press conference to say that a UFO really did crash at Roswell. This would make the U.S. dollar more valuable to overseas investors, but U.S. investors and consumers would suffer as U.S. stocks plunged. The only domestic beneficiaries might be the cardiologists called in to treat patients who’d suffered coronaries over the unexpected news. Globally, this might actually fuel growth, since investors worldwide would have more confidence that all markets would advance.

• Third, the Fed could stand pat, and do nothing. The decision alone would not affect the greenback’s value in either direction. However, global traders would likely take the dollar down anyway as companies begin raising prices to keep up with the inflationary pressures being felt around the world. And as you probably guessed, global growth – sans the U.S. market – would continue unabated.

No matter what the Fed decides to do, make sure to pay close attention to its commentary, and especially to its near- and long-term outlooks. Given that they’re being issued on Halloween, they could well be scary as anything for investors – especially if they’re expecting one scenario but end up getting another.

And no matter what the outcome is for the U.S. economy, nothing will change the green light for global growth. And that’s yet one more example of the American consumer, for so long the integral cog in global growth, becoming increasingly irrelevant on the world stage.

News and Related Story Links:

• Money Morning Investment Analysis:
  Will This "Bernanke’s Put" Force Us to Buy Real Ones?

• Money Morning News Report:
  Super-Sized Rate Cut Spurs Super-Steep Rally; Dow Soars Nearly 336 Points.

• MSNBC.com:
  Wall Street Delighted by Aggressive Rate Cut.

• Money Morning Economic Analysis:
  Will Fed Rate Cuts Have an Inflationary Impact.

• Money Morning Investment Analysis:
  How to Play Today’s FOMC Meeting.

• Wikipedia:
  Harry Houdini.

• The San Jose State University Department of Economics:
  The Bubble Economy of Japan.

• MSNMoney.com:
  The Contrarian Chronicles: Lessons from Japan’s Bubble – For Ours.

• Investment U:
  The Real Estate Bubble End Result.

• Money Morning Investment Analysis:
  Defensive Investing is One Key to Profits in an Uncertain Market.

• Money Morning Investment Analysis:
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• Money Morning Investment Analysis:
  What To Do if The ‘Do Nothing Fed’ Doesn’t Do Anything.

• Money Morning Investment Report:
  Investments For A Weak Dollar World.

• Money Morning Investment Report:
  The Second Quarter Votes are in: Global Gains Trump Domestic Pains.

• Money Morning Investment Report:
  The Three Simple Secrets to Global Investing Profits.

• Money Morning Investment Report:
  Jimmy Rogers and Me: The Latest Wisdom From a Global Investing Guru.

• Money Morning News Analysis:
  "Shocker" Jobs Report Brings Rate Cut Closer.

• Money Morning News Analysis:
  Fed Chief Keeps His Options Open.

• Money Morning News Analysis:
  Fed’s Bernanke is Pushing the Right Buttons.

• Money Morning News Report:
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From Staff Reports

The U.S. Commerce Department reported a big jump in September retail sales Thursday, according the Associated Press. The 0.6% increase outpaced projections and doubled the rise in sales seen in August. The positive news warded off much of the recession talk looming over the credit crunch and housing market.

Weak sales in department stores and specialty clothing shops were offset by strong auto sales, which were up 1.2% in September and 3.3% in August. Sales of gasoline in September jumped 2%, after sinking 2.6% the month prior.

The positive report is good news for the economy, but will disappoint some investors hoping for another rate cut.

"This was a solid report that seems to point to continued consumer spending," said Joel Naroff, president of Naroff Economic Advisors Inc., an econometric-research firm based in Holland, Pa. "As a consequence, the chances of a Fed ease on October 31st seem to be fading."

Also, the Labor Department said core prices, which exclude food and energy, rose just 0.1% – less than many analysts anticipated. Fueled by soaring food and energy costs, the overall wholesale inflation figure rose 1.1%. That increase was driven by a 4.1% surge in energy prices in September, and an 8.4% rise in the cost of gasoline. Still, the Federal Reserve and its Chairman Ben S. Bernanke prefer to gauge the core inflationary rate.

News and Related Story Links:

• The Associated Press:
  Retail Sales Jump Up in September.