This is the worst sort of "crack-up-boom" scenario but contrary to some of the "inflationistas" it is not necessarily a matter of monetary inflation that causes this result - it is debasement of the credit markets such that people stop trusting supposedly-safe short-term credit instruments like Treasuries to have stable returns that at least meet if not exceed price inflation.

The Fed didn't have to (and didn't) "print money" to cause this - all they had to do was destroy the credibility of Treasuries as "money good" instruments by taking $400 billion worth of toilet paper onto their balance sheet instead of forcing insolvent institutions to confess their sins and be shut down.

The ivory-tower idiots who thought they could jawbone people into accepting whatever they said without question or evidence - so typical for those who have never had to make an honest living and justify their actions - have now found out that the market has no duty to respect such pronouncements and it won't.

At some point, when you lie incessantly, your credibility falls to zero and the market ignores you, pricing things on its own.

At that point you may as well go find a blowup doll to play with because your effectiveness in setting policy has been eliminated, and now the people take the hit. All at once, and not in a way they can deal with easily.

Oil has doubled in price in under a year. Dow Chemical just announced a 20% across the board price hike, effective in June. There will be much more of this, as the incessant and intentional understatement of price inflation by our government through the CPI and The Fed's willful use of statistical data it knows is fraudulent has led to yet more excess liquidity being added at the precise time when liquidity should be withdrawn.

The Fed has now reached a critical juncture and absent actual, concrete action by its Presidents and the FOMC in the immediate time frame the market has demonstrated that it will "discount The Fed's speech", much like a CDO, to zero.

This combination of events and intentional actions of The Federal Reserve has sent the dollar into the ditch, the price of commodities through the roof and the bond market is waking up and not liking what it smells.

The TNX broke the 4% ceiling (10 year yield) yesterday, which is particularly ominous - last June, when FedFunds was 5.25%, the 10 was less than 100 basis points higher than the FFT - now its 200 basis points higher. Oh, and Treasury is going to keep issuing supply to fund the very deficit spending that Bernanke urged on Congress!

We've got a nasty problem on our hands folks.

We have a severe currency imbalance with China that will resolve with them revaluing their currency, probably after the Olympics, in order to stem the inflation we have exported to them for 20 years and tamp down their balance of payments problem (none of the other things they've tried, including tampering with reserve ratios, has done a thing to help.)

This will result in an insane price inflation problem in Chinese imports coming directly back at us. We already have a nutty problem with oil that was caused by The Fed's policies over the last nine months - add to this Chinese import prices and things are going to get very interesting for The United States. We could easily see 30% price increases on goods coming in from China - across the board. Go walk around your house and look for the "made in" tags - tell me how many aren't "China" among your common household goods. Now consider what happens to your budget if every one of those items goes up in price by 30% - pretty much all at once.

In the meantime inflation expectations in the latest consumer confidence report came in at nearly eight percent for the next year, a doubling over the last few months.

"Well-anchored"?

Like hell!

American Consumers have figured it out and "discounted The Fed's notes and words" severely. The Fed runs the risk of that discount being extended to ZERO if it doesn't cut this crap out right here and now and take decisive action to arrest the spiral!

There are many in this country, apparently extending to Congress and certain members of The Fed, who believe that America "sets the rules" on the International Stage when it comes to matters of economics and the rest of the world will do whatever we want, "making adjustments" as required or demanded (by us.)

Uh, yeah, ok.

Tell that to the guys who actually own what we need to buy (oil, for instance), and those who we've given a trillion or more of our money in exchange for $30 DVD players that also would like the same barrel of oil.

This little game only works until those who we are buying from come to the conclusion that we might not pay, at which point they very well may turn on us.

That day is now here!

All of this comes as American Household balance sheets are at their weakest since the Depression, with debt service-to-income ratios at all-time highs, and unemployment hasn't even begun to bite yet. It will. What happens when we can't buy any more $30 DVD players because Joe Sixpack's credit card is maxed out and gas is $5/gallon?

How do we get out of this?

The liquidity swamp must be drained now. Rates must be allowed to rise to where they provide a positive rate of return for investors or we risk them fleeing entirely.

Those who are insolvent and hiding it must be forced into the open now.

The "alphabet soup" games must end immediately.

The Fed and the rest of the banking regulators must stop allowing "insurance coverage" via OTC swaps that have absolutely no margin supervision or documented ability to pay, along with the "off balance sheet" securitization facilities such as SPVs and VIEs. The entire lot of this is fraudulent, as we discovered when ENRON blew up, and it has to cease NOW.

The brokers, bankers, Realtors and appraisers involved in thie fraud of the housing bubble must be prosecuted and sent to prison. We must send a strong signal that cannot be misinterpreted - fraud will not be tolerated.

I am not going to try to tell you that this will be "easy", or that this prescription won't have bad side effects.

It will have very bad side effects.

Specifically, there will be plenty of corporate and personal bankruptcies, housing will correct back to its historical 3x average incomes, unemployment will go significantly higher as wasteful and superfluous positions are eliminated (like, for example 90% of mortgage brokers) and the markets will tank as the "E" in their P/E gets severely damaged. We will be forced to spend less than we earn, both individually and as a nation, which means both huge spending cuts and tax increases. We will ultimately force more production back onto our own shores as much of the "offshoring" will prove uneconomic without the ability to get someone to sew your jeans for 20 cents/day.

But the risks if we don't take this action are much worse.

A full-on "crack-up boom" in commodities is the sort of event that destabilizes governments, and when it gets going there is literally nothing that can be done to stop it as the credibility of those in power has been destroyed.

We are perilously close to that sort of spiral getting underway in other nations and there is the very real possibility that it could happen in the United States.

We have crippled if not outright destroyed our ability to "get by" without foreign oil sources; should a literal bidding war result from significant supply disruption we would be in serious, perhaps even critical trouble as a nation.

Consider that China has more than a trillion dollars worth of our money and could decide to outbid us for scarce resources should geopolitical instability start removing oil supply from the market. Those reserves are their surplus; they already "paid" for it with $30 DVD players shipped to the United States. We, on the other hand, have a huge deficit and are absolutely dependant on foreigners being willing to plow $2 billion a day back into our government debt.

What happens when, not if, that support disappears?

We are not alone in this box either, and as a matter of history resource-constrained nations typically choose to try to shoot their way out of trouble. In a world chock full of things that make big "bangs", this is not a good thing at all.

It is time for America to take its medicine while we are still able to do so voluntarily.

Mr. Fisher, I challenge you to put your words into actions and force The Fed to act in a responsible manner, right here and now. If Bernanke and the rest of the FOMC refuse then I challenge you to speak from the rooftops, in the Halls of Congress, on the steps of the US Capitol and in every forum where you can find a keyboard or microphone until you are heard.

I further challenge all who read this to fax it to every one of their elected representatives and every newspaper in their town and state.

We must, as Americans, stop this nonsnese before it consumes our nation.

It is time to put action behind words.

America's future hangs in the balance.