Treasuries rose and three-month bill rates plunged to the lowest level in almost 50 years on speculation credit market losses will widen, prompting investors to seek the relative safety of government debt. The rate on the three-month bill, viewed by investors as a haven in times of trouble, dropped 32 basis points, or 0.32 percentage point, to 0.56 percent. It’s the lowest level since May 1958.

(click to enlarge)

When you are in trouble, people shun away from you, bad words spread. More people refuse to deal with you (themsevles in panic). Then you are in deeper and deeper trouble. This is called “vicious cycle”. It brought down Bear Stearns. I wish Lehman Brothers could survive this.

Larry Summers spoke at a policy research conference at Standford University. A very grim assessment and good summary of three vicious cycles in the current economy.

(click to play the video)

China’s inflation rose 8.7% over a year ago in February. Very worrisome. According to Morgan Stanley,

The jump was larger than our expectation (+7.8%), as food prices surged 23.3%, steeper than our projection of 20.5% and contributing 90% of the month’s inflation. Following the snowstorms, fresh vegetable prices jumped 46% YoY in February (+13.7% in January and +8.9% in 2007), while the supply of meat and poultry (+45.3% in February versus +41.2% in January and +31.5% in 2007) remained tight, especially that for pork (+63.4% in February versus +58.8% in January and +48.3% in 2007).

In the non-food categories, there was a noticeable increase in utilities (+6.5% in February versus +5.5% in January and +3% in 2007), but other items showed stable trends. The Lunar New Year effect eased on items such as intercity transport (+4.2% in February versus +6% in January) and travel (+1.8% versus +5.1%) services, bringing overall service inflation to 2%, down from 2.6% in January.

A busy week for me, trying to do some catchup in the weekend.

Gold price (April future) reached historical high this Thursday and briefly crossed $1000 per ounce. This is extraordinary. With inflation adjusted, gold price is still below the record of $2,239 reached in 1980. The graph below gives you a nice historical perspective (click to enlarge).

But I would nevertheless caution that we need to be open to the possibility that no matter how low the Fed brings its target rate, it may not arrest the unfolding financial disaster. Unless the intention is to go all the way with enough inflation to avert the defaults, that means we need an exit strategy– some point at which we all admit that further monetary stimulus is doing nothing more than generating inflation, and at which point we acknowledge that the goal for monetary policy is no longer the heroic objective of making bad loans become good, but instead the more modest but also more attainable objective of making sure that fluctuations in the purchasing power of a dollar are not themselves a separate destabilizing influence.

A digest of yesterday’s Fed’s move.