My Two Cents - "Dire Circumstances - Sell Dollars Now"
07/19/2006
Once again, I sit slack-jawed reading the unbelievable words on my computer screen. The Federal Reserve is now 'forward-looking'?? Incredible. The ultimate creator of inflation, which is perhaps the most misunderstood concept in history, is now laying the groundwork for a necessary pause in rate hikes. Its gotten a break from the BOJ and ECB, but with inflation pressures in Europe, and Japan ending its 0% policy, that break may be short lived. Everyone who follows this sort of thing knows the Fed can't keep raising rates. If it does, the housing market, the driver of our economy will come crashing down. In the interests of housing, rates are already too HIGH. In the interests of the overall economy, the rates are too LOW. Unfortunately, we have this little problem and its called debt. We owe so much money that we have to keep rates up or else those who are lending might take their money to a more profitable, alternative investment. If we weren't the biggest debtor nation on Earth, we might be able to get away with keeping rates down and housing going full steam ahead, but we don't have that luxury.
Of course the biggest question is how does all this affect you, your money and your future?
The simple fact of the matter here is that something is going to have to give. I don't know what and I don't know when, but I do know that it is inevitable. Maybe foreigners will wake up and start selling bonds, driving yields through the roof, and in effect, driving a stake into the heart of the credit scheme that drives this economy. Maybe the Fed will inflate the money supply to close gaps in trade/national debt, and make your dollars worthless. Maybe it will be a little of both, or maybe a third or fourth scenario will play out. But the common denominator is the same: Your dollars are in trouble. Sell them now while they're still worth something.
I had to chuckle today. Ben Bernanke was fully engaged in Fedspeak (the art of uttering many words, and saying absolutely nothing in the process), and the markets went wild, thinking that a pause is back in play. Nevermind the CPI data.. Nevermind ballooning debt.. Nevermind skyrocketing energy prices... Nevermind higher food prices. Suddenly the Fed is forward looking. We'll all be fine assures the Fed Chief. It kind of reminds me of those reporters who stand in the middle of a hurricane with garbage cans and road signs swirling about, only this reporter is talking like its a sunny day!
The fact of the matter is simple. Inflation is the expansion of the money supply and credit. Done. Rising consumer prices are a SYMPTOM of inflation, not inflation itself. In my opinion, the CPI is nothing more than a gauge the government uses to determine how well its hiding the overall growth of the monetary supply. If it inflates at a rate of 8% per year, and the CPI is only 5% for the year, then the government is understating the REAL rate of inflation by 3%. This becomes very important when foreigners decide whether or not our debt is properly valued (ie: should they buy it, demand a higher rate of return, or buy an alternative investment).
I heard on a talk show today that perhaps Ben Bernanke should look for a new job. I think I have the perfect career for him. Rumor has it that NASCAR is looking for someone to wave the green flag at its races. And waving the green flag is what he does best.
Until Next Time,
Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.
Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.