On 11 October we wrote, "The Federal Reserve is going to print more paper dollars, likely beginning shortly after the November elections. The estimates from the folks in the know is a minimum of $500 billion to $1 trillion. The U.S. economy is currently around $14 trillion and public debt is around $12 trillion - so a trillion in freshly printed greenbacks is not small potatoes. Recent comments from the likes of Federal Reserve Vice Chairman Dudley and the recently released FOMC meeting minutes all but assure that the Federal Reserve will act soon and in size. The September/October stock market rally is telling us as much."
NAILED IT!
The Federal Reserve announced on 4 November that they would be buying $600 billion in government bonds beginning immediately and running through the middle of next year. The stated intention is to drive interest rates even lower in an effort to stimulate spending and job creation in order to fight the deflationary threat which the Federal Reserve governers insist is looming. Well, most of the Federal Reserve governers anyway.
In a rare public disagreement with the consensus, FED Governer Warsh announced that he isn't concerned about deflation, citing Dr. Allan Meltzer's position that there is no deflationary threat. Dr. Meltzer, the author of dozens of academic papers and books on monetary policy and the Federal Reserve Bank, issued a scathing critique of the Fed just last week saying, "All this is not relevant now, since there is no sign of deflation in the United States. The Fed's claim that there is a risk of deflation should embarrass it." Meltzer's views carry weight since he is considered one of the world's foremost experts on the development and applications of monetary policy. It's time to take notice when Meltzer derides Federal Reserve policy in such strong terms.
So what is the Federal Reserve up to if it isn't slaying the deflationary dragon?
Well, it is almost a certainty that its real goal is to debase the U.S. dollar, making it easier for the United States to pay back the trillions it owes to its citizens, to the Chinese and other sovereign nations, and also making our exports more competitive in world markets. Of course the U.S. can't publicly admit it is following a classic "beggar thy neighbor" policy. Fed Chairman Bernanke isn't about to own up, nor is Treasury Secretary Geithner. On the contrary, Geithner just appeared on CNBC and said (with a straight face) that, "“THE U.S. WILL NEVER DO THAT. WE WILL NEVER SEEK TO WEAKEN OUR CURRENCY AS A TOOL TO GAIN COMPETITIVE ADVANTAGE OR TO GROW THE ECONOMY.” …
So is the rest of the world buying the baloney? Not hardly...
China's Dagong Global Credit Rating Co. just cut its credit rating on the U.S. to A+ from AA because of the Fed's plan to purchase bonds to spur growth and inflation. Dagong Global wrote, "The credit outlook for the U.S. is negative amid deteriorating debt repayment capability and a "drastic" drop in the government's intention to repay debt. The Fed's quantitative easing policy will erode the value of the dollar and is against the interests of creditors." Ouch!
And here is what German Finance Minister Schaeuble had to say about QE2 in an interview with Spiegel magazine last week, "I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure." He went on to say that, "It's inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money."
It would appear that the rest of the world understands very well what is going on. But why should the U.S. consumer care if the rest of the world is getting hosed (with dollars)?
INFLATION!!!!!!
Gold is saying the inflationary threat is real, reaching more than $1400 per ounce before pulling back (temporarily most likely). Although it is always difficult to forecast price levels, it is quite possible that gold will reach $2500 per ounce within a few years if the Federal Reserve continues in its madness. The bottom line though is that inflation is bad for savers and good for debtors and U.S. savers will suffer right along with the Chinese, Germans, and Japanese. Inflation erodes wealth. Inflation destroys middle classes. U.S. citizens will suffer greatly in coming years as their purchasing power is dramatically eroded by the inflationary genie that the Federal Reserve appears determined to let out of its bottle.
Biechele Royce Advisors builds properly diversified portfolios using individual stocks and bonds whenever possible to reduce costs. We are currently overweight tangible assets such as real estate, precious metals, and commodities as well as non dollar assets, including international stocks and bonds. It is our belief that Inflation is coming and it could get pretty ugly if Bernanke and his lunatics continue to run the asylum.
