There is an old adage on Wall
Street that no one rings a bell at major market tops or bottoms. That may be
true in normal times, but as many have noticed, we are now completely through
the looking glass. In this parallel reality, Ben Bernanke has just rung the
loudest bell ever heard in the foreign exchange and government debt markets. Investors
who ignore the clanging do so at their own peril. The bell's reverberations
will be felt by everyday Americans, whose lives are about to change in ways
few can imagine.
While nearly every facet of America's
economy has been devastated over the past six months, our national currency
has thus far skipped through the carnage with nary a scratch. Ironically, the
U.S dollar has been the beneficiary of the global economic crises which the United States
set in motion. As a result, our economy has thus far been spared the full
force of the storm.
This week the Federal Reserve
finally made clear what should have been obvious for some time - the only
weapon that the Fed is willing to use to fight the economic downturn is a
continuing torrent of pure, undiluted, inflation. The announcement should be
seen as a game changer that redirects the fury of the financial storm
directly onto our shores.
In its statement, the Fed
announced its intention to purchase an additional $1 trillion worth of U.S.
treasury and agency debt. The purchases, of course, will be made with money
created out of thin air through the Fed's printing presses. Few can doubt
that they will persist with these operations until the economy returns to its
former health. Whether or not this can ever be accomplished with a printing
press alone has never been seriously considered. Bernanke himself admits that
we are in uncharted waters, with no map or compass, just simply a hope that
more dollars are the answer.
Rather than solving our
problems, more inflation will only add to the crisis. Falling asset prices,
the credit crunch, declining consumer spending, bankruptcies, foreclosures,
and layoffs are all part of the necessary rebalancing of our economy. These
wrenching movements, however painful, are the market's attempts to resolve
the serious problems at the root of our bubble economy. Attempts to literally
paper-over these problems will lead to disaster.
Now that the Fed has recklessly
shown its hand, the mad dash to get out of Treasuries and dollars should not
be far off. The more the Fed prints to buy bonds the less the dollar is
worth. Holders of our debt (read China
understand this dynamic. We must expect that they will not only refuse to buy
new bonds, but they will look to unload those bonds they already own.
Under normal circumstances, if
creditors grew concerned that inflation was eating into their returns, the
Fed would raise interest rates to entice them to buy. However, the Fed will
avoid this course of action as it fears higher rates are too heavy a burden
for our debt laden economy to bear. To maintain artificially low rates, the
Fed will be forced to purchase trillions more debt then it expects as it
becomes the only buyer in a seller's market.
Just last week, Chinese premier Wen Jiabao voiced concern about
his country's massive investments in U.S. government debt. In the most
unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with
depreciation, not default. With his fears now officially confirmed by the Fed
statement, we must wonder when the Chinese will finally change course.
There is a growing consensus
that if China
no longer wants to buy our bonds, we can simply print the money and buy them
ourselves. This naïve view fails to consider the consequences implicit
in such a change. When the Treasury sells bonds to China, no new dollars are
printed. Instead, China
prints yuan which it then uses to buy treasurers. This
effectively allows America
to export its inflation to China.
However, now that we will be printing the money ourselves, the full
inflationary impact will fall directly on us.
With such a policy in place, America
has now become a banana republic. It won't be too long before our living
standards reflect our new status. Got Gold?
Peter D. Schiff
20271 Acacia Street, #200 Newport
Beach, CA 92660
/ Direct: 203-972-9300 Fax: 949-863-7100
more in depth analysis of the tenuous position of the American economy, the
housing and mortgage markets, and U.S. dollar denominated investments, read
my new book : The Little Book of Bull Moves in
Bear Markets" (Wiley, 2008).
More importantly take action to protect
your wealth and preserve your purchasing power before it’s too late.
Protect your wealth and preserve your purchasing power before it’s too
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, download my free research report on the powerful case for investing in
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