Inflation

Charles Kaldec writes:

To see more clearly how the price of the dollar has changed, it helps to
view price changes over a 10 year period. Since 2002, the price of a barrel of
oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest
that oil companies had enough power to impose such a price increase, or that
speculators are responsible for a quadrupling of the price of oil is, on its
face, preposterous. Instead, the price of oil and gasoline are up because the
Federal Reserve has driven the value of the dollar down.

For example, if the dollar since 2002 had been as good as the:

Chinese yuan, the price of oil today would be $82 and a gallon of
regular gas would cost about $3.10;

Euro, the price of oil today would be $77 and regular gas would cost
about $2.90;

Japanese yen, the price of oil today would be $71 and regular gas would
cost about $2.75;

Swiss Franc, the price of oil today would be $63 and regular gas would
cost about $2.50.

Thanks Mr. Bernanke!

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The Dollar's Decline

THE dollar’s recent decline has taken it to new lows. The chart shows the nominal exchange rate, in trade-weighted terms (ie, against the country’s trading partners). The index is now 30% below its level when the Bretton Woods system was abandoned in the early 1970s and the dollar has halved since 1985, when leading nations adopted the Plaza Accord to drive it lower.

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Cartoon: The Falling Dollar

"Gold is Money"

Nathan Lewis writes:

Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.

This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”

From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.

Let’s take a look at some of the great gold bull markets of the last hundred years:

• From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.

• From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.

• From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.

• From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.

• From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.

• From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.

Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today...

The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.

Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.

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The Collaspe of the Dollar?

Peter Schiff writes:

Much of the content of the latest Fed statement, released on September 21, echoes the central bank's previous post-credit crunch pronouncements: there is still too much slack in the economy, interest rates are still going to be near-zero for an "extended period," and the Fed will continue to use payments from its Treasury purchases to buy yet more Treasuries.

But this recent statement uses a new turn of phrase that should have Americans very upset.
The Fed says that "measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate." Though the wording treads lightly, it should not be taken lightly. It may signal the final push toward dollar collapse.

The Fed's dual mandate, since an amendment in 1977, has been to promote "price stability" and "maximum employment." While often discussed as if both goals are complementary facets of one mandate, they tend to have been at odds during every recession since the Great Depression.

The problem is that central banks tend to keep interest rates too low for too long (usually to create a feeling of prosperity credited to the government), which then causes major asset bubbles. When the bubbles pop, there is a period of high unemployment during which prices are supposed to fall. Then, the central bank must choose between boosting short-term employment through inflation or defending price stability by allowing assets to return to a reasonable market value. Aside from the early 1980s chairmanship of Paul Volcker, the Fed has always chosen more inflation...

The truth has always been that whatever the question you ask the Fed, the answer is inflation. With prices drifting steadily upward since its establishment in 1913, I dare to ask: has the Fed ever achieved its dual mandate?...

All the salient indicators tell me that the global dollar crisis has entered a new phase. The Fed is getting more aggressive about money printing because it really doesn't have any other politically viable options. I've always said the Fed uses inflation to give appearance of prosperity, but I never expected them to come out and say it! You don't give warning when you're about to rob somebody, because then the victim might take precautions – in this case, buying gold and foreign equities.

read the entire essay

My thoughts: Bernanke will destroy the economy will his printing press. Expect significant inflation, war, and $4,000/oz gold before we have return of true prosperity.

Economic Outlook: Two Scenarios

Jeff Fisher writes:

Best Case Scenario for US Markets:
-Dow/Gold ratio will trade 1.0, possible gold target of $10,000/oz.
-Dow/Silver ratio will trade 40.0, possible silver target $250/oz.
-Severe credit market conditions with interest rates over 10%.
-Some companies will survive, many banks and credit dependent businesses would fail.
-The DJIA could trade in a range of 5,000 to 10,000.

Likely Scenario for US Markets:
-Dow/Gold ratio well below 1.0: gold target well above $10,000/oz.
-Dow/Silver ratio well below 20: silver target well above $600/oz.
-Collapse of the credit market. Interest rates only capped by fiat.
-Collapse of the US treasury market.
-Most companies fail.
-Only the best businesses with no need for credit survive.
-Examples: CL, XOM, KO, PEP, PG
-Banking system shut to depositors.
-Nationalization of many businesses and all pension assets.
-Very unstable political situation, collapse of US empire along the lines of the USSR.

Additional Thoughts:
-In order to see a real recover in the US economy radical action will need to be taken. -A renaissance in thinking will have to occur.
-Centuries ago men realized that for there to be peace, Church and State had to be separated.
-In order for civilization to survive going forward, the Market and State must be separated.
-The role of government in the economy must be eliminated.
-The age of central banks and central planning must end.

read the entire essay

The Dollar

The US Dollar depreciated by 37% between 2002 and 2008.

The reality is that America's "weak dollar" policy – its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts – amounts to the biggest currency manipulation in human history.

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Cartoon: The Dollar

Marc Faber: On the Dollar and the Economy

On Bernanke: "He's a money printer. He does that well."

Jim Rogers on the Economy

Speaking to CNBC Wordwide Exchange today Rogers said "All the government officials and bureaucrats loved the fact Lehman failed, because they could all jump in and support banks."
"This whole problem was not caused by Lehman Brothers or Lehman Brothers failure. Lehman was an effect not a cause."

"The real problem over the past 10-15 years has been that regulators have not let people fail. Had they let people fail we would have solved this problem a long time ago. I don't know why they're not in jail," Rogers said.

Reiterating his view about US monetary policy and their effect on the Dollar, Rogers warned. "I would expect there to be a currency crisis or a semi-crisis this fall or next year. It's crony capitalism, Bernanke and Greenspan have brought crony capitalism to America … but that's not going to solve the world's problems."

"We're going to have zombie capitalism for the next 15-20 years. How long are you going to let the bureaucrats run the thing so we can't have a clean system?," he added.

"Banks have been going bankrupt for a few hundreds years. The way the system works is when somebody fails you let him fail. What we're doing now is we're taking the assets away from the competent people and giving them to incompetent people and telling them now you can compete with competent people with their money."

read the article

Bill Bonner on America, Empire, and the Economy

Long-time Daily Reckoning sufferers will recall why the nation chose George W. Bush to lead the country. Nature abhors a monopoly and detests a void. At the time, America had an almost complete monopoly on power. The Soviet Union had thrown in the towel. China had taken the capitalist road. The US empire had no rivals…and badly needed to be taken down a notch. But how? If a nation has no worthy competitors, how can it be beaten? The answer is obvious: it has to become it’s own worst enemy. George W. Bush was the man history needed…a man who would be putty in the hands of the neo-cons…a man who could be counted on to do the wrong thing…and put the nation on course for destruction.

Ossama bin Laden kindly sent a videotape explaining to him how to do it. The United States would have to spend its way to disaster, he said. The United States would have to undertake costly, futile wars…while actually expanding domestic spending too. GWB signed the single most expensive bill of all time – a health care measure – while simultaneously sinking the empire in its single most expensive war, one that would last longer and cost more than WWII.

But George W. Bush was just the beginning. Now, he’s back in Texas. And the empire is still in business. What can the Fates do to us now? Give us Obama and Bernanke! Obama continues the imperial wars. And, with Bernanke as his sidekick, the two of them now set out to destroy the empire’s finances. When they are finished, the dollar will no longer be the world’s reserve money. US Treasuries will no longer be the safest, surest credit in the world. And Americans will no longer be the planet’s richest people.

That is our prediction. Prove us wrong!...

In short, Ben Bernanke is no hero. And the economy is not recovering.

read the entire essay

The FED and Price Stability

The Federal Reserve System is fraudulent. Whatever its stated purpose, its effective purpose is to create a mechanism of deficit spending by politicians, through the insidious invisible taxation of monetary debasement (aka inflation). With printed money, the Government can buy services for its voters before the effects of inflation are felt. It is then the voters whose money buys less the following year, as the new money has raised prices, and they are none the wiser.

read the essay

False Recovery?

Legendary investor Jim Rogers told CNBC on Wednesday he is not short or hedged in anything at the moment, but buying Japanese Yen. The next crisis in his eyes is in currencies which makes sense since sovereign states have taken much of the bad debt from the banks and piled them onto their own balance sheets.

The stock market may hit new lows this year or the next as the current rally has been largely caused by the money printed by central banks and fundamental problems remain unsolved, he said.

His views echo those of renowned bear Marc Faber, who told CNBC last week that the rises in share prices did not mean the world was embarking on a path of sustainable economic growth...

Governments have not solved the essential problems that caused the crisis but instead they "flooded the world with money," according to Rogers. Trying to solve the problem of too much consumption and too much debt with more consumption "defies belief" and will not work, he said.

The price of oil is also likely to remain high despite the fact that the recession is taking its toll on demand, he said.

"You know supplies worldwide are declining at the rate of anywhere from 4% to 6% a year, yes, demand is down at the moment but in longer term, unless somebody discovers a lot of oil very quickly, the surprise is going to be how high the price of oil stays, and how high it eventually goes," Rogers added.

The next financial meltdown will be in the currency markets, as central banks around the world have been printing money, giving the appearance of massive government intervention to weaken their currencies, legendary investor Jim Rogers, Chairman, Rogers Holdings, told CNBC on Wednesday.

"At the moment I have virtually no hedges, I suspect it is going to be the next problem, big crisis will be in the currency markets, I'm trying to figure out what to do there," Rogers said.

"If I am right, you're going to see a lot of currency problems in the next decade or two," Rogers said.

Governments around the world are doing their best to destroy currencies, many currencies in fact. And people need to understand that; if they don't understand it now, they're going to find out, they're going to find out the hard way," he added.

read the entire article

My thoughts: We might achieve a recovery on paper, but true economic prosperity could be years down the road.

Peter Schiff on the Economy

Peter Schiff on Obama and the Economy

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression...

Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed...

There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing...

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success...

However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

read the essay

My thoughts: Schiff continues to be the only consistent commentator who has correctly predicted our current crisis and understands the path to sustainable economic growth.

Cartoon: National Debt

The Dollar: Bernanke, China, and Printing Presses

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...

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 treasuries. 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.

read the full article

My thoughts: Bernanke is busy trying to paper over the current recession instead of allowing the malinvestments to clear. This policy, if successful, will only create the the illusion of prosperity. Bernanke contiunes to lay the groundwork for the most serious recession we have seen since the Great Depression. The process started in September 2007 with the slashing of interest rates. Now the printing presses will be running around the clock. The stage is being set for a inflationary recession that will make the late 1970s and early 1980s look like a bull market.

Peter Schiff on the Economy