The Natural Forces of Deflation Vs. The Federal Reserve

[su_quote]The thing to understand about inflation is that if one major country does it, all the others have to do it too. A single country can benefit by making its currency less valuable, because a falling exchange rate gives its exporters a pricing edge in global markets. But the pop in exports comes at the expense of competitors who then demand that their governments join the currency race-to-the-bottom. This happened to Switzerland in September, as global capital poured into what was seen as a financial safe haven. The Swiss franc soared, traumatized local exporters complained, and the government pegged the Swiss franc to the euro, in effect putting it on the same road to oblivion as Europe’s doomed common currency. [/su_quote]  -John Rubino of and co-author of The Collapse of the Dollar and How to Profit From It.

Today, the Federal Reserve (FED) came out with an official statement that said the economy was expanding moderately. Which is true, if you completely discount the effects of inflation, which is exactly what the FED does. Forget about $100 oil and higher food prices, the FED’s goal is to keep the Dow Jones propped up and keep housing and government spending propped up. The fact is when you have a real unemployment rate that is somewhere between 16-21% (U-6, Gallup, or, you shouldn’t be seeing $100 oil, instead you should be seeing $10 oil. The fact that the FED can say we are seeing moderate growth is simply a result of the very inflation they have created and not real economic growth.

Real economic growth brings prosperity, more purchasing power, and a sustainable economy. Not one that is dependent on fake interest rates and the government injecting trillions of dollars into an economy. Certainly not 46 million people on food stamps, 40% of which have jobs, this is not growth, this is an inflationary depression.

The FED (NOT the market) has kept interest rates at a historic low range of 0% to 0.25% for the past 3 years and today recommitted itself to keeping rates this low until at least mid-2013. The FED has purchased 2.3 trillion in bonds trying to push down long-term interest rates. Just a few months ago the FED announced Operation-Twist where they plan to buy longer term securities and sell $400 billion of short-term debt to lengthen the average maturity of securities on its balance sheet.

By NOT mentioning an official quantitative easing 3 (QE3), the FED gave the market a nice head fake. The Dow Jones, which is now just a place that you can place bets on what the FED will do next, no longer a place where you can invest in the shares of actual company fundamentals, the Dow Jones dropped nearly 200 points at the exact time the FED released their statement. Once the “market” saw no QE, which has been priced into the market since last summer, the market tanked along with commodities. has been saying since last summer that QE3 will happen, but prior to it happening, the FED NEEDS a bit of a pull back in asset prices. Remember, QE3 could add $50 or more to the price of oil, so with oil already at $100, this creates a problem for the FED when it comes to the timing of their next QE announcement.

To break this down simply, the FED is dealing with severe deflationary forces, an aging population, housing, unemployment, and peak private debt. The FED is creating inflation, a lot of it, the result of inflation of course is higher asset prices. Now when it comes to hyper-inflation, remember, hyper-inflation is the loss of faith in a currency, this can actually happen overnight. Anyone who compares the 1930’s to today is comparing apples to onions.

The fact is in the 1930’s we still had a currency tied to gold, and after FDR closed the gold window for American citizens and enforced confiscation of gold, the government devalued the dollar significantly. However, foreign powers could still cash in their dollars for gold, so the loss of faith in the currency itself wasn’t really an issue.

Although this time, it is possible that we could see a loss of faith in the dollar, in fact, we could see a loss of faith in many currencies. Do we have hyper-inflation, a great reset, or perhaps a great dollar rally as the other world currencies fall apart?

We think the best way to find the answer to that question is to ask the money printers, now they won’t tell you flat out, remember their job is to do nothing but lie. However, if we look at their actions, the global money printers around the world are buying gold.

The Natural Forces of Deflation Vs. The FED