Thread: Federal Policy Pushes U.S. Dollar Ever Closer to Collapse

Federal Reserve Policy Pushes the U.S. Dollar Ever Closer to Collapse
Currencies / US Dollar
Oct 15, 2010 - 06:22 AM

By: Money_Morning

Peter D. Schiff writes: Much of the content of the latest U.S. Federal Reserve statement, released on Sept. 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 "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.

But it has never admitted it.

The Fed statement said that "inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate." Notice that there is no mention of a deflation threat here - as quantitative easing has effectively quashed that possibility - but rather "subdued inflation for some time."

The Fed defines inflation differently than I do, as an increase in consumer prices rather than the amount of dollars in circulation. By my definition, massive inflation has already been created, which is reflected in the fact that prices for houses, consumer goods, stocks, and bonds haven't fallen steeply and stayed down since the dot-com and mortgage bubbles popped.

But even by the Fed governors' definition, they acknowledged that we are experiencing inflation - just not enough for their taste.

Apparently, according to the renegade policy of the Fed, we're not paying enough for food, energy, clothing, healthcare, or education. No matter that nearly 20% of the population is unemployed or underemployed, that each U.S. taxpayer's share of the federal debt is now some $121,000, or that average tuition at a private university is set to rise 4.5% this year to $27,325. Apparently, these factors do not affect "price stability."

Some might say that a certain amount of inflation must be permitted when unemployment is so high - that the dual mandate involves trade-offs. If that were the case, then when we were in a boom period like the 1990s or mid-2000s, the money supply should have been shrunk. Also, there is ample evidence that falling prices during the Great Depression actually provided life-saving relief to the unemployed.

The truth has always been that whatever 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?

The market has certainly lost any hope of price stability in dollar terms. Since the Fed statement was released, gold prices have hit new all-time nominal highs, silver is the highest since the Hunt brothers tried to corner the market in 1980, and the Aussie dollar (a commodity currency) is nearing its own record highs. Even housing is headed back up. Meanwhile, the dollar index has hit a new seven-month low. In short, holders of U.S. dollars are trading for any real assets they can acquire.

A confounding factor is the strong performance of dollar-denominated bonds. When the Fed creates inflation, it erodes the value of fixed-asset investments like bonds, which can't adjust their returns to the new price level. So many commentators are pointing to the record low bond yields as evidence that inflation is not a threat. But this is a misreading of the situation.

What is overlooked is that when the Fed prints more dollars, it typically uses them to buy bonds. Traders know this, so they are stocking up on bonds at ridiculous prices just to flip them to the Fed. They don't care that, in the long run, the Fed's policies will destroy the bonds' value because in the short run, the weak dollar policy serves as a tremendous subsidy to bond sellers.

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.

We should be angry at what the Fed has pledged to do to us, and frankly I'm surprised there hasn't been more of an uproar. But what's more important is to figure out how you are going to protect yourself.

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "Crash Proof: How to Profit from the Coming Economic Collapse," as well as "The Little Book of Bull Moves in Bear Markets." His latest book is "Crash Proof 2.0: How to Profit from the Economic Collapse." For more information about Schiff's new gold-coin-and-bullion company, Euro Pacific Precious Metals, please click here.]

Source : http://moneymorning.com/2010/10/15/fede ... ve-dollar/

http://www.marketoracle.co.uk/Article23523.html

U.S. Dollar Makes New Lows, Inflation Unplugged
Stock-Markets / Financial Markets 2010
Oct 15, 2010 - 12:16 PM

By: PhilStockWorld

The dollar is making new lows.

As I’ve been saying all week(s) that is the story that is driving the market. Still people interview me and ask me how high I think the markets can go which is kind of silly because, as I keep trying to explain, the markets aren’t going anywhere, the only variable is the currency they are priced in. Why do people not get this? Why do financial writers not get this? Why do TA guys not get this? Why does nobody talk about this in the MSM?



Sure they talk about the weak Dollar or the strong Yen (but rarely the strong Pound or Euro, because it is contrary to the average viewer’s vision of America and we don’t want to upset the viewers, do we?) but who ever shows you a simple and obvious chart of the S&P or any other index priced in a foreign currency? How hard is this to understand?



So, if you are a Japanese investor, watching your US equities, THIS is how they are performing. It’s not much different from an EU perspective, where we FAILED the 200 DMA on 9/21 and the 50 DMA made a death cross last week. Yet I still see chart guys running out on CNBC telling us their TA tells them we can go to the moon. Sure, we can go to the moon. Price your stocks in Hungarian Forints and suddenly the S&P is at 240,000 - all we have to do is ignore the fact that the currency has changed - JUST LIKE WE DO WITH THE DOLLAR - and we are rich, Rich, RICH!



Yes, that would be ridiculous. Almost as ridiculous as a bunch of grown men, who make a living analyzing the markets, acting as if the underlying value of the currency we are pricing things in doesn’t matter. Do you know what the World’s hottest market was in 2007? Zimbabwe! That sucker would gain 500-1000% in a single day - invest over there and you made money hand over fist. Howard Stern had a game called "Who Wants to be a Turkish Millionaire" and he would give away a Million Turkish Lira and the joke was how excited the contestants were and how much they would be willing to humiliate themselves for what they did not realize was about $6.

That’s the con that is being played on American investors by the Fed. It’s a game called hyperinflation and in the early stages, it does seem like a lot of fun as your investments go up 10% while your savings devalue by 10% and the stuff you buy goes up 10%. So what do you do, you cash a little of your investments so you can buy more stuff and - WOW! - the Government’s plan is working,, you are spending money in the economy! But now you have more stuff (and the food and fuel you consume, so that’s gone) and your savings are still down 10% and you withdrew 10% of your investments but, not to worry, the investments go up another 10% and mask your next 10% drop in hard assets. And meanwhile, at the Hall of Unintended Consequences… http://www.thereformedbroker.com/2010/1 ... sequences/

This cycle continues until your saving are worthless and you have used up all of your investments paying for day to day living and then the whole thing collapses in a giant meltdown when, like Zimbabwe, the government finally revalues the currency by cutting some zeros off of all the notes. As I’m writing this, Bernanke is giving an "inflation is good" speech. I like inflation, I think the US should inflate it’s way out of debt but the kind of inflation Ben is giving us is the wrong kind. QE inflation DEVALUES what you have and makes things you want more expensive. Stimulus inflation drives more cash through the workforce and demand drives up the price of goods so everybody benefits. It’s a BIG difference…

Who makes out well when we have hyperinflation without wage inflation to match? The investing class, of course - and that’s us. As I said yesterday, we have been making long selections and holding our noses as we buy but it’s the only sensible thing to do when the Chairman of the Federal Reserve is on a mission to cause inflation.

"The topic of this conference–the formulation and conduct of monetary policy in a low-inflation environment–is timely indeed" says Ben. Wow, really?!? What an amazing coincidence. Who could have imagined that the topic of the Speech you give on options expiration day with the dollar making new lows would just so happen to drive the dollar even lower and squeeze the markets higher - that is just a gosh-darn freaky coincidence!

But, is Ben promising enough to feed the market beast that’s already grown $5Tn in the past 30 days? Can he possibly dump enough money on the economy to fill this gaping value hole or is the whole thing going to blow up in our faces? We report, you decide…

As I said yesterday, I vow to spend this weekend destroying as many brain cells as possible in order to try to shut down my brain and join the party. As a fundamentalist, I have to lose many, many brain cells in order to buy into this nonsense but, as a guy who’s been around a while, I also know that being a fundamentalist in 1999 meant you missed almost daily doubles in anything that had a dot com attached to it. Right now we have a commodity bubble as if you can charge whatever you want for copper, oil, tin, wheat, corn and, of course gold without affecting global demand despite the fact that global wages are in decline, global standards of living are in decline and close to 20% of the people on the planet aren’t even working.

Goldman Sachs says "Fuhgeddaboudit" in their latest report, http://www.bloomberg.com/news/2010-10-1 ... etals.html where they have now DOUBLED their predictions on commodities, now projecting a 30% rise for the year. This too reminds us of 2008, when GS goosed the markets with their almost weekly upgrades of oil and drove it up 40% as wave after wave of suckers came into the market, driving oil up to $140 a barrel - right before it crashed to $35 by the end of the year.

At $120 in May of 2008, Goldman’s target was $200 for oil and, at the time, I wrote "$200 Oil - Who’s Going to Pay For It?" That did not stop oil from rising another $20 (15%) before it crashed but I could say the same thing now about copper and corn and wheat and silver and platinum. Gold can go up to $5,000 because gold isn’t actually used by anyone and there’s not all that much of it so idiot speculators can make up prices on their shiny bits of metal the same way they pay $100M for a painting - when money is that meaningless, it’s hard to understand the real value of it.

That brings me to the ethanol scam. Hopefully I can get out of my preachy mode after this week but shame, shame, shame on Obama and this administration and every single member of Congress for perpetuating this nonsense. Corn is NOT an efficient fuel. It takes as much corn to fill up an SUV with fuel as it does to feed a person for an entire year. Just because something can be done, doesn’t mean it should be done!



There are 62M people who die of hunger each year on Earth including 15M children. Can filling up 15M tanks of gas be worth their lives? This is just total BS and needs to be stopped, maybe even more than Bernanke needs to be stopped:

It’s just one insane policy after another these days but, as I said, we will just have to go with the flow, no matter how stupid that flow may be. ADM, who spends millions of dollars buying politicians to push this ethanol nonsense, is going to be a great buy at $33. Heck, they were over $50 in 2008 and happy days are here again for the commodity pushers but you’d better make your 40% gains quickly as the dollars you will get back won’t be worth much if you wait too long…

Have a great weekend,

By Phil

www.philstockworld.com

http://www.marketoracle.co.uk/Article23534.html

How to Hedge Yourself from the Coming Fed Inflation Disaster

Stock-Markets / Inflation
Oct 15, 2010 - 06:35 AM

By: DailyWealth

Porter Stansberry & Braden Copeland write: Most investors know the Federal Reserve's "easy money" policy is creating an enormous amount of new credit and new money.

And most people know this policy has created an explosion in the prices of gold and silver.


But most people have no idea where the bulk of the Fed's new money is actually finding its home: in Asia. This has enormous implications for you as an investor, which I'll show you in a moment...

According to Bill Gross, who manages the world's largest pile of fixed-income assets at PIMCO, the Federal Reserve is going to resume large-scale quantitative easing at the rate of $100 billion per month. News of this plan has been leaking out for the last two months following an important speech Bernanke gave in Jackson Hole, Wyoming this summer. He said, essentially, we needed a lot more inflation.

If the Fed does resume quantitative easing at the $100 billion-per-month range, it would be buying the equivalent of all of the new debt the U.S. Treasury is issuing – all of it. This represents an increase of roughly 30% to the money supply in the first year... an extraordinary amount of new cash.

Trade and capital flows are transferring most of the inflation the Fed is creating to the Chinese economy. U.S. politicians continue to stimulate consumption in the U.S., while most of the production to meet this demand comes from China. We borrow and spend. They produce and profit. Hopefully, you understand printing more money and buying government bonds won't change this dynamic. It simply results in still more money being sent to China.

What will China do with the flood of capital? Lots of things. But one thing it will certainly do is build more coal-fired power plants. Coal-fired plants produce 80% of the electricity in China, and demand for electricity is growing roughly 9% a year. It's hard to comprehend how fast demand for coal is growing in China, but consider these facts...

China is now the world's second-largest consumer of electricity, after the United States. A decade ago, China's installed generation base was only 315 gigawatts. Today, it's 900 gigawatts – and 78% of its production is still coal-based.

Today, China consumes three times more coal than the U.S. – more than three billion tons. But China only has about half of the U.S.'s coal reserves. And that means it must import a lot of coal.

At current growth rates, China would exhaust its current reserves in only 16 years. Obviously that's not going to happen – more mines will be dug. But just as obviously, it will take a long time to build the mines and lay the railroad infrastructure required. In the meantime, China will need a lot of coal.

Current market surveys show China will import 150 million tons of coal this year. That's only 5% of China's total coal demand, but it represents 15% of the total U.S. demand. Right now, almost all of this coal comes from Australia, where China takes up about 60% of the export supply of coal.

And here's the crucial fact: China's coal imports doubled in the last year.

We know total power production in China is scheduled to double over the next eight years. It's building a new coal-fired plant nearly every week. The United States has built only 12 new coal-fired power plants since 1990. Assuming China's coal imports double again (and they will), Chinese demand will exhaust Australia's export capacity. And when China's import demand doubles again after that (to 600 million tons per year), it will exhaust the world's total export supply.

China's not the only problem... Don't forget about India.

India's installed power base exceeds 600 gigawatts, and demand is growing at about the same pace as in China. India also relies on coal for most of its power (70%). It currently burns 500 metric tons of coal a year, mostly from domestic sources. But Vinay Kumar Singh, the CEO of India's Northern Coalfields, says the country will need to import at least 250 million tons of coal a year by 2020. India's imports of coal from South Africa rose 74% last year.

It's no exaggeration to say China and India's demand for electricity is the future of global power. Already China's coal production represents more than twice the amount of energy produced from all of Saudi Arabia's oilfields.

What's fueling all of this demand for coal-fired power plants? Huge urban populations in China and India. Consider these figures. In America, the baby boomers – the 50 million Americans born in the years after World War II – produced the demand for vast amounts of new infrastructure in America.

There are 300 million newly urban Chinese people. And 300 million newly urban Indians. That's 600 million people moving out of the Stone Age and into the modern world – a group 12 times bigger than the baby boomers. While it's true these people will want to buy lots of things – from Cokes to Buicks – the thing they need most is electricity.

Americans don't yet realize the Fed's attempts to paper over our debts come with serious consequences. As our money loses its purchasing power, costs will rise – especially power costs. Undoubtedly, our politicians will blame "speculators" for the soaring price of coal. But the truth is, the paper that will push prices higher came from the Federal Reserve, not from any hedge fund.

Whether we realize it or not, we compete with other nations around the world for resources. Historically, our currency – as the world's reserve currency – has given us an enormous advantage. Coal, for example, is priced in dollars. But we stand on the verge of losing that advantage... and the consequences will be drastic. We will face higher prices for coal, among other sources of energy.

To hedge yourself from this coming Fed disaster, buy coal stocks. They're going to go much higher in the coming years.

Good investing,

Porter Stansberry & Braden Copeland
P.S. To profit from a coal boom – one we expect will be unlike anything the world has ever witnessed – you want to own coal in America. We're the Saudi Arabia of coal. To learn our favorite way to cheaply buy a huge amount of coal assets, make sure to read the most recent issue of Stansberry’s Investment Advisory (out just days ago). You can learn more about a subscription here.

http://www.dailywealth.com

http://www.marketoracle.co.uk/Article23525.html

Bernanke Ponders The "Nuclear Option"

Interest-Rates / Quantitative Easing
Oct 15, 2010 - 07:35 AM

By: Mike_Whitney

Ben Bernanke's speech on Friday in Boston could turn out to be a real barnburner. In fact, there's a good chance the Fed chairman will announce changes in policy that will stun Wall Street and send tremors through Capital Hill. Along with another trillion or so in quantitative easing, Bernanke is likely to appeal to congress for a second round of fiscal stimulus, this time in the form of a two-year suspension of the payroll tax. That's what he figures it will take to jump-start spending and rev-up the flagging economy. It could be the most radical intervention in history; Bernanke's version of “shock and aweâ€