Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Three Reasons Why Inflation Will Not Be Stopped

Economics / Inflation Nov 17, 2009 - 05:34 PM GMT

By: Dr_Jeff_Lewis

Economics

Best Financial Markets Analysis ArticleInflationary practices are the primary driver of growth in the value of precious metals, and they are already in play to combat the credit crunch.  Although the Federal Reserve is planning its exit strategy, there is little chance one will actually be enacted – which means that inflation will continue to bulldoze the value of the US dollar. 


#1 Reason: All Stops Have Been Pulled

Never before in the history of the Federal Reserve have rates been allowed to plummet as low as they have today to combat the most recent financial crisis.  Today's rate of 0-.25% is the lowest the Federal Reserve can issue without literally paying banks and lenders to borrow money. 

Since 1983, Federal Reserve rates have fallen from 9% to 7% in 1987, 3% in 1992, and 1% in 2002 to today's nonexistent 0 – .25% rate.  The Federal Reserve has nothing left in its interest rate arsenal to combat the crisis.  With the Fed’s fuel is running on low, a further reduction in rates is all but impossible.  If the Fed loans at a negative rate, they'll be losing money with each loan made!

#2 Reason: Low Rates Help Banks

The financial crisis was largely started by banks that did not have enough capital to shelter themselves from any decline in the economy.  Subsequently, the Fed reduced its rates to help revive the failing financial industry. 

The Fed’s low interest rates have benefited the banks not only through better spreads on consumer loans, but also better returns on Treasury purchases.  For instance, banks can borrow from the Federal Reserve through the window at 0 – .25%, and then lend to the US government via Treasuries and earn a hefty 1.4% in one year Treasuries.  The arbitrage allows for essentially no risk and no collateral, but dramatic profits for any institution with access to the Federal Reserve's lending window – all at the cost of everyone else. 

Low rates also help keep governmental borrowing expenses lower, which is important considering the $1 trillion deficit Congress has deployed to “stimulate” the economy.

#3 Reason: An Exit Would Temporarily Disable the Economy

Prior to the creation of the central bank, bank runs were devastating, even though they lasted only a period of months.  Modern recessions last for years and ultimately harm more people, as the unemployed remain fully out of the workforce until any recovery. 

Although a Federal Reserve exit would help the economy in the long term, the short term fluctuations would seem catastrophic to anyone not already familiar with the history of monetary policy.  If the Fed were to exit, the US government budget would have to be immediately balanced, and the US economy would have to wean itself off its credit addiction and into real capital. 

The Bottom Line: Preparing Yourself

Chairman Ben Bernanke has made it evident that today's low rates will not be changing in the near future, regardless of any economic “green shoots.”  As we cannot change monetary policy enacted by the Fed, the second best response is to buy precious metals, which will only head higher as more and more inflated dollars work their way into the system.  Much of the vastly increased money supply remains in the coffers of the banks; however, when the Fed removes the ability for easy arbitrage between the Fed and the Treasury, the amount of dollars in circulation will explode. 

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2009 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in